There were some big changes made to the S&P 500 on March 17, with several well-known stocks getting reclassified. For instance, Target (NYSE:TGT), Dollar General (NYDE:DG) and Dollar Tree (NASDAQ:DLTR) are now classified as consumer staples rather than consumer discretionary stocks. And Visa (NYSE:V), Mastercard (NYSE:MA) and Paypal (NASDAQ:PYPL) have been moved from the technology sector to financials, which all makes sense.
In addition to reclassifications, companies can be replaced in the index if they fail to meet market cap or other requirements. After all, the S&P 500 is made up of the 500 largest publicly traded companies in the U.S.
As an article in
Standard & Poor’s has become increasingly aggressive in deleting stocks from the S&P 500 index. Where once it made replacements in the index only when a particular stock had to be removed due to merger or acquisition, corporate restructuring, and bankruptcy filing, S&P now voluntarily removes a company for a variety of reasons, which may include low market capitalization, low share price, dwindling market share, or simply the need to find a spot for an up-and-comer.
I would argue that the names below are not only S&P 500 stocks to sell but ones that no longer deserve to hold a place in the prestigious index.
|FRC||First Republic Bank||$13.69|
|NCLH||Norwegian Cruise Line||$13.27|
VeriSign’s (NASDAQ:VRSN) big claim to fame is that it owns two of the world’s 13 internet root servers and is one of the world’s largest domain name registry services. Without Verisign and others like it, the internet would be unable to function.
In 2022, VeriSign processed 39.9 million new domain name registrations for.com and .net. It finished the year with 173.8 million registrations, up 0.2% from 2021. That business translated into $1.42 billion in revenue, 7% higher than a year earlier. Operating income of $943.1 million for 2022 was 9% higher year over year. Its operating margin is a healthy 66.2%.
VeriSign’s biggest U.S. competitor is GoDaddy (NYSE:GDDY), which generated approximately $2 billion in revenue from domain name registration in 2022. Meanwhile, the company generated total revenue of $4.1 billion and operating income of $498.8 million.
Verisign’s margins are much higher than GoDaddy’s because it has a monopoly on the .com and .net top-level domains. This is why it should be booted out of the S&P 500. Its business model promotes nearly zero growth. It probably always will.
Dentsply Sirona (XRAY)
In 2022, the company’s sales fell 7.3% to $3.92 billion. Excluding currency fluctuations, organic sales were off by 0.5%. On an adjusted basis, it earned $2.09 a share last year, down nearly 26% from $2.82 in 2021.
The company has failed to consistently grow its revenue. In 2016, Dentsply Sirona generated $3.75 billion in revenue. That means its compound annual growth rate (median sales growth rate for companies in the S&P 500 over the past 20 years is 5.2%.) over the next five years was less than 1%. For comparison, the
Surprisingly, five of the 13 analysts that cover the stock give it an “overweight” rating, with the rest rating it a “hold.” Yet, their average target price of $39.82 is just 3.4% above where shares currently trade.
In February, the company announced plans to restructure in an effort to drive growth and profitability. Given its track record thus far, maybe it should do so from outside the index.
First Republic Bank (FRC)
First Republic Bank (NYSE:FRC) is one of the regional banks that got caught up in the collapse of Silicon Valley Bank. Founded in 1985 to service the wealth management needs of high-net-worth clients, many of those customers bolted to big banks.
Fortunately for First Republic, 11 of those same big banks deposited $30 billion to signal to customers and investors alike that the banking system was stable. The deposits must remain at First Republic for at least four months.
However, the damage has been done in terms of the share price, with FRC stock cratering 88% from $115 on March 8 to less than $14 a share today. And its market cap has fallen to a mere $2.7 billion.
University of San Francisco finance professor Ludwig Chincarini was quoted in The San Francisco Standard, saying:
“The longer-term question [investors are] asking is: What are they going to do with the lost deposits? Either they’re going to have to call clients back and say, ‘We’re doing OK now,’ or they’re going to have to lay off a bunch of people,” Chincarini said. “I think that latter option is more likely.”
This sullied regional bank has no business being a part of America’s most prestigious index.
Boston Properties (BXP)
Real estate investment trust ( Boston Properties )(NYSE:BXP) will likely be one of my biggest mistakes in 2023. In early January, I included the owner of 194 properties and 54.1 million square feet of office space in a group of seven REITS that will be big winners in 2023.
