Twitter’s stock jumped on news that the company is being added to the S&P 500.
This may be a good time to sell Twitter TWTR, +0.24%[1]
That’s because stocks added to major U.S. stock market benchmarks such as the S&P 500 SPX, +0.15%[2] tend to lag the market over the next several years. In fact, the new stock in a benchmark frequently underperforms the stock it replaced.
Twitter’s addition to the S&P 500 [3]is a perfect opportunity for investors to learn about the risks inherent in popular companies that are riding high and the attractive long-term potential of stocks that are out of favor.
Take the changes made in September 2013 to the Dow Jones Industrial Average DJIA, +0.46%[4] . That’s when three stocks were removed (Alcoa AA, -0.46%[5] , Bank of America BAC, +1.96%[6] , and HP HPQ, -0.49%[7] in favor of Goldman Sachs GS, +0.83%[8] , Nike NKE, +1.09%[9] and V, +0.86%[10]
Since then, according to FactSet, the three deleted stocks have produced an average annualized total return of 21.5%, versus a gain of 17.1% for the three stocks that replaced them.
(Note that we’ll never know if Twitter will end up lagging the stock it replaced — Monsanto MON, +0.01%[11] . That’s because Monsanto is being acquired by Bayer AG...