There seems to be lots of fear in the market about the end of the lockups on February 14, with talk of
Valentine's Day Massacres and the like.
I'm betting that this
fear is overstated, and that nobody's going to dump 170 million shares on the market all at once.
And I think there's a reservoir of support for the stock that will soak up as many shares as anybody wants to sell at current prices.
That reservoir of support is Google's
pristine financial performance coupled with the prospect of being added to the
S&P 500 index in the near term.
Consider some basic numbers. The market cap of the S&P 500 is about
$10 trillion. Of that, about
$1.1 trillion, or 11%, is held in funds that try to mimic the composition of the index. So when companies are added or removed from the index, these funds must buy or sell to keep their portfolios in line with the index.
Since Google only recently began trading publicly, it is not now in the index. When it is added, though, you can expect that about 11% of its market value would need to be purchased by S&P 500 index funds. That would be about $5.7 billion of incremental purchases, or about 30 million shares at today's price.
So how likely is it that Google will be added to the S&P 500? Very likely. It already meets all but one of the criteria. And the remaining requirement, that at least 50% of its shares be available to trade, will be met when the last lockup expires on Monday.
Check out this
article from CNN written last year, which shows the requirements that Google's met to be added to the index. And this
article from Optionetics discusses the other big changes to the S&P 500 index due to all the big mergers, which will require that the acquired company be dropped from the index. Optionetics thinks Google is likely to be added to the index sooner rather than later.
So it seems almost certain that Google will be added to the index, which will create new demand for its shares. The only question that remains is whether institutions have already started buying in advance of the announcement, or whether they're waiting for a Saint Valentine's Day bargain to accumulate shares.
