FTSE 100 reshuffle: Who’s in and out in a week of disruption?
The FTSE 100 reshuffle is the first since the Covid-19 pandemic hit the economy and stock market.
The FTSE 100 is attempting to return to peaks last seen in January 2020. I’;s been a turbulent time. On 12 March 2020, the index fell 10.87%, the biggest in more than 30 years.
The index dropped on news of the Omicron variant of Covid-19, which sent markets across the globe into a spiral. Investors moved from transport, travel, leisure and energy stocks. Most companies in the FTSE 100 were down by close on 26 November 2021. The index fell by 3.64%, its biggest fall since March 2020.
This has raised further interest in the reshuffle of the FTSE 100 index.
FTSE 100 reshuffle explained
The FTSE 100 is reshuffled on a quarterly basis, in March, June, September and December. A review will take place on Tuesday 30 November before the next FTSE reshuffle date on 1 December. Companies in the index are ranked based on their market capitalisation.
Companies previously not in the FTSE 100 that have risen above 90th in the FTSE 250 will be promoted to the FTSE 100, while companies in the major index that fall below 110th will be demoted. It’s a relatively simple approach to selection compared to the S&P 500, which takes into account eight formal specifications when ranking and selecting stocks.
Which stocks will move in or out of the index?
FTSE Russell highlights four companies earmarked for possible promotion or relegation.
Electrocomponents creates industrial electronic products and solutions. It’s enjoying a bumper year, delivering a stellar performance on the back of sustained demand for electronics, while successfully negotiating global supply chain issues.
An adjusted pre-tax profit increase of 91%, according to an earnings report for the first half of 2021 (H1 2021), adds to a 126% spike in earnings per share against the same period last year, allowing the company to reduce net debt from £144.8m to £83.6m.
The company’s share price has grown by an impressive 37.05% year-to-date, while a 12.34% increase in the last three months has led to Electrocomponents banging on the door of the FTSE 100 in time for the latest review. Its share price is currently (29 November) 1,211p, giving a market cap of £5.7bn.
“Although there are likely to be further cost pressures ahead, Electrocomponents appears in a robust position, particularly given that demand for electrical parts shows little sign of waning,” Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, wrote in a note.
Dechra Pharmaceuticals looks like another prime candidate to be promoted to the FTSE 100 index, but as a result of shifts in consumer behaviour, rather than the structural industrial growth experience.
The company, which specializes in pharmaceuticals for the pet market, has benefitted from a wave of demand linked to a corresponding growth in pet ownership. According to the Pet Food Manufacturers Association (PFMA), 3.2m UK households acquired a pet in the 12 months after the onset of the pandemic.
That has inevitably translated into more demand for pet-allied health products, confirmed by the company’s annual report for the year to 30 June 2021, released on 20 September. It showed revenues had increased by 21% year-on-year while diluted earnings per share (EPS) increased by 19.4%, resulting in a full-year dividend of 40.50p, a 18.1% rise. Earnings were helped by the acquisitions of Osurnia and Mirataz.
The company’s share price has grown by 46.67% year-to-date, although that’s been tempered by a 3.16% fall in the last three months. It’s current market cap is £5.52bn. Entry into the FTSE 100 this quarter would follow an indicative expectation among analysts in September.
“There is a risk that with incomes facing a squeeze from rising inflation, spending per head could decline, so there could be headwinds to navigate. But other results from pet orientated companies indicate that demand for pets doesn’t seem to be falling away, which bodes well for future revenue streams,’’ Streeter said.
It’s been a quarter to forget for Darktrace, a self-learning AI Cybersecurity company based in Cambridge. The company could drop out of the FTSE 100 on 1 December, which appears even more striking when contrasted with its bumper second-quarter performance. The stock jumped 40% on its market debut, followed by a surge to the top 100 in September as shares continued to rise to 76.2% since launch.
The company has also enjoyed good sales data, which suggests that growth remains healthy. Latest earnings for the first quarter show a 42.7% year-on-year increase in customers to nearly 6,000, and a 50.8% rise in revenue, while raising revenue growth guidance for the full year.
But the company’s shares fell 35.79% in the past month, suffering a massive 25% drop on the day when Peel Hunt, a broker, suggested the stock was overvalued on 25 October 2021.
The stock fell to 471p, below Peel Hunt’s initial sell note that set a price target of 473p. It marks a steep fall, which Streeter suggests is a result of its IPO lock-up period coming to an end.
“Its successful launch in the spring was seen as a coup for the London market, and if it exits the top-flight it will leave a big tech gap in the FTSE 100. However, given ongoing growth reported by the company and some pretty upbeat trading updates, it may not stay outside the top-flight for long,” Streeter wrote, noting that strong sales and the ongoing shift to digital should fortify the stock’s longer term prospects.
Troubling long-term concerns add to short-term headwinds that could see Johnson Matthey take a permanent exit from the FTSE 100. The engineering and chemicals company is battling for the hearts and minds of investors as it takes a turbulent pivot in its strategy.
The company’s misfortunes have primarily come from its decision to exit the electric battery market, causing shares to plunge by more than 16% as investors called into question the logic of opting out of a high growth, high promise industry in favour of renewed focus on catalytic converters for Internal Combustion Engines (ICEs).
In addition to the surprise announcement, the group struggled in the last year to build on its fundamentals. Latest earnings for the first half of 2021 reveal losses before tax of £9m, compared to a £26m profit for the same period last year, while operating profit fell 71% to £20m. That was enough to put further downward pressure on Johnson Matthey shares.
Johnson Matthey stock has performed poorly through the year, falling 14.80% year-to-date. That masks a much heavier hit in the last quarter, with shares plunging 31.09% in the past three months and 23.71% in the last month only. Its current (29 November) market cap of £4bn and share price of 2,066p suggest that it could tumble out of the top 100.
“Management says it will focus on other potential growth avenues, but ultimately the group will be starting from scratch as it looks for new opportunities alongside the new greener auto industry. Although catalytic converters won’t be rendered obsolete immediately, the clock is ticking and as the transition to electric vehicles speeds up, Johnson Matthey will need to quickly find a new sense of direction,’’ said Streeter.
How does the FTSE 100 reshuffle work?
During a FTSE 100 reshuffle, stocks in the index are ranked based on their market capitalisation. Companies previously not in the FTSE 100 that have risen above 90th in the FTSE 250 will be promoted to the FTSE 100, while companies in the major index that fall below 110th will be demoted.
When is the next FTSE 100 reshuffle?
The FTSE 100 is reshuffled on a quarterly basis in March, June, September and December. A review will take place on Tuesday 30 November 2021 before the next FTSE reshuffle comes into play on 1 December 2021.