Good Bye, Sara!

The company replacing Sara Lee Corp. (SLE) is none other than Monster Beverage Corp. (MNST).

Sara Lee is breaking up its business into two entities—one for meat products and one for beverages like coffee and tea. The resulting businesses are too small to be included in the S&P 500 and the index needed a replacement.

It comes as no surprise to me that they chose Monster.

If you’re not familiar with the company, you’re in the minority. The beverage behemoth, formerly known as Hansen Natural Corp., has been on a tremendous growth track thanks to a very aggressive marketing and sponsorship campaign in motorsports and so-called extreme sports. Everyone from motocross riders to skateboarders wear the signature green “M” and are seen drinking their energy drinks.

With this strategy, Monster has done a much better job of attracting younger customers than the major soft drink companies.

In the first quarter, net income jumped 38% to $76.1 million, or $0.41 per share. Analysts forecast earnings of $0.38 per share, so Monster Beverage Corp. posted an 8% earnings surprise. Over the same period, net sales advanced 28% to $454.6 million; this topped the $447.1 million consensus estimate by 2%. In the first quarter, the company also expanded its presence in Hong Kong, Macau, Japan and Ecuador, and finalized plans to launch in additional international markets later this year.

But the big question is whether Monster is a good buy right now and if being added to the index is a good thing for the company.

I’ll start with the latter.

I don’t believe in indexing. If you aim to simply match the market’s average return, then go ahead and invest in an index fund. But you are leaving a tremendous amount of money on the table when you do so. That’s the end of my rant.

Now, when it was announced that MNST would join the S&P 500, the stock jumped 4%. That’s a plus, but being added to the index is no guarantee that the profits will start pouring in.

I took a random sampling of stocks that were added to the S&P 500 over the last few years and I think you’ll be surprised by the results:

In December of 2009, it was announced that Mead Johnson Nutrition Co. (MJN) would replace MBIA Corp. (MBI) and that Visa Inc. (V) will replace Ciena Corp. (CIEN) in the S&P 500. How have these companies fared since the announcement?

MBI did better out of the index with shares rising 167% vs. MJN’s 114%. The same was not true of the second swap where V did better than CIEN rising 51% vs. 36%.

Back in 2010, Cablevision Systems Corp. (NYSE: CVC) replaced King Pharmaceuticals Inc. (NYSE: KG) in the S&P 500. CVC is down 45% since then and KG was scooped up by Pfizer, which is up well over 50% in the last two years.

The list goes on and the results are just as mixed. This is all the proof I need. While companies get added attention from investors and analysts as well as qualify for addition to more funds from the listing it still comes down to the individual stock.

I hate to say it, but bad stocks are just as likely to be added to the indexes as good ones and if you use indexing as your primary investing strategy, you are guaranteed mediocre returns. When you focus on fundamentals like earnings growth, sales growth and buying pressure, you’ll see the health of your companies increase and your profits beat the indexes.

This is what I do every day in my newsletters and my members have racked up impressive market-beating gains. If you’re interested in learning more, here’s a quick comparison chart showing the differences and track record of each of my services.

If you want to own companies more like Monster and less like Sara Lee, use my free stock ratings tool.

And now I want to hear from you:

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Are you more likely to buy Monster now that it has been added to the S&P 500?

Sincerely,

Louis Navellier

Louis Navellier

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