Newsmax (NYSE: NMAX) reached a notable milestone in its brief existence as a publicly traded company on Monday, and investors reacted by snapping up shares of the stock. It closed the day nearly 14% higher in price, and with that performance absolutely thrashed the S&P 500 index’s 0.5% gain.
Maximizing visibility
As of Monday, Newsmax is part of both the Russell 2000 and Russell 3000 indexes. At a stroke this makes the media stock a member of both a prominent small-cap equity tracker, as part of the former index, and a component of an index that includes the largest U.S. companies with the latter.
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Inclusion on (or exclusion from, while we’re on the subject) an index has little if no direct effect on a company’s operations and fundamentals. However there’s the phenomenon of “the index effect,” in which stocks can get pops simply from the free publicity and higher visibility that comes with joining a well-known index.
To a degree, this is justified. The many index funds that sniff around Russell 2000, Russell 3000, or any one of the many other stock indexes always need to be invested in component stocks. Inclusion automatically makes a company a candidate for such institutional buyers, thereby raising demand for its stock to some extent.
Remember what’s important
While Newsmax is surely glad and proud to be part of the two Russells, I should reiterate and emphasize that this development alone shouldn’t sway investors toward or away from the company’s stock.
It’s the fundamentals that ultimately matter, and at the end of the day Newsmax will sink or swim on them. Personally, I’m not captivated by its performance and I wouldn’t buy the stock just now, although the business surely has potential.
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Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