Even though it had 4.4 million square feet in development at the time, between the mini-banking crisis and the continuation of work-from-home policies, office space in major cities is seeing sagging demand. As a result, the media and real estate experts are asking what should be done with all the empty office space. That’s hardly a confidence booster.
“There are places in the U.S. where office occupancy is down 20% or 30%, which is a big amount, but not necessarily catastrophic — there are also places where it’s down 50% or more,” said Brookings Institution fellow Tracy Hadden Loh in a January interview. “Those are the places where you start to hear rhetoric like downtown is a ghost town.”
Eventually, Boston Properties will figure out how to resolve this crisis. Until then, does it make sense to have an office REIT in the index? I don’t think so, especially when shares are down 57% over the past five years.
Newall Brands (NWL)
Shares of consumer and commercial products manufacturer Newall Brands (NASDAQ:NWL) are trading at their lowest level since May 2020. Chief Financial Officer ( ) Mark Erceg must believe they are a good deal. He bought nearly 77,000 shares this month at prices between $12.81 and $13.
It’s always impressive when insiders make this big of a bet on their company. Erceg became CFO in December, having previously served as CFO of Tiffany & Co., Cerner and several other large companies. Unfortunately, for Erceg, Newell’s shares are currently trading just above $12, so he’s already underwater on his bet.
At the end of January, the company announced a restructuring plan that would eliminate 13% of its office positions by the end of this year. As part of the restructuring, it expects to generate annual pre-tax savings of up to $250 million.
Less than two weeks after announcing the restructuring plan, Chief Executive Officer (announced he was retiring after less than four years in the top job. Replacing Saligram will be Newell’s former CFO and current president, Chris Peterson. ) Ravi Saligram
Newell has more than 100 brands. It’s sold off a bunch in recent years, but it still owns way too many. This company should be taken private where it can be rehabilitated away from the glare of Wall Street.
Norwegian Cruise Line (NCLH)
This is not a slight against Norwegian Cruise Line (NYSE:NCLH), but do we need three cruise line operators in the S&P 500? Yes, I know, there are five airlines in the index, so three cruise operators shouldn’t be a big deal. However, compared to Carnival (NYSE:CCL) and Royal Caribbean Cruises (NYSE:RCL), NCLH is considerably smaller. Its $5.9 billion market cap is less than half that of the former and roughly one-third of the latter.
It doesn’t help that Norwegian Cruise Line reported weaker-than-expected guidance for 2023 at the end of February. Since then, NCLH stock has lost nearly a fifth of its value, giving back most of its gains for the year. And it’s trailing its larger peers by a considerable amount in 2023.
The company is also burdened with a tremendous amount of debt like the entire cruise industry. Its $14.25 billion in debt is 2.4 times its market cap. That’s high.
Fortunately, travel demand is also high right now, so the cruise line operator should be able to manage its debt load just fine… for now. But I return to my original question: Do we need three cruise lines in the index? I don’t think so.
Lumen Technologies (LUMN)
Lumen Technologies (NYSE:LUMN) is the newish name of CenturyLink, a provider of telecommunications services for enterprise customers. It changed its name to Lumen in 2020 as it moved away from consumer services, opting to serve a more profitable enterprise end user.
In early March, a class action lawsuit was filed against the company in Louisiana. The suit alleges Lumen intentionally misled investors about its Quantum Fiber residential buildout plans to boost its share price artificially. Management announced in early February that it was cutting its planned buildout from 12 million locations to between 8 million and 10 million.
Lumen is undergoing what CEO Kate Johnson called a “year of rapid change,” which is estimated to cost it roughly $3 billion in capital expenditures. I will admit that I got caught up in the transformation strategy Lumen is selling investors. In August 2022, I included LUMN in a group of ultra-high-yield dividend stocks worth considering. Trading at $11.26, shares were yielding 9%.
“Get paid to wait for the completion of its transformation,” I wrote at the time.
Unfortunately, the company eliminated its dividend in November, saying it would focus on share repurchases. It was also meant to give the newly appointed Johnson a fresh slate for capital allocation.
Dividend investors abandoned the stock, which is down 64% since the announcement. At $2.6 billion, it has the smallest market cap in the index, with First Republic coming in second. It ought to be gone.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this articleare those of the writer, subject to the InvestorPlace.com Publishing Guidelines.