This Goose could fly south, straight out of Canada’s main stock index

Like its namesake, trading in shares of parka maker Canada Goose Holdings Ltd. GOOS-T is flying south, and that may cost the company its place in the country’s flagship stock index.

S&P Dow Jones Indices is expected to announce plans to tweak the S&P/TSX Composite Index on Friday as part of the benchmark’s quarterly rebalancing.

Toronto-based Canada Goose, which has a $1.5-billion market capitalization, listed on both the Toronto and New York stock exchanges when it went public in 2017. Chief executive officer Dani Reiss built the brand around a “Made in Canada” mantra, with marketing campaigns based on preserving the country’s polar bears and sponsorships that outfitted Canadian mountain climbers.

However, the majority of trading in GOOS – the company’s stock symbol – now takes place on the New York Stock Exchange (GOOS-N), where daily trading volumes average 688,000 shares, compared with 173,000 shares of Canada Goose changing hands on the Toronto Stock Exchange.

As a result, Canada Goose and up to three other companies could be dropped from the index, according to a recent report from analyst Jean-Michel Gauthier at Scotiabank.

Renewable energy company Ballard Power Systems Inc. BLDP-T, Africa Oil Corp. AOI-T and Westshore Terminals Investment Corp. WTE-T are also expected to be removed from the equity benchmark, Mr. Gauthier predicted. He forecast Bird Construction Inc., a Mississauga, Ont.-based builder with a $1.3-billion market capitalization, will join the S&P/TSX Composite. The index changes will be announced this week and take effect on Sept. 30.

Dropping Canada Goose, a leading domestic consumer product company, and Ballard Power would increase the S&P/TSX Composite’s already relatively high exposure to financial and natural resource companies.

S&P may also choose to drop Algonquin Power & Utilities Corp. AQN-T from the S&P/TSX 60 index, a selection of most of the largest companies in the composite, Mr. Gauthier said. The company recently announced plans to sell its renewable energy division for $2.5-billion. If that happens, Mr. Gauthier said the leading candidate for membership in the index is Fairfax Financial Holdings Ltd.

S&P has a degree of discretion in decisions around which stocks go in its indexes. The key criteria it uses is known as “float” – the value of shares that aren’t held by insiders and that therefore trade frequently and are easily available to the public. The index provider does not release its proprietary float calculations.

To stay in the composite, a company’s float must not drop below 0.025 per cent, or 2.5 hundredths of a percentage point, of the total value of the index.

Canadian stocks added to the composite – which has about 220 to 250 members, depending on the quarter – can see price bumps before and after inclusion, with higher-than-normal trading playing out on the day the index is adjusted. Similarly, companies removed from the index lose a source of demand for their shares.

If Canada Goose and the other three companies are dropped from the S&P/TSX Composite, index funds and other passive investors that build portfolios to track benchmarks will be forced to sell large amounts of stock. Mr. Gauthier estimated institutions would sell two million shares of Canada Goose, equivalent to two days of trading in the stock.

Passive fund managers would need to sell 11 million shares of Ballard Power, equivalent to three days of trading volume, 19 million shares in Africa Oil, which equates to eight days of trading, and 1.5 million shares of Westshore Terminals, which is 15.5 days of buying and selling in the thinly traded stock, according to the Scotiabank report.

If Bird Construction does join the S&P/TSX Composite, index funds will need to buy 2.4 million shares, equal to 11 days of trading in the stock, Mr. Gauthier said. Analysts at ATB Securities Inc. estimate index-related demand accounts for an average of 5.5 per cent of the float of a S&P/TSX Composite member company.