Is Palantir Getting Included In The S&P 500 This Friday?

Analyzing Palantir's chances...

Welcome back to DailyPalantir! In today’s newsletter, we go deeper into if Palantir can get into the S&P 500 Index this week. Let’s get into it!

Why Getting Into the S&P 500 Matters

Getting included in the S&P 500 is a major milestone for any company because it brings substantial recognition and benefits. The S&P 500 tracks the performance of 500 of the largest and most successful publicly traded companies in the U.S., and being a part of this index signals that a company is among the elite in terms of size, stability, and financial health. For a company like Palantir, inclusion would represent a significant validation of its growth and potential, as it would be recognized alongside some of the most important and influential businesses in the world.

In addition to brand recognition, being part of the S&P 500 brings a boost in visibility and credibility. Fund managers and institutional investors around the world often allocate capital to mirror the S&P 500, meaning they are required to purchase shares of any company included in the index. This can drive significant buying pressure, increasing demand for the stock. Moreover, many individuals who invest in S&P 500-based ETFs or index funds will inadvertently become shareholders of Palantir, further driving up its stock price and providing liquidity.

The inclusion in the index also comes with a reputational boost. It signals to the broader market that the company has achieved a certain level of maturity, stability, and financial viability. For a company like Palantir, which has faced skepticism over its long-term profitability, being part of the S&P 500 would be a strong counter to critics. It would demonstrate that the company has not only turned profitable but is now considered a reliable part of the U.S. economy’s backbone.

Another important factor is how the S&P 500 is used as a benchmark by many institutional investors. Many funds and investment vehicles are structured around the S&P 500, meaning that once Palantir gets included, fund managers will need to purchase shares to ensure their portfolios reflect the index. This creates a steady stream of institutional investment, which is critical for long-term stock price stability. It also opens up new avenues for exposure to a broader base of investors who may not have considered Palantir before.

In summary, getting into the S&P 500 is not just about prestige. It’s about access to new capital, increased buying pressure from institutions, and heightened visibility. It signals to the world that Palantir is not only a significant player in the AI and defense space but also a reliable, profitable company with long-term potential. This is why inclusion in the S&P 500 matters so much.

We will know on September 6th, at around 5:15PM EST if Palantir gets in. On September 20th, the actual rebalance will happen.

What Happens to Companies That Get In

When a company gets included in the S&P 500, one of the most immediate effects is a rise in stock price due to the automatic demand created by index-tracking funds and ETFs. Fund managers that track the index must adjust their portfolios to reflect the new company’s inclusion, leading to a surge in buying activity. This influx of capital can boost the company’s stock in the short term, as seen with past inclusions of companies like Tesla and CrowdStrike. This buying pressure generally leads to a price increase leading up to and immediately following the inclusion.

However, it's important to note that stock price reactions can vary after the initial inclusion. Some companies experience a significant run-up before they are officially added, only to see a pullback afterward. This is because much of the buying happens in anticipation of the inclusion, and once the event occurs, there may be profit-taking. For example, Tesla’s stock surged in the months leading up to its S&P 500 inclusion but then saw a pullback shortly after. The initial spike is often followed by a period of consolidation, but the long-term effect is generally positive due to sustained institutional interest.

Being included in the S&P 500 also means that the company has passed certain financial and structural requirements, which gives investors more confidence in its stability. To qualify, a company must meet market capitalization thresholds, demonstrate liquidity, and show a consistent track record of profitability. These requirements ensure that only the most robust companies are included, which in turn makes the index itself more attractive to investors. For Palantir, being included would mean it has met these rigorous standards, signaling to the market that it has transitioned from a high-growth, speculative stock to a more stable, long-term investment.

In addition to attracting institutional investors, S&P 500 inclusion can also lead to greater media coverage and attention from analysts. The companies in the index are closely watched and regularly reported on, which increases their visibility. For Palantir, which has often been the subject of debate over its long-term prospects, this could provide an opportunity to reshape the narrative around its business model. Being part of the index would offer more transparency and scrutiny, but it could also help Palantir gain more trust and credibility among investors who are looking for companies with staying power.

