Google missed Standard & Poor's 500 index

BOSTON: Google Inc. may have been passed over for inclusion in the Standard & Poor's 500 index last week but investors expect it to be brought in soon and say the move will likely lead to another pop in the company's high-flying shares.

Many had anticipated the Web search provider would replace consumer goods maker Gillette, which left the index after it was acquired by Procter & Gamble Co. The $57 billion deal closed on Saturday, but instead of Google, an S&P committee chose homebuilder Lennar Corp.

Fund managers said the committee, which got burnt adding tech stocks just before their bubble burst in the 1990s, likely erred on the side of caution with Google stock around all-time highs and climbing. But few doubted Google would soon make the index.

"Google clearly meets all the qualifications, so they'll add it, it's just a question of when," said Amy Schioldager, managing director of U.S. Equities Indexing at Barclay's Global Investors, which has about 35 funds pegged to the S&P 500.

In order to qualify for inclusion in the index, a company must have a market capitalization of at least $4 billion, four consecutive quarters of positive earnings and a public float of at least half of its stock, among other requirements.

With more mergers and acquisitions ahead, such as Oracle Corp.'s merger with Siebel Systems Inc., another slot should open for Google, Schioldager said: "It's possible to see the company in the index by the end of the first quarter of next year."

Alex Motola, portfolio manager at Thornberg Investment Management, said he would be "fairly surprised if it isn't included this year, but I'd be shocked if it doesn't happen in the first quarter of 2006."

The shares, he added, would "definitely get a bump," partly from the so-called "index effect," which occurs when a stock is added to the S&P 500, triggering buy orders from portfolio managers who invest in the index.

About $1.2 trillion is invested in index and exchange-traded funds tied to the S&P 500, and many other investors have holdings that at least partly track the index.

Those who aren't in Google stock would be forced to buy significant amounts, especially as the company's current market value of roughly $87 billion would have a weighting of around 0.8 percent in the S&P 500. The total market value of the index as of Aug. 31 is $11.2 trillion.

Some were relieved by S&P's decision. John Waterman, chief investment officer at Nuveen Investments in Chicago, said Google presents a challenge to investors because of its high valuation, with the stock trading at about 40 times its projected 2006 earnings, and fast growth, which he judges unsustainable.

"For growth managers having gone through the bubble it's a tough stock to own because of unsustainable growth rates and questions about the dependability of their market," Waterman said in an interview.

According to Reuters Estimates, Google earnings are set to grow 33 percent in 2006 and about 30 percent in 2007.

While S&P declined to comment, these concerns may in fact be behind its decision to leave Google out for now.

"I suspect the reluctance to add it to the index is because the stock is at an all-time high and S&P was crucified in the late 1990s for adding tech stocks at all-time highs before the bubble burst," Schioldager said.