By John Spence
BOSTON (Dow Jones) -- As if the credit crisis and the latest
brutal sell-off weren't enough for troubled financial-services
firms, some stocks could be punished further if they are ejected
from widely followed indexes.
Hard-hit financial stocks may be dropped from the S&P 500
Index as the recent wave of selling whittles down their market
caps, a Wall Street analyst said Wednesday.
If the index committee at Standard & Poor's decides to
remove embattled financial stocks from the blue-chip benchmark, it
could push the shares even lower, as index funds sell to reflect
the index changes.
"In the S&P 500, four financials rank within the bottom 10
companies in the index," wrote Melissa Roberts at Keefe, Bruyette
& Woods in a research note.
She named the financial stocks at the greatest risk of near-term
deletion from the S&P 500 if the committee opts to proactively
remove the smallest constituents: Developers Diversified Realty
Corp. (DDR), E-Trade Financial Corp. (ETFC), Huntington Bancshares
Inc. and MBIA Inc. (MBI).
Through Tuesday's close, shares of bond insurer MBIA and online
broker E-Trade were both down more than 35% so far this year.
Meanwhile, real estate investment trust Developers Diversified was
off 60%, and Huntington has plunged nearly 85%.
In late February, S&P cut eight stocks from a trio of
indexes it manages: the S&P 500, the S&P MidCap 400 and the
S&P SmallCap 600. Roberts at KBW noted that those impacted
stocks were the smallest constituents in their respective
indexes.
"The S&P index committee does not actively manage the index
and seeks to keep turnover to a minimum, but does from time to time
remove the smallest-ranking constituents in the index," the analyst
said.
"The limited acquisition activity impacting index members leave
very few spots opening for replacement in the index," she added.
"This may force the index committee to remove such low-ranking
capitalization constituents if corporate actions of current index
members such as spin-offs necessitate it."
S&P says the committee's goal is to ensure that the S&P
500 is a leading indicator of U.S. stocks, reflecting the risk and
return profile of large-cap shares. The committee also considers a
stock's liquidity and tries to limit turnover.
Looking at the smaller-cap indexes, Roberts said Colonial
BancGroup Inc. (CNB) has the largest risk of falling out of the
S&P MidCap 400 if the committee elects to remove the smallest
members. Meanwhile, she flagged Independent Bank Corp. (IBCP) in
the S&P SmallCap 600.