Study Shows Stocks Removed From S&P 500 Can Outperform Market

A recent report reveals that stocks deleted from the S&P 500 may outperform broader market indices over the following years. Etsy, recently removed from the index, showcases strong potential for growth due to its robust free cash flow and high return on invested capital, suggesting a hopeful turnaround.

Date: 07-10-2024

AI Rating: 7

The report indicates that historically, stocks removed from major indices like the S&P 500 have outperformed the broader market by an average of 5 percentage points annually over five years post-deletion. This counterintuitive trend can be attributed to significant stock sell-offs following their removal, leading to attractive valuations.

Focusing on Etsy, recently excluded from the S&P 500, the company demonstrated a Free Cash Flow (FCF) growth of 42% annually since 2017, which is notable. In addition, Etsy has an impressive FCF margin of 25%, further enhancing its prospects as a desirable investment.

Moreover, Etsy's return on invested capital (ROIC) stands at a striking 40%, suggesting that the company efficiently generates cash relative to its equity and debt. These factors contribute to Etsy's value proposition and create enthusiasm around its potential recovery and growth out of value territory.

Additionally, the company has initiated share buybacks, reducing its share count by 9% in three years, positioning it favorably amidst its 9.6% FCF yield. Despite a rough performance leading to a market cap drop from above $30 billion to approximately $6 billion, Etsy's business is fundamentally stronger than in 2017, illustrating its ability to bounce back.

Etsy's focus on enhancing its mobile app - an area currently underutilized with only 45% of buyers using the app - has the potential to significantly increase sales, as mobile users typically have higher purchase rates. Success in this domain could unlock additional growth and drive its valuation higher.

Stocks: ETSY AMZN WMT