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Why Peloton Stock Popped Today
Key Points
Traders are driving up Peloton's stock price ahead of its inclusion in a leading small-cap index.
The fitness company is taking steps to strengthen its cash generation.
Shares of Peloton Interactive (NASDAQ: PTON) spiked on Friday, following news that the exercise equipment maker is slated to be added to the S&P SmallCap 600.
Image source: The Motley Fool.
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Peloton is set to join the index next week
Peloton will replace waste management and recycling specialist Enviri, which is spinning off assets and being acquired by Veolia Environment. These changes to the S&P SmallCap 600 are scheduled to occur before trading begins on Wednesday, May 27.
Being added to the S&P SmallCap 600 should increase demand for Peloton's shares among passive funds that need to purchase them to continue tracking the index's constituents. Traders know this, so they may be attempting to front-run these purchases.
Together, these dynamics can create a temporary spike in the stock price of a new index entrant. That was likely the case today with Peloton.
Additionally, Peloton has a relatively high short interest. News of inclusion in the S&P SmallCap 600 and the subsequent price spike could be driving some of these short sellers to exit their positions to limit potential losses. To close their shorts, they need to buy shares, which could amplify upward price volatility.
Strengthening financials
The index inclusion comes after Peloton reported improved profitability earlier this month. The exercise bike and treadmill maker's free cash flow surged 59% year over year to $151 million in the quarter ended March 31, driven by price hikes and a new content licensing partnership with audio streaming giant Spotify.
Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Peloton Interactive and Spotify Technology. The Motley Fool has a disclosure policy.