When it comes to the predictability of the stock market, the quarterly rebalancing of the S&P 500 (SPX) remains one of the few scheduled events that reliably influences liquidity and sector rotation. To keep individual company weights sufficiently balanced to reflect overall index performance, a committee at S&P Dow Jones Indices rebalances S&P 400, 500 and 600 on the third Friday of March, June, September and December.
This time, the S&P rebalance update is scheduled for release this Friday after market close, with the actual reshuffling set for December 19th. Companies that no longer meet the SPX inclusion criteria will be removed and replaced by firms that had positive earnings for the last five quarters, as just one of many eligibility criteria.
Conversely, as index funds erect buy pressure to track the benchmark as closely as possible, newly added companies often face short-term stock price boost, referred to as the “index effect”. In short, investors should expect pre-announcement speculative positioning in the “rumor phase” leading up to Friday’s update. These stocks currently sit at the center of the rumor mill.
Ares Management Corporation (NYSE: ARES)
With a trailing twelve month price-to-earnings ratio (P/E) at nearly 70, Ares stock is down 10% year-to-date, but up 5.5% over the past month. Although the company has a diversified portfolio, it mainly focuses on credit ($391.5B), real estate ($132.4B), private equity ($25.1B) and infrastructure/secondaries ($38.4B).
Altogether, as of September, Ares holds $596 billion of assets under management (AuM), with over 4,270 employees and 55 offices across the globe. Ares generates revenue through investment management fees and performance-based fees from funds it manages on behalf of high-net-worth individuals, institutional investors and family offices.
Since 2012, Ares has had a Compound Annual Growth Rate (CAGR) of 20%, starting with a modest AuM of $60 billion, having increased the number of direct institutional investors by 13x. Yet, the firm still only holds 1% share of the total addressable credit market worth $40 trillion.
Most recently on Monday, Ares consolidated its vertically integrated global logistics real estate platform under a single brand – Marq Logistics (“Marq”) – making it one of the top landlord solutions across the Americas, Europe and APAC, combining over 600 million square feet worth of properties.
In Q3, Ares generated $1.24 billion net income compared to $1.1 billion in the year-ago quarter. At present, Wall Street Journal’s stock price consensus puts ARES stock significantly above the current price of $159.92, at an average price target of $184.86 per share. The bottom outlook is not far off at $156 while the ceiling target is $205 per share.
Vertiv Holdings LLC (NYSE: VRT)
Also with a TTM P/E ratio near 70, Vertiv Holdings generates the bulk of its revenue from selling digital infrastructure equipment to data centers, telecom, industrial clients, governments and financial services. Whenever there is a need for precision cooling systems and uninterruptible power supplies (UPS), Vertiv Holdings is there to supply them.
Outside of hardware sales, the company has steady income from consulting, maintenance and emergency repairs. Suffice to say, in the age of AI-driven data centers which are only slowed down by the limits of existing energy grid output, the company has plenty of demand to look forward to.
This was demonstrated in the latest Q3 earnings report, with organic orders up 60% from the year-ago quarter and up 20% from Q2. Vertiv’s adjusted operating profit increased 43% to $596 million year-over-year.
Such strong performance pushed Vertiv to acquire Purge Rite Intermediate in early November worth ~$1 billion, as one of the leading companies providing mechanical flushing, purging and filtration services for data centers.
Currently priced at $180.91, the average VRT price target is $194.97, situated between the low of $112 and the high of $234 per share. Year-to-date, VRT stock is up 53%, but down 7.5% over the past month.
AppLovin Corporation (NASDAQ: APP)
In early October, we covered AppLovin’s stock slide after a report of a SEC probe hit the public spotlight via Bloomberg. The app-monetizing platform has been allegedly extracting user data from major platforms without proper consent to deliver more targeted ads.
However, by December, APP stock completely recovered, having gained 92% value year-to-date. The company generates revenue through multiple channels, ranging from developer fees and income from in-app purchases to shared ad revenue within apps.
Moreover, AppLovin targets both indie developers and large global enterprises, owing to its automated, data-driven marketing solutions that simplify app monetization. In Q3, the company increased its revenue by 68% from the year-ago quarter, to $1.41 billion, delivering 93% more income from continuing operations to $836 million.
AppLovin has its own proprietary machine learning engine AXON 2.0 that optimizes real-time ad placement and targeting, resulting in global advertising scaling with a very high profit margin of 82%. Year-to-date, APP stock is up 94%, or 3% over the past month.
Wall Street Journal’s forecasting data puts the average APP price target at $742.83 against the current price of $653 per share. However, due the aforementioned regulatory risks and reliance on Apple/Google ecosystems, APP stock could go down as low as $458. The ceiling price target for APP is $860 per share.