The individual-investor darling GameStop Corp. is now three times as valuable as the smallest S&P 500 stocks, thanks to a sharp run-up in its shares in August.
Some traders are betting GameStop could take another leap higher if S&P Dow Jones Indices adds the stock to the S&P 500 when it is rebalanced later this year.
Getting a stock into the most widely watched index isn’t a straightforward or predictable process. Unlike indexes including the Russell 2000, whose makeup is primarily determined by criteria including market capitalization, the S&P 500 is constructed by a committee of human beings. The identities of the committee members, who are full-time staffers at S&P Dow Jones Indices, are kept anonymous.
"Entrance to the S&P 500 is a combination of both art and science," said Art Hogan, chief market strategist at National Securities Corp.
Committee members have a few rules they follow when deciding to make changes in the S&P 500. Companies being added to the index must be highly liquid U.S. firms with a market capitalization of at least $13.1 billion, for instance. Moreover, the committee has leeway in deciding on changes.
The index committee has the final say on index constituents, which helps explain why the S&P 500 includes 500 of the largest publicly traded U.S. companies—but not necessarily the 500 largest companies.
That means even companies that meet the requirements for inclusion don’t necessarily have a quick or easy ticket into the index.
At first glance, GameStop might seem to be a possible contender.
The videogame retailer has been on a tear lately. Its shares are up more than 10-fold for the year, well above the S&P 500’s 20% gain.
The S&P 500 dropped GameStop from the index in 2016. In August this year, GameStop moved from the S&P 600 small-cap index to the S&P 400 midcap index.
The rally has pushed GameStop’s market capitalization to around $16 billion, meaning it easily satisfies the S&P 500’s minimum market capitalization requirement and is roughly three times the size of current index constituents such as NOV Inc., Perrigo Co. and Unum Group, according to FactSet.
GameStop is also highly liquid, with at least a quarter million of its shares having traded in each of the previous six months, according to Mr. Hogan. It has enough shares publicly available to trade to fulfill the S&P 500’s float requirement.
A possible deal breaker? Companies considered for index inclusion must have posted positive earnings for their most recent quarter. The sum of their past four quarters’ earnings must also be positive.