-- Q: Does Standard & Poor's tend to add hot stocks to the S&P 500 index, rather than sleepers?
A: It's often believed that when stocks get added to the Dow Jones industrial average, their days as great stocks are over.
And there's been some truth to that statement. Half of the four most recently added stocks to the Dow have been very poor performers, according to Dow Jones and Standard & Poor's Capital IQ. Consider some examples:
• Bank of America bac has dropped 85% since being added to the Dow on Feb. 19, 2008.
• Cisco Systems csco is down 11% since June 8, 2009.
• Kraft kft is up 5% since Sept. 22, 2008.
• Travelers trv has risen 30% since June 8, 2009.
The idea that stocks tend to languish after being added to the Dow isn't all that surprising. After all, the index is supposed to be a collection of the 30 most established and widely recognizable companies. These aren't, by definition, going to be the stocks that set the stock market on fire.
But you're asking the opposite question. Does S&P have a track record of adding hot stocks to the S&P 500, perhaps as a move to goose the index' performance?
To find out, here's an examination of the stocks that were added to the S&P 500 this year and how they'd done in the two years prior to being added, according to Standard & Poor's Capital IQ:
• Mosaic mos: Up 24% two years prior to Sept. 21, 2011.
• Accenture acn: Up 86% two years prior to July 5, 2011.
• Alpha Natural Resources anr: Up 80% two years prior to June 1, 2011.
• Chipotle Mexican Grill cmg: Up 271% two years prior to April 20, 2011.
• BlackRock blk: Up 55% two years prior to April 1, 2011.
• Edwards Lifesciences ew: Up 187% two years prior to March 31, 2011.
• Covidien cov: Up 29% two years prior to Jan. 26, 2011.
• Noble ne: Up 81% two years prior to Jan. 14, 2011.
Looks like your hunch is correct: S&P, at least this year, has been adding winners to the S&P 500. Every one of the added stocks has gained over the past two years, and in many cases, by a large amount.
But before you assume that these changes tilt the index, remember, that the role of the S&P 500 is to reflect the value of the stock market. Stocks that are gaining market value are bigger contributors to the stock market, and therefore, deserve to be a bigger part of the index.
Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies and Fundamental Analysis for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at email@example.com. Follow Matt on Twitter at: twitter.com/mattkrantz