Top 5 Stocks Removed from the S&P 500 That Have Outperformed the Market

In the United States, success is celebrated with fanfare, while setbacks often lead to quiet reflection. When Apartment Investment and Management (AIV) was replaced by Tesla in the S&P 500 in 2020, many anticipated AIV's decline into obscurity. Surprisingly, in the six months post-replacement, AIV delivered an 80% better return relative to Tesla. Despite challenges from rising interest rates, AIV's stock has appreciated roughly 60% since then. This phenomenon isn't isolated—companies removed from the S&P 500 frequently outperform the market by up to 5% annually over the next five years.

This highlights a key investing lesson: setbacks can pave the way for remarkable comebacks. In this article, we explore five companies that have outperformed the S&P 500 after removal and debunk myths around the so-called "index effect" linked to joining or leaving the index.

Key Insights

• Inclusion in the S&P 500 attracts significant passive investment and raises a company's profile.
• Removal signals a company is no longer among the largest or most influential U.S. firms.
• Surprisingly, removed companies often outperform the market by approximately 5% annually over five years.

What Happens When Stocks Are Added or Removed from the S&P 500?

Being added to the S&P 500 is typically associated with positive stock price movements due to automatic purchases by index funds and enhanced visibility. Conversely, removal is often perceived negatively, triggering selling pressure and declining investor confidence.

However, research from Research Affiliates covering 1990-2022 reveals that stocks removed from the S&P 500 outperformed those added by over 5% annually in the subsequent five years. This outperformance is partly attributed to undervaluation caused by excessive selling immediately after removal, creating buying opportunities for contrarian investors.

Initial price drops following removal often overcorrect, with stocks rebounding as the market adjusts. This dynamic suggests that while removal may initially hurt share prices, it can set the stage for strong future returns.

Investor Tip

Market reactions to index changes tend to be emotional—celebrating additions and mourning removals—often creating investment opportunities.

The "Index Effect" Explained

The traditional belief in a strong "index effect"—where stocks joining the S&P 500 experience significant price bumps and those leaving suffer declines—has diminished. Earlier decades showed clear price impacts, but recent studies indicate these effects are now minimal or statistically insignificant.

Factors contributing to this change include improved market efficiency, increased liquidity, predictable index changes allowing arbitrage, and the nature of index transitions often involving moves between large and mid-cap indices rather than first-time inclusions or removals.

Quick Fact

The S&P 500 is rebalanced quarterly, typically on the third Friday of March, June, September, and December.

Inclusion in the index enhances a company's reputation, media coverage, and analyst attention, akin to joining the major leagues of American business. Removal, however, can be perceived negatively, impacting morale and investor sentiment.

Investment Insight

From 1991 through 2023, an index of companies removed from the S&P 500 yielded an average annual return of 14.0%, outperforming the S&P 500's 10.6%. For example, a $100 investment in the outcast index would have grown to approximately $7,500 compared to $2,800 in the S&P 500 over 33 years.

Despite common advice to avoid stocks removed from the index, data shows these companies often present lucrative opportunities for patient investors.

Five Stocks Removed from the S&P 500 That Have Outperformed

Zions Bancorporation N.A.

• Removed: March 18, 2024
• Return since removal: 52%
• S&P 500 return since removal: 15%

Amid regional bank turmoil in 2023, Zions Bancorporation was removed from the S&P 500. However, improving economic conditions and Federal Reserve rate cuts sparked a strong rally beginning in late 2023.

Lincoln National Corporation

• Removed: September 18, 2023
• Return since removal: 42%
• S&P 500 return since removal: 33%

Lincoln National faced challenges including pandemic-related impacts and financial setbacks. Since removal, the company has improved operations and seen significant stock price appreciation.

Lumen Technologies Inc.

• Removed: March 20, 2023
• Return since removal: 262%
• S&P 500 return since removal: 51%

After exiting the S&P 500, Lumen shifted focus to enterprise services and capitalized on AI-driven network demands, resulting in a remarkable stock rebound and renewed investor optimism.

PVH Corp.

• Removed: September 19, 2022
• Return since removal: 86%
• S&P 500 return since removal: 54%

Owner of iconic brands like Calvin Klein and Tommy Hilfiger, PVH has rebounded from retail headwinds thanks to falling borrowing costs, easing recession fears, and strategic investments.

Apartment Investment and Management Company (AIV)

• Removed: December 21, 2020
• Return since removal: 79%
• S&P 500 return since removal: 61%

AIV, replaced by Tesla in the S&P 500, has benefited from increased real estate demand and lower interest rates, outperforming the broader index since its removal.

Frequency of S&P 500 Changes

The S&P 500 undergoes quarterly rebalancing, but additions and removals can occur anytime, especially due to mergers, acquisitions, or delistings. In 2024, twelve companies were removed, while fifteen were removed in 2023.

Recent 2024 Changes

Removed stocks include American Airlines Group, Etsy Inc., Bio-Rad Laboratories, Robert Half Inc., Comerica Inc., and Bath & Body Works Inc. New additions comprise Amentum Holdings, Palantir Technologies, Dell Technologies, and CrowdStrike Holdings.

Conclusion

Although removal from the S&P 500 may trigger initial selling and negative sentiment, history shows these companies often deliver strong long-term returns. Investors who look beyond the immediate reaction and assess the fundamentals may uncover significant opportunities among these so-called outcasts.

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