The Nasdaq index rebalancing will change the weights of key stocks within the fund. Big tech stocks will have a lower concentration within the index. Some investors believe the rebalance is long overdue, with six stocks currently markup up 50% of the Nasdaq 100’s assets. The index rebalancing will reduce these corporations to 40% of the index’s portfolio.
This rebalancing act will strengthen the index’s diversification. However, it also presents a short-term opportunity for savvy investors. The other Nasdaq stocks now have a chance to shine since more shares must get purchased to rebalance the index. This short-term activity can push their prices higher.
The readjustment will be completed on July 24th, giving investors a narrow window to capitalize on the opportunity. These three Nasdaq stocks seem poised to make up a higher percentage of the popular index and reward long-term investors.
Intuitive Surgical (ISRG)
Intuitive Surgical (NASDAQ:ISRG) is a high-flying growth stock that has more than doubled over the past five years. The company creates robotic products for clinical services and is also a part of the S&P 500.
The company reported 14% year-over-year revenue growth in the first quarter, an improvement from recent quarters. Net income declined from $366 million in Q1 2022 to $355 in the first quarter. This decrease is smaller than declines from prior quarters.
The company’s da Vinci procedures grew by 26% year-over-year. Despite disruptions during the pandemic, Intuitive Surgical has reported a compounded annual growth rate of approximately 18% for da Vinci procedures between the first quarter of 2019 and the first quarter of 2023.
Broadcom (AVGO)
Broadcom (NASDAQ:AVGO) is a semiconductor stock that is poised to benefit from the artificial intelligence (AI) boom. In the first quarter, Broadcom reported higher revenue, net income, and profit margins than Nvidia (NASDAQ:NVDA). Despite the better earnings, Broadcom carries a price-to-earnings (P/E) ratio of 27 times, while Nvidia’s P/E is over 200 times.
Broadcom has similar opportunities as Nvidia, and both companies can be the top winners in AI. A Nasdaq index rebalance will distribute funds allocated for Nvidia stock to other companies. Since Broadcom has similar market opportunities, a strong business model, and long-term stock price appreciation, the Nasdaq 100 rebalance may involve replacing some Nvidia shares with Broadcom shares.
AVGO stock returns have exceeded 300% over the past five years. A Nasdaq 100 rebalancing can help those high returns continue.
Zscaler (ZS)
Zscaler (NASDAQ:ZS) is a volatile growth stock that features excellent revenue growth but net losses. The cloud security company is up by over 60% since the start of May and can benefit from a Nasdaq index rebalance.
The company reported 46% year-over-year revenue growth in the most recent quarter. Total revenue came in at $418.8 million, while net losses came in at $46.0 million. Net losses for speculative growth companies are concerning, but if these companies can flip the switch to profitability, they can gain value quickly.
Zscaler’s net loss represents a significant improvement. The company reported a $101.4 million net loss in the same quarter last year. The company’s leadership offered guidance for $429 – $431 million in revenue for the following quarter. Those numbers imply 34.9% to 35.5% year-over-year revenue growth. The guidance suggests more revenue deceleration, but Zscaler has exceeded revenue guidance before.
A Nasdaq rebalancing can help this stock gain short-term momentum. The recent spike in share price and this stock’s status as a top performer during the pandemic make it a great momentum play to consider. However, the company will have to become profitable soon or accelerate its revenue again to be a more compelling long-term buy.
On this date of publication, Marc Guberti held a long position in AVGO. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
