5 stocks that could enter the ASX 200 Index next month

Shareholders of Australian fruit and vegetable company Costa Group (ASX: CGC) have voted in favour the $1.5 billion ($3.20 per share in cash) takeover bid from Paine Schwartz Partners.

The bid remains subject to final court approval, scheduled for 9:30 am AEDT on 7 February, 2024.

If approved, Costa shares are likely to be removed from official quotation by 8 February, 2024 and leaves behind a vacant spot within the ASX 200 Index.

Five potential candidates

Morgan Stanley has identified five potential additions to replace Costa Group within the ASX 200. The analysts have ranked this in order of preference based on the six-month average daily float-adjusted market cap.

1. Stanmore Resources (ASX: SMR)

2. Strike Energy (ASX: STX)

3. Siteminder (ASX: SDR)

4. Audinate (ASX: AD8)

5. McMillan Shakespeare (ASX: MMS)

Stanmore was the highest ranked based on "a 6-month float-adjusted market capitalisation of $1.3 billion," the analysts said.

Why the six-month average?

There are several reasons why a six-month average daily float-adjusted market cap is used instead of an outright market cap.

• Reduced short-term volatility: The index aims to represent the long-term performance of the largest Australian companies. Using a six-month average smooths out any short-term fluctuations in a company's market cap, caused by factors like temporary news events or market sentiment.

• Improved liquidity assessment: Market cap alone doesn't guarantee a stock's liquidity. The float-adjusted part considers only publicly traded shares

• Alignment with institutional investor needs: Large institutional investors like index funds rely on the stability and transparency of the index construction process

• Consistency with other major indices: Many other major global indices like the S&P 500 and FTSE 100 also use historical averages for market cap calculations

Potential upside for the chosen candidate

United Malt Group was removed from the ASX 200 Index late last year after it was acquired by Malteries Soufflet SAS. The key dates include:

• 13 October 2023: S&P Dow Jones Indices announced it will remove United Malt Group from the S&P/ASX 200, subject to final court approval

• 18 October 2023: S&P Dow Jones removed United Malt Group from the S&P/ASX 200, effective prior to the open of trading

The Las Vegas-based Light & Wonder (ASX: LNW), the world’s second-largest “casino gaming content” company was elected as the replacement.

It's worth noting that the Friday, 13 October 2023 announcement was made after market close. So come Monday, 16 October, Light & Wonder shares rallied 5.6%.

On Tuesday, 17 October, Light & Wonder shares eased 1.1% but almost 750,000 shares traded hands. To add some perspective, the stock's 20-day average volumes sat at around 95,000 – So the turnover was almost 700% higher than usual.

On the inclusion day, Light & Wonder shares finished 0.3% higher but experienced a brief 5.5% spike right before market close.