NEW YORK – Google Inc.'s (GOOG) planned addition to the influential Standard & Poor's 500 index boosted its stock as much as 8 percent on Friday, but raised fresh concerns over the stock's volatility and an uneven flow of information from its executives.
Web search leader Google will replace oil and gas producer Burlington Resources Inc. (BR) on the marquee stock index after the close of trade on March 31.
Shares of Google jumped $22.80 to $364.69 on Nasdaq in the afternoon, and traded as high as $370.09, following a 9 percent rise after the change was announced late on Thursday.
"(Google) shares should react positively to the news near term as index funds will add the name to their holdings," Merrill Lynch analyst Lauren Rich Fine wrote in a research note Friday. Fine maintained a "neutral" rating on the shares.
Merrill Lynch S&P Index analyst John Davi estimated about 30 million shares in Google would be bought due to the move, amounting to nearly three days of trading volume.
Investors have waited for Google to join the trading big leagues since July, close to its first anniversary as a public company. Many index funds base their investments on whether a stock is included in the S&P 500, a key stock market barometer, requiring them to add Google shares to their holdings.
"It's a sign that this is a company that represents the economy, represents the stock market and should be a member of the S&P 500," David Blitzer, chairman of the S&P 500 Index Committee, said in an interview on CNBC television.
Google shares had lacked "seasoning" until about six months ago and looked unusually volatile for entry into the index as recently as October, Blitzer said. But if Google shares had not been introduced now, the index may have had to wait until September or October at the earliest, he said.
A Google spokesman said the company was honored to join the benchmark index.
With its market value just over $100 billion on Thursday, Google would become the 19th-largest member of the index.
The traditional premium for entry into the S&P 500 could amount to an 8 percent gain for Google shares, said Scott Devitt, an analyst at Stifel Nicolaus.
"The stock stabilizes around current levels, and then it just depends on execution" of company growth strategies, said Devitt, who raised his rating to "buy" from "hold" on Friday.
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Concern over Google's future growth, particularly for its core search advertising revenue, led to erratic jumps in trading since the share hit an all-time high of $475.11 on January 11. But since its debut on the market, Google stocks have been slightly less volatile on average than the total market.
Entering the S&P 500 "may have a somewhat dampening effect on Google volatility," said Tim Biggam, options strategist at Man Securities. "S&P players will now be part of providing liquidity in Google that previously was not evident.
Google trades at nearly 39 times projected earnings, but other rivals in the index are pricier despite slower growth rates, such as Yahoo Inc. (YHOO) at 43 times earnings, and eBay Inc. (EBAY) topping 50 times earnings. Devitt said that justified a "buy" view on Google even before the S&P move.
But Devitt has priced in a discount for Google shares, citing the company's occasionally unpredictable way of communicating with investors and its dissemination of information on Internet blogs.
Google's stock sank in February after Chief Financial Officer George Reyes told a conference that the company's overall growth is slowing, despite a general policy of not providing earnings targets for investors.
A larger base of institutional investors buying into the company may pressure management to organize its communications along more traditional lines.
"I'm comfortable living in a no-disclosure environment but management has to be very careful of what they do because some out of context comments by the CFO caused the stock to lose $15 billion," said Devitt. "Is Google going to change? If they do, the stock would probably be worth 10 percent more."