The NDX Rejects to Watch Next Year

The annual rebalancing of the Nasdaq-100 Index (NDX) was recently announced. These changes will take place prior to the market open next Monday, Dec. 18th. The NDX is made up of the largest non-financial companies listed on the Nasdaq. The first table below shows the stocks being added to the index and the second table shows the stocks being removed. I also show the number of analysts following the stocks and the percentage of "buy" recommendations, according to Zacks. As such, I'll be looking at how stocks have performed after they have been added or removed from this index during their end-of-year rebalancing.

NDX Additions and Removals Since 2010

The tables below summarize how stocks have performed after either being added or removed from the NDX during the end-of-year rebalancing. Some probably find it surprising that the stocks removed have outperformed the ones added across all time frames, as measured by average return and percentage that were positive.

From a contrarian's perspective, though, it's not that surprising. The stocks getting kicked out of the index are typically ones that underperformed leading up to its removal. Also, the fact that they are getting kicked out could make some investors wary. The pessimism could get excessive and when the selling subsides it could leave these stocks fundamentally undervalued. This leads to outperformance going forward for these stocks.

Here is a table showing the year-by-year breakdown of stocks added and removed. You can see the stocks removed from the index outperformed the ones added in five of the seven years as measured by average return. Overall, only a third of the stocks added outperformed the index over the next 12 months. Of those removed, over half beat the Nasdaq 100.