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S&P 500: Embracing the Future?

At first blush, Standard & Poor's latest alterations to the S&P 500-stock index seem to be a classic case of out with the old, in with the new.

On Nov. 14, S&P announced that (AMZN) would replace AT&T (T) in its index, the benchmark of stock pickers everywhere. Amazon's stock shot up 6% in extended trading to close the following day at $44.45, up $1.92, or 4.5%, since the news was announced.

AT&T -- still remembered fondly by investors as "Ma Bell" and once the largest and most widely held stock in the country -- is being acquired by SBC Communications (SBC) in a deal expected to close around Nov. 18. The largest U.S. long-distance telephone company, broken up by the U.S. government two decades ago, is emblematic of the wire-line telecommunications industry that's swiftly being left behind by emerging wireless and Internet-based technologies.

Scratch the surface, however, and you'll see the out-with-old-AT&T and the in-with-the-new-Amazon interpretation of events doesn't quite hold up.

GOING MAINSTREAM For starters, Amazon's entrance into the iconic S&P index is a sign of its maturation as a company, not its newness, says Peter Cohan, a venture-capital investor and author in Marlborough, Mass. Having the online retailing king join the S&P 500 is a turning point, he says. "It is a symbol of the extent to which e-commerce is a part of the mainstream and not a new and exciting technology."

He points out something else that hasn't been all that exciting of late: Amazon's stock price. It is nowhere near its dot-com bubble peak of $105 (adjusted for stock splits, that is) -- nor has it returned to the $47 level it reached before third-quarter results disappointed investors (see BW Online, 10/26/05, "Amazon: Good, Just Not Good Enough").

Still, being added to the index grants Amazon new legitimacy, says Howard Silverblatt, equity market analyst at Standard & Poor's. It proclaims to the investment community that the online retailer is profitable, liquid, and large.

The stock enjoyed a bounce following the addition, in part because many more institutional investors and index funds are now buying it, but also because some traders try to buy the stock before institutional purchases lift the price. However, that trading activity could be short-lived, warns Silverblatt. Amazon was already 70% owned by institutions. "The test will be in the next two weeks," he says.

SEARCHING FOR GOOGLE If S&P was really out to add the most new and exciting Internet company to its index, the hands-down winner would have been Google (GOOG). Not only is Google's market cap far larger than Amazon's, but it is the company many investors see as the most innovative. "Amazon is a mainstream retailer while Google is on the cutting edge of high tech," says Cohan.

Some investors had expected Google to be added next to the S&P. Its stock dipped at the open on Nov. 15 as investors who thought it would replace AT&T were disappointed. S&P's goal in choosing stocks for the S&P 500 is simply to represent the broader market, says Silverblatt. The company, which like BusinessWeek is a division of the McGraw-Hill Companies, won't comment on why specific stocks are not selected for its index, but it does weigh how long a company has been publicly traded in its decision (Google's IPO was just 14 months ago). The search giant will no doubt make it into the index sometime soon.

What about AT&T and the out-with-the-old scenario? It certainly is an old company, but it isn't really being pushed out of the index at all. It is simply being merged into another S&P 500 member. That opens up a new spot in the 500-stock index, but SBC plans to change its name to AT&T and keep the coveted "T" symbol (single-letter tickers have cachet with investors).

HOLD THE PHONE "Technically the old AT&T is dead, but it's still around in name anyway," says Chuck Carlson, editor of DRIP Investor and publisher of tax-calculation software for long-time AT&T shareholders (see BW Online, 2/16/2005, "R.I.P. AT&T").

AT&T may not really be out of the S&P 500, and Amazon isn't really that new and exciting anymore. Nonetheless, there is irony that "gone is the old way of communicating, and in is a whole new technology structure that didn't exist 15 years ago," Carlson insists. Either way, the reconstituted index will be more up to speed with the current -- if not the future -- U.S. economy as a result of the switch.


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