Although some stock indices use systematic criteria, the S&P 500's inclusion criteria is determined by an anonymous committee at S&P Dow Jones Indices.
GameStop was recently S&P 500-listed in 2016. It now meets many of the S&P's requirements.
GameStop's greatest obstacle to index inclusion could be its inability to make a profit.
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The company's incredible run-up in 2021 has earned it a market capital that exceeds the threshold required for inclusion in the S&P 500. It still faces significant obstacles, mainly due to a few factors described in a Wall Street Journal report.
Some stock indices use systematic criteria. However, the selection of stocks that make it into the S&P 500 is made by an anonymous committee at S&P Dow Jones Indices. Although the committee is guided by a variety of rules, they have ultimate discretion.
GameStop was S&P 500-listed in 2016 and now meets all of the S&P's requirements. The stock's current market capitalization of around $16 billion is well above the $13.1 billion minimum. GameStop shares can also be liquidated and are held by a large number of people.
GameStop's greatest obstacle to index inclusion may be its inability to sustain profitability. S&P rules require that listed companies have positive earnings for both the last quarter and the previous year. However, the game retailer suffered a loss in both the first quarter and three of four quarters of 2020.
The S&P committee could in principle overlook GameStop's weak earnings, perhaps because of its enormous market value. Art Hogan, Chief Market Strategist at National Securities Corporation, said that the committee might be nervous about approuving GameStop's inclusion too quickly, given its rapid rise.
He said that while the company might check all the boxes, it's difficult to predict how long it will continue to be so.
In some cases, the S&P committee may have downplayed raw market cap. Many of the smallest players in the S&P 500 have markets caps that are well below the minimum, like NOV Inc.'s market valuation of $5 billion.
Hogan explained to the Journal that "Entrance to S&P 500 requires a mixture of science and art."
