Nasdaq-100's Changes Are Shape of Things to Come: David Wilson
By David Wilson
Princeton, New Jersey, Oct. 5 (Bloomberg) -- The Nasdaq-100 Index's membership changes this week foreshadow what's likely to happen in December, when the gauge of the Nasdaq Stock Market's largest companies goes through an annual overhaul.
Andrx Group, a generic-drug maker seeking to introduce a version of AstraZeneca Plc's ulcer drug Prilosec, became part of the index yesterday. Gilead Sciences Inc., another drugmaker, was added today after a U.S. Food and Drug Administration advisory panel recommended approval of its Viread treatment for HIV.
They replaced At Home Corp. and Exodus Communications Inc., respectively, which dropped out of the index because they filed last week for Chapter 11 bankruptcy protection. At Home is the largest provider of Internet access over cable-television lines, and Exodus operates ``server farms'' that run company Web sites.
Several more health-care companies probably will join the index on Christmas Eve, when Nasdaq is scheduled to complete this year's makeover. At the same time, more companies that have built their business on technology, media or telecommunications -- TMT, for short -- are likely to lose their places.
These changes, in turn, will affect the composition of the most active exchange-traded fund, a type of mutual fund that can buy and sell its own shares throughout the day even as investors trade them with each other.
Trailing Benchmarks
The fund's shares are called Cubes because of their ticker symbol, QQQ. About 67.8 million have changed hands on an average day this year. Only Cisco Systems Inc.'s shares have traded more actively; the daily average for the largest maker of networking equipment is 87.9 million.
There were $17.8 billion of Cubes outstanding at yesterday's close. Just one exchange-traded fund is more valuable: the SPDR Trust, at $23.4 billion. The trust tracks the Standard & Poor's 500 index and has shares nicknamed Spiders.
Nasdaq futures on the Chicago Mercantile Exchange will be affected as well. These contracts, among the most active stock- index futures, are based on the Nasdaq-100 -- not the market's Composite Index, a more popular benchmark for U.S. stocks.
For anyone owning Cubes or futures, the annual revisions to the Nasdaq-100 can't come too soon. The index has lost 46 percent this year, while the Nasdaq Composite has declined 35 percent and the S&P 500 has fallen just 19 percent.
Each December, on the Monday following the third Friday, Nasdaq takes companies out of index that are no longer valuable enough to qualify. The determination is based on companies' share prices at the end of October and the number of shares outstanding at the end of November.
Different Criteria
Last year, Nasdaq made a dozen changes to the index's lineup. The year before, there were 15. Replacements must have at least a two-year history as a public company.
Companies added in 2000 include Singapore's Flextronics International Inc., the second-biggest maker of electronics for sale under other companies' brands, and Israel's Check Point Software Technologies Ltd., a maker of Internet security software. They joined Sweden's Ericsson AB, the biggest manufacturer of mobile-phone networks, as the only Nasdaq-100 members that aren't U.S.-based.
Foreign companies must exceed $10 billion in market value worldwide and $4 billion in the U.S. to join the index, and their average daily trading on Nasdaq has to surpass 200,000 shares. For U.S. companies, there isn't any hard-and-fast dollar value and the trading minimum is only 100,000 shares.
Flextronics and Check Point are both at risk of losing their places this year. At Wednesday's close, the companies' respective market values were $8.8 billion and $6.2 billion.
Fourteen U.S.-based companies, including 10 valued at less than $1 billion, are in the same position. Nasdaq-100 members must be among the top 150 eligible companies by market value to stay in the index.
Biotechnology Leads
Among the 16 most valuable companies listed on Nasdaq that aren't already members, 10 are in the health-care business. Four are biotechnology companies:
-- Cephalon Corp., which sells a narcolepsy treatment known as Provigil;
-- Icos Corp., which counts Microsoft Corp. Chairman Bill Gates among its investors and directors;
-- ImClone Systems Inc., which will receive $1 billion from Bristol-Myers Squibb Co. in exchange for a 20 percent stake; and
-- Invitrogen Corp., which signed a research agreement with American Home Products Corp. last month.
Three others are health-benefit managers. AdvancePCS Inc. and Express Scripts Inc. focus on prescription drugs, and First Health Group Corp. runs group health-care programs.
Rounding out the lineup are Sepracor Inc., a maker of improved versions of drugs produced by other companies; Cytyc Corp., the maker of ThinPrep test kits for detecting cervical cancer; and Lincare Holdings Inc., a supplier of respiratory products such as oxygen tanks.
Companies they may replace in the Nasdaq-100 include Ariba Inc. and BroadVision Inc., two developers of electronic-commerce software,; CMGI Inc., an Internet venture firm that owns the Alta Vista search service; and Inktomi Corp., a provider of software to speed the delivery of data over the Internet.
Few Substitutes
Other technology companies among the least valuable index members are 3Com Corp., a maker of computer networking equipment; Palm Inc., the largest maker of handheld computers; Novell Inc., a provider of networking software; and Vitesse Semiconductor Corp., a producer of chips for fiber-optic networking gear.
Cnet Networks Inc., whose Web sites report on technology. represents media. RealNetworks Inc. also fits the category; among other things, the maker of RealPlayer audio and video software is creating MusicNet, an online music service, with AOL Time Warner Inc. and Bertelsmann AG.
As for telecommunications, three providers of telephone and Internet service -- McLeod USA Inc., Metromedia Fiber Network Inc. and XO Communications Inc. -- are in line for removal. They were among the index's five least valuable companies on Wednesday. A fourth, Level 3 Communications Inc., also may lose its place.
Only a couple of ``TMT'' companies are in a position to replace them: Charter Communications Inc., the cable-television company controlled by Microsoft co-founder Paul Allen, and Lamar Advertising Inc., the largest independent billboard company.
That means the Nasdaq-100 will have a far different look once December comes than it does now. Andrx and Gilead will have plenty of company, for sure.
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