The S&P 400 index of midcap stocks on Wednesday named its replacement for U.S. Steel after its drawn-out acquisition by Nippon Steel. The new entry, APi Group, joins the S&P 400 on Tuesday, about six weeks after it earned a place in the IBD Breakout Stocks Index.
The New Brighton, Minn.-based APi Group is a leading provider of fire safety, security, elevator and escalator services, including inspections, maintenance and monitoring. The company is making a push to expand its elevator business as part of its acquisition strategy.
APi stock had moved sideways for about 14 months, with its relative strength line, the blue line in IBD MarketSurge charts, showing that it badly lagged the S&P 500 over this period. But APi surged 52% from April 8, the day before President Donald Trump delayed the second step of his "Liberation Day" tariffs, to Wednesday's close.
In early Friday stock market action, APi is surging as its S&P 400 addition puts the stock more squarely on the radar of fund managers.
S&P 400 Inclusion Impact
A 2019 study by IHS Markit, which S&P Global subsequently acquired, found that inclusion of a stock to the S&P 500, S&P 400 or S&P 600 "is more impactful" than news that Warren Buffett's Berkshire Hathaway has purchased the stock.
Actually, IHS Markit found that inclusion in the S&P 600 provides the biggest boost, followed by the S&P 400 and then the S&P 500.
However, it's an especially big deal when a company is added to the S&P 400 after not previously having been in the S&P 600. That's the situation for APi and likely a major reason why it's surging on Friday.
IHS Market found that the addition to the S&P 400 lifts a stock by an average of 6.1%. However, the net effect is just 0.6%, if the stock moves from the S&P 600 to the midcap index.
Further, IHS Markit noted that index fund initiations "can often account for 5%-10% of an issuers' shares outstanding" as ETFs accumulate shares to match the index. Even for active fund managers that aren't tracking an index, they still may be more likely to buy shares after a company is added to the index their prospectus says they're trying to outperform.
APG Stock Takes Off Early
APi climbed 5% to 51.38 in early Friday stock market action. Shares took off as analysts labeled the company as defensive play that was relatively well-positioned to withstand tariffs.
The stock cleared a 41.31 buy point from a nine-week consolidation on May 2, following the prior day's earnings that saw revenue growth accelerate to 7%.
Shares kept rising after APi Group announced new financial goals on May 21, setting targets of $10 billion in net revenue and mid-single-digit organic growth.
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