What Impact Could Inclusion in the S&P 500 Have on BlackRock Stock?

+6.59%
Upside
800
Market
853
Trefis
BLK: BlackRock logo
BLK
BlackRock

BlackRock (NYSE:BLK) is the largest publically traded asset management firm with assets under management (AUM) in excess of $3.5 trillion as of 2010-end. BlackRock provides investment advisory services on equity, fixed income, cash and alternative investments such as hedge and private equity funds. BlackRock competes with other investment management companies such as State Street (NYSE:STT) (with $1.9 trillion AUM as of Dec’09) and Fidelity Investments (privately held with $1.5 trillion AUM as of Dec’09).

See our full analysis and $184 price estimate for BlackRock

While BlackRock’s market capitalization exceeds $50 billion, a majority of BlackRock’s shares have been tied up in affiliated partners ever since it went public in 1999. Bank of America/Merrill Lynch (with 33.9% equity stake) and PNC Financial Services (with 24.3% equity stake) sold almost 59 million (of the total of 191 million) shares to the public in a secondary offering in November 2010, which increased BlackRock’s free float to over 50% and made it eligible for inclusion in the S&P 500 index. [1]

We currently value BlackRock stock at $184. As inclusion in an index has often sparked growth in a company’s stock price, we decided to explore the potential impact this scenario could have on BlackRock’s stock price.

Relevant Articles
  1. Up 10% Since The Beginning Of 2023, What Should You Expect From BlackRock Stock?
  2. Up 10% In The Last Six Months, Does BlackRock Stock Have More Room For Gains?
  3. Will BlackRock Stock Top The Estimates In Q3?
  4. BlackRock Stock Topped The Earnings Consensus In Q2
  5. BlackRock Stock To Beat The Street Expectations In Q2
  6. BlackRock Stock To Top The Estimates In Q1

Why Does Inclusion in an Index Affect Stock Price?

As the old Wall Street adage goes…”It takes volume to make prices move.

Inclusion in an index immediately leads to significant increase in trading volume. ETFs and index funds increase the proportion of their equity stake in the stock to match the index. Index-based trading strategies (passive investing) create additional order flows that translate into higher trading volumes. Increase in overall demand drives prices upward.

Upon inclusion in an index such as the S&P 500, the stock is also automatically “cross-listed” in the index derivatives market such as the S&P 500 index futures and options market. This move exposes the stock to additional trading by arbitrageurs, who trade index derivatives and ETFs against individual stocks in an effort to exploit market inefficiencies and make quick profit gains.

Potential Impact on BlackRock Stock

While higher trading volume can translate into a higher stock price based purely on the supply and demand balance, inclusion in an index doesn’t necessarily alter a company’s intrinsic value. Rather, higher trading volume primarily increases a stock’s liquidity.

Inclusion in an index as prestigious as the S&P 500 does, however, increase investor and consumer awareness of a stock. This awareness can potentially increase investor confidence in the stock’s worth and consumer confidence in the company’s overall business.

While we do believe that inclusion in the S&P 500 could cause a short-term spike in BlackRock’s market price, we remain cautious on whether any spike could be sustained over the long-term.

Notes:
  1. BlackRock Stops Share Buying to Get Into S&P 500, Reuters, Jan 25’ 2011 []