Here is a good article about Russell 2000 reconstruction and what is
likely to happen to ASTN if it is added to the index:
Updated: 02-Jun-99
A Russell 2000 Reconstruction Play
The Russell 2000 Index will be reconstructed, along
with all of the Russell Indexes, at the end of June. A
preliminary list of the possible additions to the index
will be published on June 11, by the Frank Russell
company.
Stocks which are added to the Russell 2000 list often
rise during the month of June as index funds which
mimic the Russell indexes start buying the new stocks
(and selling the dropped stocks).
As a stock play, buying some of these stocks in advance
can sometimes be a successful move, with gains of
10-15% in a single month being possible.
The Russell Indexes
The Russell Indexes measure nearly all of the US
equity markets, by market capitalization. The Frank
Russell company, which builds and maintains the
indexes, does make some adjustments to straight
market capitalization numbers, such as not including
companies whose shares trade for less than $1.00, and
adjusting for shares not available for trading (stock
option shares and large private individual or corporate
held shares for example), if such shares constitute more
than 10% of the outstanding shares.
The Russell 3000 Index comprises the top 3000
companies in the market. This accounts for 98% of the
total market capitalization of all US markets. The
Russell 1000 index comprises the top 1000 companies
in the Russell 3000. The Russell 2000 comprises the
next 2000 companies in the Russel 3000 index.
Why is the Russell reconstruction important? There is
more than $120 billion currently invested in index
funds that mimic the Russell indexes. As soon as new
components of the Russell indexes are published, these
funds will start dumping the stocks which are dropped,
and buying the stocks which are added.
Briefing.com's Stock Screen
With that in mind, Briefing.com did a stock screen
looking for the best candidates for this play.
We started with a list of all available stocks on the
market, then screened out stocks already in the Russell
3000. Next we screened out all stocks with a market
capitalization of less than $250 million, which we think
will be about the cutoff for this year's Russell 3000
bottom.
Next we screened out stocks with a market
capitalization of more than $1.5 billion. Stocks with a
market capitalization above this likely will become part
of the Russell 1000. While there are Russell 1000 index
funds, most large cap index funds emulate the S&P500.
The Russell 2000 is used more often as a proxy for
small cap stocks, and there is simply more index money
in Russell 2000 stocks than there is in Russell 1000
stocks. In addition, because the stocks are smaller, there
is greater chance of the institutional money influencing
the price. This decision leaves out some of the bigger
stocks such as Priceline (PCLN) and Goldman Sachs
(GS).
This still provides a list of more than 150 stocks. To
look for a handful of stocks that might be playable in
this way, we then screened for stocks with a float of
less than 15% of the outstanding shares, which gave us
45 stocks. From this we choose the ten stocks with the
lowest float. The theory behind this idea is that the new
money buying the stock has a greater chance of
influencing the price if there are less shares to be had.
This left out some IPO's that will surely be added to the
index, such as Digital River (DRIV), which has a float
of 15%. But you simply can't buy all 45 stocks with
floats of less than 15%, or pretty soon you have your
own index fund.
So the ten stocks with the lowest float percentages that
are likely to be added to the Russell 2000 index next
month are listed below. All numbers are in millions.
Company
Stock
Mrkt
Cap
Float
Shrs
Outstd
MicroStrategy
MSTR
949.8
4.6
38.0
Carrier Access
CACS
846.8
3.0
23.9
Value America
VUSA
825.8
5.5
44.4
BEBE Stores
BEBE
698.7
2.4
24.2
Multex
MLTX
667.5
3.0
21.8
Siebert Financial
SIEB
579.9
0.9
22.2
Unigraphics
UGS
578.0
0.7
36.3
CyBear
CYBR
530.1
0.4
13.3
NVIDIA
NVDA
500.1
3.5
24.1
Mannatech
MTEX
379.2
3.1
24.1
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.
However, if you are willing to take these risks, which
means assuming a flat to rising market for the next
month, you could consider a Russell 2000
reconstruction play.
Briefing.com will track the above performance of the
selected stocks as of their opening prices today, June 2,
and let you know how this play works out during the
next month. Here is a schedule for the Russell 2000
reconstruction, as published by the Frank Russell
company (www.russell.com).
Date
Event
June 1
Reconstruction Schedule Published
June 11
Preliminary list published
June 18
First Revised list
June 25
Second Revised list
July 1
Reconstruction of index
July 9
Final list published
Comments can be emailed to the author, Robert V.
Green, at rvgreen@briefing.com. |
