The FTSE 100‘s supposed to represent the largest publicly-traded companies based in the UK, weighted by market-cap. And every three months, the index is reshuffled to reflect this.
In the latest reshuffle, easyJet (LSE:EZJ) is set to rejoin the index, with Endeavour Mining moving into the FTSE 250 to make way. So could this create a buying opportunity for my portfolio?
Index reshuffle
The latest FTSE 100 reshuffle happens after the close Friday (15 March). So easyJet becomes part of the index at the start of next week.
Given this, it’s natural to think demand for the airline’s shares will be unusually high on Monday morning. Funds that aim to track the FTSE 100 will have to add the stock to their portfolios.
In the stock market – as with any market – when demand surges, prices go up. So it seems reasonable to expect the easyJet share price to rise at the start of next week.
It might therefore seem like now’s a great time for investors to buy the stock. But I’m dubious of this for a few reasons.
Caution
One I’m wary about is news of the FTSE 100 inclusion has been public for a while. People wanting to get ahead of the curve have therefore already had time to do so.
Given this, it seems plausible to me that demand might have been elevated for some time. If I’m right, the additional boost Monday morning’s going to be limited.
Furthermore, I’d expect any increase in demand to normalise pretty quickly. Even if the share price does go up, I’d view this as a short-term opportunity, rather than a long-term one.
From an investment perspective, I don’t think a boost from FTSE 100 inclusion is going to make a meaningful difference. Over time, I think the equation comes down to how the business performs.
easyJet shares
Since the end of the pandemic, easyJet’s managed a strong recovery. And the firm’s low-cost model should make it more resilient than most in difficult economic times.
Nonetheless, there are some significant considerations that put me off the stock as a long-term investment. One is the state of the airline industry, where fixed costs are high.
The cost of operating a flight doesn’t depend much on the number of passengers. Most of the costs – fuel and staffing – are fixed regardless of whether the plane is 75% or 100% full.
This incentivises airlines to sell their last few seats at any price, since the cost increase is minimal. The result is intense competition, making a meaningful competitive advantage hard to come by.
A buying opportunity
It’s natural to think easyJet’s inclusion in the FTSE 100 presents a buying opportunity. But from an investment perspective, I’m not so sure this is the case.
Buying the stock ahead of an expected surge in demand for the shares looks risky to me. Given this, I’m looking elsewhere for stocks to buy at the moment.
This post was originally published on Motley Fool
