The Russell 2000 Reconstruction Play: Part II
[BRIEFING.COM - Robert V. Green] Every year at this time the Russell 2000 index is reconstructed. Stocks which get added to the list sometimes show a good short term pop in price.
The Background
Check Tuesday's Stock Brief for a full description of the Russell indexes, including the statistics for last year. Click here to read the Stock Brief, "The Upcoming Russell 2000 Reconstruction Play."
Note: On some sites where Briefing.com is republished, links to the Briefing.com archives may not be operational. For a free temporary account to access the archives on the Briefing.com subscription service, please send an email to me, Robert V. Green, at rvgreen@briefing.com
The Reconstruction Schedule
Here is the schedule for the upcoming Russell 2000 index reconstruction this year.
Date Event
June 8 Preliminary list published and available at www.russell.com
June 15 First Revised list
June 22 Second Revised list
July 1 Reconstruction of index
July 9 Final list published
The Play
The reconstruction play is to look for stocks with the following characteristics:
Increased in market capitalization from below the market cap limit last year to above this year's likely "cut-off" line. We estimate this to be about $175 million.
IPO'd since the last reconstruction and have market cap higher than the minimum, but lower than the upper limit. We estimate the upper limit to be about $1.5 billion this year.
Have a small float.
Actually trade enough shares to meet the Russell minimum trade requirements.
Balancing the last two requirements is tricky because Russell does not publish its criteria for minimum amount of shares that must be available for trading, and which actually trade. The index excludes stocks which are determined to have "too few" tradable shares.
But stocks with the least amount of shares available are those which are most likely to rise with the added buying pressure from the index funds.
After all, the play is to own the very stocks which the index funds must buy, two to four weeks from now.
The Stocks
With all of these characteristics in mind, we went hunting for possible Russell 2000 stocks to play. Here is a list of 11 stocks for this year's play.
This is a mix of large cap and small cap stocks, but all have float percentages of less than 15%. Stocks with lower average daily volumes might see higher price pressures due to the lower liquidity.
In general, the larger stocks are more likely to be purchased by the index funds, but the smaller stocks that are purchased will likely show a higher percentage increase in their price.
Company Stock Market Cap Float Shrs Outstd Average Daily Volume
Exult EXLT 1,420.8 13.7 91.666 140,000
Bruker Daltonics Inc. BDAL 1,217.0 8.2 54.795 157,000
SureBeam Corporation SURE 841.9 6.7 55.753 395,000
Precise Software Sol. Ltd PRSE 650.9 3.4 26.461 430,000
GenesisIntermedia, Inc. GENI 364.9 1.5 21.853 242,000
Western Multiplex WMUX 349.1 5.2 57.424 114,000
Schuler Homes, Inc. SHLR 279.9 2.0 20.139 78,000
Sunquest Inform. Systems SUNQ 246.6 1.6 15.578 17,000
Witness Systems, Inc. WITS 240.5 1.3 22.146 98,000
Rigel Pharmaceuticals Inc RIGL 210.7 5.0 36.958 39,000
Richardson Electronics RELL 186.5 1.4 13.386 49,000
The Risk
How well does this strategy work?
Increased buying pressure always increases the effective price pressure on a stock, but, this doesn't mean the stock will necessarily be higher a month from now.
Market risk may well overshadow of any effect of increased index fund buying. For example, if the reconstruction is announced in the middle of a market collapse, the index funds will still be buying. However, they may be the only ones buying. Their buying pressure might only have the effect of keeping the stock from falling further than it might otherwise.
Each individual stock might also have a problematic event prior to the index reconstruction announcement. If the market cap falls below the minimum on May 31, the stock will not make the preliminary list. If it falls below the minimum before June 22, it might also get dropped.
However, if you are willing to take the market risk, which means assuming a flat to rising market for the next month, you might want to consider a Russell 2000 reconstruction play.
Who Is This For?
It is a particularly good play, we think, for someone who has put aside active trading for a while, but wants to get started again. The "forced" buying pressure behind the $200 billion in Russell index funds may be the only buying pressure you can count on these days.
Comments may be emailed to the author, Robert V. Green, at rvgreen@briefing.com
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