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The S&P 500 All Rookie Team

Posted: Jul 24, 2008 08:46 AM by Gregory S. Davis

Tickers in this Article: MA, AXP, DFS, AKS, X, NUE, COG, MEE, GM, BC

Changes of supply and demand, investor sentiment and confidence are reflected in the economy and in the indexes built to track the performance of companies in the marketplace. The S&P 500 index, which follows the performance of 500 of the largest market capitalization stocks, has lost 14% of its value year to date, but it is up 33% over the past 10 years. Investors should be aware of recent changes made to the index in comparison to their own portfolio makeup.

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Plastic Earns Another Spot
At the end of last week, transaction processing service MasterCard (NYSE:MA) replaced property and casualty insurer ACE Ltd. (NYSE:ACE) on the S&P 500. ACE is changing its incorporation to Switzerland, removing its eligibility for U.S. indexes. MasterCard also replaced embattled Detroit automaker General Motors (NYSE:GM) on the S&P 100. MasterCard stock is up nearly 31% year to date on revenue of $4.33 billion last year and an operating margin of 30%. Increased transactions and volumes led to a nearly 30% increase in revenues for the first quarter of 2008 over the same period a year ago. MasterCard joins fellow plastic payment processors American Express (NYSE:AXP) and Discover Financial Services (NYSE:DFS) on the iconic index.

AK Steel Gets a Shot
In June, flat steel roll producer AK Steel (NYSE:AKS) replaced the over leveraged former mortgage lender Countrywide Financial. AK Steel joins steel plays U.S. Steel (NYSE:X) and Nucor (NYSE:NUE) on the index. AK Steel has the lowest price-to-earnings growth (PEG) ratio at 0.48 of the three stock plays. AK Steels' PEG ratio below 1 along with its low price-to-sales ratio suggests that this stock is undervalued. AK Steel generated revenues of $7.07 billion last year with an operating margin of 9.67%. In comparison Nucor generated revenue of $17.8 billion and an operating margin of 14.86%. Growing infrastructure demands in the U.S. and in emerging markets adds credibility to this addition. (To learn more, read Analyzing Operating Margins.)

Energy Additions
June also included the addition of oil & gas exploration firm, Cabot Oil & Gas (NYSE:COG) and coal producer Massey Energy (NYSE:MEE). The energy resource plays replace marine boat and fitness equipment maker Brunswick (NYSE:BC) and office supply store retailer OfficeMax (NYSE:OMX). Since the beginning of the year Cabot Oil & Gas and Massey Energy are up 24% and 90% respectively. Rising commodity prices aided by a falling US dollar and increasing energy demands are reflected in the performance of these energy plays. (To learn how to analyze these stocks, check out Oil And Gas Industry Primer.)

Conclusion
The additions to the S&P 500 family reflect the growing importance of energy, raw materials and financial services in the global economy. Investors should review their portfolio to ensure appropriate changes are made since having out of style investment positions is a sure way to constantly trail the performance of bell weather indexes.

For further reading, be sure to check out our related content Is it possible to invest in an index? and Index Investing.

By Gregory S. Davis

Gregory S. Davis is an investment writer and consultant for his company G.Davis Capital Inc. His core methodology for choosing investments include patience, diversification and asset due diligence. Gregory is a graduate of the Wharton School of Business. He is also a board member of StoriesWork, a non-profit organization based in Durham, NC that uses storytelling to empower youth and individuals to utilize alternative dispute resolution tactics.

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