The S&P 500 is a well-recognized benchmark within the stock market. It holds shares in 500 companies and prioritizes them by market cap. Trillion-dollar corporations have more influence over the index than companies with $20 billion market caps. This market cap-weighted setup explains why the Magnificent Seven stocks continue to impact the stock market’s performance.
The index periodically replaces underperforming stocks with new corporations that fulfill the index’s criteria. Corporations must be profitable in the most recent quarter and in the trailing twelve months. Companies must also have market caps above $18.0 billion to qualify for inclusion.
Many stocks see their prices soar upon getting added to the index. That happens for two key reasons. The first reason is that fund managers who track the S&P 500 must buy shares of newly added companies to continue tracking the index. Another perk is that inclusion in the S&P 500 can bring more attention to a stock. These are some of the stocks to buy before they join the index.
Palantir (PLTR)
Palantir (NYSE:PLTR) is a big data analytics company that has been using artificial intelligence for several years. The stock has more than tripled over the past five years and has logged a 79% year-to-date gain.
The business has relied on government contracts for several years, and while that makes up a good percentage of total revenue, U.S. commercial revenue is soaring. Palantir reported 27% YOY revenue growth in the second quarter of 2024. Commercial revenue in the United States jumped by 55% YOY to reach $159 million. That growth rate came as the company grew its customer base by 83% YOY. Meanwhile, U.S. government revenue soared by 24% YOY to reach $278 million.
Palantir is also profitable and had a net profit margin close to 20%. Net income jumped by 377% YOY in the second quarter. Financial growth has been strong for Palantir, and its $67 billion market cap makes it eligible to join the S&P 500.
Duolingo (DUOL)
Duolingo (NASDAQ:DUOL) isn’t quite ready to join the S&P 500, but it can end up on the index after a few years. The language learning app has an $8 billion market cap but has been profitable for several quarters. Profit margins have been expanding rapidly and closed in at 13.7% in the most recent quarter.
The stock’s long-term returns aren’t much to boast about yet. Shares are down by 14% year-to-date and are only up by 31% since its IPO. However, Duolingo has reported exceptional financial growth that suggests it’s due for a rally. The educational tech company delivered 41% YOY revenue growth in the second quarter as the company exceeded 100 million monthly active users. Paid subscribers are up by 52% YOY while daily active users have jumped by 59% YOY.
It’s easy to see more daily active users converting into paid subscribers. The app regularly runs ads that encourage people to subscribe to avoid seeing ads in the future. Subscriptions also come with additional features that speed up learning.
Dell (DELL)
Dell (NYSE:DELL) is an AI beneficiary that has a $68 billion market cap and a 1.85% yield. The company fulfills the requirements for S&P 500 inclusion and is soaring. Shares are up by 28% year-to-date and have almost quadrupled over the past five years. The stock is in the middle of a sharp correction that has resulted in a P/E ratio of just below 20.
The tech firm reported 6% YOY revenue growth in the first quarter of fiscal 2025. Servers and networking revenue increased by 42% YOY as artificial intelligence continues to drive results for Dell. The company used some of its profits to the benefit of shareholders. Dell allocated $1.1 billion toward stock buybacks and dividend distributions during the quarter.
Net income was also positive, surging by 65% YOY to reach $955 million. Rising revenue and profit margins can help the stock outperform the market for several years, especially as AI tailwinds remain strong.
On this date of publication, Marc Guberti held a long position in DUOL. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.comPublishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or
indirectly) any positions in the securities mentioned in this article.