What happened
Shares of candy maker Tootsie Roll Industries (TR -0.86%) were higher by as much as 15.5% at one point this week according to data from S&P Global Market Intelligence. By the start of trading on Friday, Dec. 10, they were still up an impressive 15% or so. Most of the gains, however, came on Monday, Dec. 6, with the shares trending slowly higher after that big daily advance. The reason for the quick jump involved some changes made by S&P Global.
So what
After the market closed on Friday Dec. 3, S&P Global announced that its S&P Dow Jones Indices were making changes. To sum it up quickly, there were a bunch of stocks shifting between the S&P 500 index, the S&P MidCap 400 index, and the S&P SmallCap 600 index. This isn't unusual and just represents a regular rebalancing, with the changes set to take effect on Dec. 20. Tootsie Roll Industrial is one of the stocks moving, going from the MidCap index to the SmallCap index.
Image source: Getty Images.
Index funds that track these indexes have to make the changes S&P Dow Jones Indices hands down. Investors know this and often try to front run that activity, hoping to make a profit as stocks are bought and sold. In addition, actively managed funds that focus on certain market cap sizes often make changes based on index shifts. There was a volume spike in Tootsie Roll's shares on Monday, which isn't shocking. But here's the complicating factor: Tootsie Roll is classified as a controlled company because insiders (largely the Gordon family) own a large percentage of the company's outstanding shares and voting power. That means there's a lot less stock in the hands of outsiders than might be the case at other companies and, thus, liquidity is reduced. So, the stock price can act oddly when an outside change, such as an index shift, takes place.
Now what
Tootsie Roll Industries is an interesting company that, thanks to the material ownership of the Gordon family, tends to operate a little differently than other companies with larger investor ownership. One week's rally or a change in an index is not a good reason to buy this stock. You need to take some time to understand Tootsie Roll and how it is run before stepping in here. That's not to suggest it is a bad company. But if you buy this stock you are, quite literally, trusting that the Gordon family will do a good job running it because there's little you (or any other outside investor) could do to change things if the family doesn't.
