S&P 500 Rings In New Year With Higher-Tech, Larger-Cap Names

The close of trading Friday marks the end of the road in the marquee Standard & Poor's 500 Index for New York Times Co. (NYT), Office Depot Inc. (ODP) and Eastman Kodak Co. (EK), mirroring changes both in consumer behavior and the marketplace.

The index aims to emulate the U.S. economy, which has largely gone digital, pressuring more traditional industries like print publishing, brick-and-mortar retailers and photography.

Taking the place of the companies will be Internet-traffic service provider F5 Networks Inc. (FFIV), online-movie rental service Netflix Inc. (NFLX) and gas and oil exploration company Newfield Exploration Co. (NFX).

"If you look at who's going on and who's going off, it looks more like a global change in how everyone does business," said Morningstar analyst Joscelyn MacKay. "It kind of shows that new technology is making inroads and some of the older technologies are leaving."

Netflix has the most recognizable name of the three new additions and its shares have more than tripled this year alone.

"Netflix, with its new streaming product, really revolutionized television," said Gabelli & Co. analyst Brett Harriss, referring to the delivery of video online.

Meanwhile, F5, with the biggest market cap of the three, has benefited from the overall growth of mobile traffic and cloud computing. And Newfield, traditionally a natural-gas focused company, has been shifting more toward lucrative oil production, helping send its shares on a tear.

In a typical year, there are about 30 changes in the S&P 500, many of which are due to mergers and acquisitions, said S&P's David Blitzer, chairman of the index committee. In one such move, also after Friday's close, Cablevision Systems Corp. (CVC) is replacing King Pharmaceuticals Inc. (KG), which is being acquired by Pfizer Inc. (PFE).

But this year, there were fewer opportunities to make merger-related moves, Blitzer said, adding there had only been 12 previous changes in 2010.

"Over the last two to three months, it's become clear that unless we get a big pickup in M&A activity, that some changes would be appropriate," he said.

While a company's market cap must be at least $3.5 billion to be considered for inclusion in the 500, there isn't a set threshold for removal. And unlike the Russell indexes, which are reconstituted annually, there's no set schedule for changes.

The companies leaving the index Friday had market caps between $1 billion and $3.5 billion as of Dec. 9 and are joining the MidCap 400. The new additions, meanwhile, are worth more than $7 billion, more in line with the median market cap of the index at $10.9 billion.

Among Friday's changes is the removal of Kodak, which has been part of the 500 since the index was first published in 1957. After Friday, the number of original members in the index will fall to 73. Kodak shares, which traded above $90 in 1997, have steadily declined along with its traditional film business.

A spokesman for the company, which was also a component of the Dow Jones Industrial Average until 2004, called the S&P shift a mere mathematical consequence of a change in market capitalization.

Meanwhile, New York Times shares are essentially flat over their 26-year life in the index, despite a big run-up in the late 1990s and early 2000s. Over the same period, the total market value of the index has surged to $11.8 trillion from $1.2 trillion.

A representative for The New York Times declined to comment.

Howard Silverblatt, S&P's senior index analyst, noted the deterioration in the publishing industry and said it no longer needs the representation in the 500 that it did at one time, though "it needs representation in the mid-cap area, which speaks to the market value."

Coincidentally, Meredith Corp. (MDP), publisher of Ladies' Home Journal and Better Homes and Gardens, is among the stocks remaining in the index with the smallest market cap, according to FactSet Research.

As for Office Depot, the office-supplies retailer entered the 500 in 1999, when its market cap was roughly $8.4 billion. But it suffered during the recession amid high unemployment among white-collar workers and competitive pressure.

An Office Depot spokesman said S&P's decision has no impact on its long-term strategic plan, though it acknowledged moving from one index to another could cause certain index funds to unload the shares.

Indeed, there is often a decline in shares of companies that are removed from the 500 as index managers rebalance their portfolios.

Silverblatt estimates 11.4% of the shares of S&P 500 constituents are held by licensed index funds or managers, with more emulating the index.

But some observers say the move could ultimately have a positive effect on share prices. The companies will lose limelight leaving the 500, said Cirrus Research's Satya Pradhuman; however, they may take up greater market share in the smaller index depending on the relative weights they take hold of.

For investors, S&P's Blitzer said the one thing to remember is "this is not investment advice in any way, shape or form."

-By Caitlin Nish, Dow Jones Newswires; 212-416-2076; caitlin.nish@dowjones.com

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