The Russell 2000 Reconstitution Play:
Update
Earlier in the month we listed ten stocks that we though might be added to the
Russell 2000 in its annual reconstitution on July 1. We tried to pick stocks with
the lowest possible float that also had market capitalizations large enough that
index funds would actually buy them.
On June 11, after the market close, the preliminary list of Russell index
additions was added. Nine of the stocks on our list of ten were picked.
So how has the play worked out so far, just eight days later?
The total return of all nine stocks for the past 8 trading days has been 7.37
percent, versus 3.59% for the overall Russell 2000 index. These nine stocks, on
average, have done twice as well as the overall Russell 2000 index.
Is there any play left in this strategy? There probably is, right up until July 1,
and afterwards. However, if you haven't already taken a position in these
stocks, it may not be worth the risk at this point. Some of the expectation of
index funds buying the stocks is now built into the price.
An overall Russell 2000 strategy can't usually be expected to bring much more
than 10% over a single month and that requires a flat or rising overall market.
With a 7.4% return already, the risk/reward ratio is now leaning towards the
unfavorable side, for new positions. While Russell 2000 index fund purchasing
does create buying pressure, if the overall market trends down, it only creates
price support, and does not guarantee a profit.
Here is a list of the stock prices, and percentage gains for each stock.
14-June
23-June
100
Shares
June 14
100
Shares
June 23
Gain/Loss
Percentage
MSTR
23 1/2
30
2,350.00
3,000.00
650.00
27.66%
CACS
34 1/8
35 1/8
3,412.50
3,512.50
100.00
2.93%
VUSA
18 7/16
19 1/2
1,843.75
1,950.00
106.25
5.76%
BEBE
24 1/2
27
2,450.00
2,700.00
250.00
10.20%
MLTX
26 7/8
26
11/16
2,687.50
2,668.75
-18.75
-0.70%
SIEB
19 9/16
24
1,956.25
2,400.00
443.75
22.68%
UGS
16 5/8
17
1,662.50
1,700.00
37.50
2.26%
NVDA
17
17 1/4
1,700.00
1,725.00
25.00
1.47%
MTEX
13 1/2
11 7/8
1,350.00
1,187.50
-162.50
-12.04%
19,412.50
20,843.75
1,431.25
7.37%
0.00
IUX
431.53
447.04
43,153.00
44,704.00
1,551.00
3.59%
A second preliminary list of Russell 2000 stocks will be issued to clients of the
Russell company on June 25. The final list of additions, and deletions, from the
Russell 2000 will be published on July 1.
A complete list of the preliminary stocks added to the Russell indexes is
available at: russell.com.
Comments can be emailed to the author, Robert V. Green, at
rvgreen@briefing.com.
CMGI Buys AltaVista, et al., Maybe
Late on Tuesday, a rumor swept through Wall Street that CMGI (CMGI) and
Compaq (CPQ) were in discussions to have CMGI buy Compaq's internet
services, primarily AltaVista, for approximately $2 billion in CMGI stock.
Wall Street obviously hated the idea, dropping CMGI stock by $8 1/16 to $94
15/16, or about 7.5%. Compaq was the beneficiary, as their stock rose 1 11/16
to 23 13/16, or about 7.6%. All of these changes happened in the last hour and a
half of trading.
What to make of this situation? Here are a few of Briefing.com's observations.
First, it shows just how fickle Wall Street is, and how willing they are to react to
unsubstantiated rumors. This was a Wall Street trading floor type rumor. It is
worth remembering that most institutions are playing with other people's
money. Their primary fear is explaining large losses to clients. Small losses can
be buried within the overall performance of a fund. But large losses demand
explanations, in most cases. So dumping on rumors is a quick way to avoid what
might become a bigger problem. They can always buy it back if they are wrong.
(If there is any clear difference between professionals and individuals it might
be the ability to completely change a point-of-view instantly.)
Dumping on the rumor should not be construed that the deal does not make
financial sense. How could it, since no one has had any chance to evaluate the
financial nature of the deal, or even what the $2 billion includes? It is pure
knee-jerk reaction.
Secondly, CNBC reported after the close that they had talked to David Wetherell,
chairman of CMGI, who refused to comment. While a refusal to comment will
probably fuel the rumor on Wednesday (this is being written Tuesday night),
since it is not a denial, it is far from a confirmation. The market is in pure
speculation territory at this point.
Third, to us at Briefing.com, the way we heard it, the idea sounds terrific.
What we heard after the close, is that CMGI is going to buy all of Compaq's
internet operations, including AltaVista and Shopping.com. We could not get any
information about whether Millicent was included, and we should emphasize that
all we heard is what the rumor is, not any kind of "inside" gossip.
But, if Millicent is included, then CMGI is getting a great deal. Millicent is an
existing, fully beta-tested, ecommerce product that allows collection of millicent
"credits" by internet merchants on a page view basis. There is no registration or
signup for users that have millicent credits. When you view a millicent enabled
page, your account is debited, by as little as a thousandth of a penny (hence
milli-cent). To the user, Millicent is transparent and completely anonymous.
(Think what it would do for pornography sites alone...)
At Briefing.com, we have always thought that Compaq was sitting on "two
loaded shotguns" in AltaVista and Millicent. We said so in our Stock Brief of July
27, 1998. At the time, we argued that Compaq could turn Millicent into a
defacto form of currency on the internet by a simple three step business model:
1.Install a Millicent wallet on every Compaq PC with buying power already
installed, perhaps $20 - $50 worth. Sell additional credits by credit card.
2.Distribute Millicent server software free to Internet merchants
everywhere.
3.Collect a percentage-of-transaction fee from internet merchants when
they "cash in" their Millicent credits. Earn interest on the float between
the time Millicent credits are purchased by users, with credit card, and
the time that internet merchants cash them in.
The potential at Compaq would have been huge, we felt, (especially if Compaq
also made AltaVista the default home page for preinstalled browsers.) We even
heard later from members of the Millicent team at Digital, that our Stock Brief
was presented to Eckhard Pfeiffer, then CEO of Compaq, in an attempt to get
Compaq to support the idea. Pfeiffer, we were told, refused to consider it. He's
gone now, but he never did much with the Internet except purchase the nearly
bankrupt Shopping.com for $200 million.
In January, Briefing.com spoke with Russ Jones, manager of the Millicent
division (See Stock Brief of January 13, 1999). At that time, he told us that
Compaq planned to sell Millicent to a third party who would commercialize the
product. No announcement has every been made since that time regarding the
Millicent product.
In the hands of CMGI, Millicent could instantly become a widely used service on
the internet. There are many subscription based services who would like to
offer users the ability to view pages for a small fee, without having users
commit to subscriptions. Briefing.com would welcome a Millicent solution as a
way to allow users to sample Briefing.com on a trial, but paying basis, as well as
accommodate occasional users. Hundreds of other sites would also. Currently,
no such system exists on the internet.
If CMGI is able to purchase AltaVista, Shopping.com, and the Millicent software
group for $2 billion in CMGI stock, we think they could be stealing a very
powerful package from Compaq. Lycos (LCOS) is worth $4 billion. AltaVista is
consistently in the top ten visited web sites. It may not have revenues or
earnings to speak of, but Lycos's value isn't based on revenues, either. AltaVista
simply needs to be developed, but so do the other portals!
Why Wall Street thinks that Compaq's internet products in the hands of CMGI is
a disaster is baffling, especially if Millicent is also included. CMGI is a company
that could finally do something with these powerful, but neglected products.
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