The Toronto Stock Exchange is expected to welcome three new members to its benchmark index next month, including bulked-up construction company Aecon Group Inc., ARE-T while dropping a slimmed-down Algonquin Power and Utilities Corp. AQN-T from the S&P/TSX 60 index of the country’s largest companies.
S&P Global Inc. is scheduled to update the TSX stock indices on Dec. 6, and analysts predict at least three companies will join the main benchmark, the S&P/TSX Composite Index.
The most likely candidate for inclusion is Aecon, with a stock price that has more than doubled over the past 12 months, creating a $1.8-billion market capitalization that analysts say easily exceeds S&P’s threshold for index membership.
Adding the Toronto-based company to the benchmark would give passive investors such as index funds more exposure to the nuclear industry, a growing source of low carbon emission power in many industrialized countries. Aecon recently acquired New Jersey-based nuclear power construction specialist United Engineers & Constructors Inc. for US$33-million.
TerraVest Industries Inc., a manufacturer of home heating products and gas transport vehicles, is expected to be added to the index as well, according to a recent report from analyst Jean-Michel Gauthier at Scotiabank. TerraVest’s stock price has risen more than 200 per cent in the past 12 months, boosting its market capitalization to $2.2-billion.
Its stock is relatively thinly traded, and Mr. Gauthier said that if it does join the index, passive investors will need to acquire 600,000 shares, equal to 13.6 days of trading volume. Passive buying of Aecon shares, a more liquid company, would be equivalent to 5.4 days of trading.
Being part of a major index can significantly affect a company’s share price with the rise of index funds and passive investing. As a result, Canadian stocks added to the composite, which typically has 220 to 250 members, can see price increases before and after inclusion. Similarly, companies removed from the index lose a key source of demand for their shares.
A surge in demand for a stock can temporarily boost its price, and investors such as hedge funds often buy shares in companies they consider candidates for index inclusion.
Two other candidates for the S&P/TSX index are NGEx Minerals Ltd. and Enerflex Ltd. NGEx is a gold and silver miner and also relatively thinly traded. Mr. Gauthier said passive investors will have to buy 5.4 million shares, equivalent to 18.7 days of trading.
Enerflex makes equipment for natural gas producers and electricity generators and is a candidate for addition if it continues to perform as it has in recent weeks, Mr. Gauthier said.
Algonquin Power is expected to be dropped from the S&P/TSX 60 index after restructuring over the summer. The Oakville, Ont.-based company sold its renewable energy business for as much as $2.5-billion to pay down debt in August. It’s now half its former size and may no longer qualify for a benchmark meant to reflect a cross-section of the country’s biggest companies.
Insurance company Fairfax Financial Holdings Ltd. is likely to replace Algonquin Power in the S&P/TSX 60 Index, as it’s the largest S&P/TSX Composite name not in the 60, Mr. Gauthier said. However, he said the index committee might opt to pick trucking company TFI International Inc. over Fairfax, as it comes from a logistics sector that is under-represented in the large-cap index, which is already heavily weighted toward the financial services industry.
If Algonquin Power is dropped, passive investors would be forced to sell 21 million shares, representing roughly two days of average trading volumes. Adding Fairfax would mean demand for 600,000 shares, or 9.5 days of trading. If TFI International joins the benchmark, investors would have to buy 2.2 million shares, equivalent to 3.8 days of trading.
S&P Dow Jones uses the “float” – the value of shares available for public trading, excluding those held by insiders – to determine whether a company should be included in its indexes. The specific float calculations are proprietary and not publicly disclosed.
To be added to an index, a company’s float-adjusted market capitalization must account for 0.04 per cent of the total index value. To remain, the float must not fall below 0.025 per cent.