Key Points
The famed S&P index reflects the 500 largest U.S. companies by market value.
Notably, three of the new additions happen to make products for data centers.
The S&P 500 index is rebalanced each quarter to reflect changes in companies' market capitalizations and ensure it comprises the 500 largest publicly traded U.S. companies. S&P Dow Jones Indices did that rebalancing on March 6, adding four artificial intelligence (AI)-related stocks, and the change became effective on Monday, March 23.
The new additions to the benchmark index are Coherent(NYSE: COHR), EchoStar(NASDAQ: SATS), Lumentum(NASDAQ: LITE), and Vertiv Holdings(NYSE: VRT). So should you consider investing in them? Let's have a closer look.
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I wrote about Lumentum and Coherent back on March 5 after chip manufacturing giant Nvidia announced plans to invest $2 billion in each company. Both make advanced optics technologies.
Most of the money Nvidia is investing in the two companies is earmarked for advanced research and development of its optical networking products. Those products are critical for scaling AI factories and improving the energy efficiency and resiliency of large-scale AI networks and data centers.
Lumentum's share price has more than doubled this year, up about 116%. Coherent stock has climbed about 47% year to date. Both are now in the S&P 500's information technology sector.
Vertiv Holdings makes products that manage power and cooling for servers and other digital equipment, keeping data centers and communications networks running smoothly. The stock is now in the S&P 500 industrials sector. It is up 70% year to date.
Image source: Getty Images.
EchoStar manufactures digital set-top boxes and products for direct-to-home satellite service providers. S&P has it in the communication services sector. The stock is up a more modest 13% this year but a stunning 360% over the past 52 weeks.
Joining a major index usually gives a stock a boost
All four stocks got a bump-up in price after joining the S&P 500, as expected. The so-called "index effect" occurs because once a stock is added to a major index, demand for it from index funds and other passive investors increases. Plus, more investors become aware of the stock once it's in a benchmark index like the S&P 500, which also increases demand and sends the share price higher.
Investors shouldn't invest in these stocks merely because they're now in an elite index. But all four companies have done very well in recent months and could continue to benefit from the AI build-out, which has driven much of the stock market's recent momentum.
Should you buy stock in Lumentum right now?
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Matthew Benjamin has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Coherent, Lumentum, Nvidia, and Vertiv. The Motley Fool has a disclosure policy.