In the long run, companies that enter the S&P 500 tend to benefit from increased liquidity and a more stable shareholder base. The index attracts long-term institutional investors who are less likely to engage in speculative trading. This stabilizing effect can lead to reduced volatility over time, which is beneficial for both the company and its shareholders. For Palantir, inclusion could mean a shift from being a stock known for volatility to one that is seen as a more predictable, stable growth investment.

Will Palantir Get In?

The question of whether Palantir will get into the S&P 500 hinges on a few key criteria. First and foremost is the company’s financial viability. Palantir has now been profitable for several consecutive quarters, which satisfies one of the most important requirements for inclusion. S&P 500 companies must show profitability not just in a single quarter but over a sustained period. With Palantir demonstrating ongoing profitability, it meets this threshold, positioning it well for inclusion.

Palantir’s market capitalization also exceeds the minimum requirement for S&P 500 companies. With a market cap of around $70 billion, it is far above the $14.5 billion cutoff, meaning it qualifies easily in terms of size. Additionally, Palantir’s stock is highly liquid, regularly trading millions of shares per day, which further strengthens its case for inclusion. Liquidity is essential for companies in the index, as it ensures that shares can be bought and sold easily without disrupting the market.

Recent additions to the S&P 500:

• CrowdStrike Holdings (CRWD): Added on June 24, 2024.

• GoDaddy (GDDY): Added on June 24, 2024.

• KKR & Co. (KKR): Added on June 24, 2024.

• Vistra (VST): Added on May 8, 2024.

• GE Vernova (GEV): Added on April 2, 2024.

• Solventum (SOLV): Added on April 1, 2024.

• Super Micro Computer (SMCI): Added on March 18, 2024.

• Deckers Outdoor (DECK): Added on March 18, 2024.

Recent removals from the S&P 500:

• Robert Half (RHI): Removed on June 24, 2024.

• Comerica (CMA): Removed on June 24, 2024.

• Illumina (ILMN): Removed on June 24, 2024.

• Pioneer Natural Resources (PXD): Removed on May 8, 2024.

• V.F. Corp. (VFC): Removed on April 3, 2024.

• Dentsply Sirona (XRAY): Removed on April 3, 2024.

• Whirlpool (WHR): Removed on March 18, 2024.

• Zion Bancorporation (ZION): Removed on March 18, 2024.

One potential obstacle to Palantir’s inclusion is the relatively low percentage of institutional ownership. Many S&P 500 companies have institutional ownership levels of 60-80%, while Palantir’s sits at around 45%. While this is not a hard requirement for inclusion, the S&P committee may weigh it when making its decision. Institutional ownership can be a signal of stability, as large investors tend to hold stocks for longer periods, which reduces volatility. If Palantir continues to attract more institutional investors, its chances of inclusion will improve.

Palantir’s current institutional ownership:

The timing of Palantir’s inclusion is another factor to consider. While the company has met the profitability requirement and has the necessary market cap, the S&P 500 committee may choose to wait and observe further financial performance before adding it. The inclusion process is not automatic, and the committee has discretion over when to add companies. If Palantir continues to show growth and profitability over the next few quarters, it’s likely that the company will eventually be included, even if it’s not this year.

So, Palantir has a strong case for inclusion in the S&P 500, but the decision will ultimately depend on the committee’s evaluation of its financials and market stability. The company meets most of the key criteria, and its ongoing profitability makes it a strong contender.

If Palantir is not included in this upcoming round, it is likely only a matter of time before it joins the ranks of the S&P 500, given its current trajectory. Again, I think it is obvious that Palantir is one of the best 500 companies in America, but it’s up the committee, and their decision just might rest on other factors then the fundamentals around the company.

That’s it for today - see you tomorrow!

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