was basking in the glow of its new-found
Standard & Poor's
announced last night the St. Louis bank would become the newest member of the elite group, replacing
. The move will go into effect Feb. 20.
Not surprisingly, shares of Mercantile jumped on the news, to 56, up 2 1/2, after hitting an intraday high of 57 1/16 on extremely heavy volume. Further down the food chain, the stocks of several other companies have also reacted to the news as index funds moved to buy or sell shares, depending on which S&P benchmark they track.
Ted Aronson, managing partner of
Aronson + Partners
, said the situation demonstrates numerous strategies that are undoubtedly playing themselves out around Wall Street. "Investment firms have a minor industry going on around how to anticipate these announcements," said Aronson, adding that prior to the S&P's announcement some traders were speculating on which stocks they thought would be moving into the S&P 500. "There was imagined activity and now there is real activity, and it will likely continue until the effective date." Aronson said his firm does not have a major holding in any of the stocks involved.
Index fund managers in particular will likely be watching the stocks' movement until the effective date, hoping to rejigger their portfolios at exactly the right time. Vanguard VP Brian Mattes says one way the firm's
Index: 500 fund can add value over the index is by rebalancing when the stocks to be added are cheapest. "We do it such a way as the cost is as low as you can go."
Another fund manager, a hedge specialist, said although hedge funds were probably not playing in this arena, he had heard some day traders were. "I think it's more their realm," he said, requesting anonymity.
, the stock that will be taking Mercantile's spot in the mid-cap
, jumped to 57 1/2, up 1 3/4, today. The movement of the Houston-based oil field service company was not entirely unexpected since more and more investors and fund managers are following the mid-cap sector. (Indeed, one fund manager joked that Mercantile was "demoted" with its move to the bigger index.)
, which will take Camco's spot on the small-cap
, also jumped. Its stock was at 16, up 7/8, on heavy volume. PMT, based in Nashville, markets and services electronic credit card authorization systems to retailers.
A stock unrelated to the indices but related to Mercantile also moved.
Firstbank of Illinois
agreed earlier this month to be acquired by Mercantile in a $700 million stock swap. Under terms of the deal, Mercantile will trade 0.83 of a share for each First Illinois share.
Arbitrageurs or index fund managers hoping to use the merger as a cheap back-door way of getting Mercantile stock had that door slammed. First Illinois stock rose alongside Mercantile's to 45 1/2, up 1 3/4, on more than six times the average volume. The change in both the acquiror's and target's stock means that First Illinois shares will be valued at $46.48 each in the deal, up from $41.96 when the deal was originally struck. (For quick-acting M&A speculators, that means there is a 98-cents-per-share premium on First Illinois stock, providing the terms of the acquisition don't change because of this news.)
On the losers' side, there was no dramatic swing. ITT, the stock being dumped from the S&P 500 in keeping with the index's exclusion of real estate investment trusts (ITT is set to merge with
, a REIT), did not see the drop in price one would expect with such a loss of status. The stock remained solid at 83 15/16, up 1 5/16, on somewhat subdued volume.
In addition to the companies directly involved, auxiliary stocks -- those in the same or a related industry -- might also see a bump over this period. "The assumption is that if the S&P was looking at this stock, maybe it's looking at another in the same sector," Aronson said. "But, by the same token, you could also make the argument that if the S&P took this stock, they won't take another from the same sector."
Aronson said many fund managers may be waiting this ride out and will buy or sell closer to the effective date. In addition, he speculated, some of these initial pops may make the stocks the target of short-sellers. "It's easy to say this news doesn't warrant this price increase on some of these stocks," he noted.
Alison Pederson contributed to this story.