Beating the S&P (SPY) is a challenge for many money managers. However, for nimble investors, there are many ways to stay ahead of the averages. At the end of May, Russell Investments will initiate its annual reshuffling of the Russell 2000 index ("the Russell" or "R2K"). This annual event represents an unique opportunity for investors who can identify the winners (and losers) before they are selected
When the new Russell 2000 is announced, ETFs and other funds will be obligated to buy the new additions and sell the deletions. This will create millions of dollars of demand or selling pressure. Being early to buy or short the right names is a perennial money-maker. In 2011, our picks returned an average of 18% in just six weeks.
In our last article, we predicted that Perfumania (PERF) will be deleted from the Russell, which could spark a 30% decline in its share price. We also highlighted Media General (MEG) and Uni-Pixel (UNXL), which we expect to be added to the Russell. In this piece, we are presenting two new candidates for removal.
PDI, Inc (PDII)
Float, excluding institutional holdings
PDI provides marketing services to healthcare companies. The company describes itself as being "dedicated to enhancing engagement with health care practitioners and optimizing commercial investments for its clients by providing strategic flexibility, full product commercialization services, innovative multi-channel promotional solutions, and sales and marketing expertise."
The shares were at $8 and all was going well when the company was added to the Russell last year. However, since that time, the company has reported several quarters of unprofitable results and finished 2012 with $127 million in revenues, down nearly 20% versus 2011. The stock has responded by pulling back to $6. We predict the company will soon be removed from the Russell 2000.
We estimate that this will force fund managers to dispose of one million shares, adding pressure to the stock, though it appears to be nearing oversold levels.
Berkshire Bancorp (BERK)
Float, excluding institutional holdings
Berkshire Bancorp could get deleted from the Russell by no fault of its own. The company does a good-enough job of producing steady income and has a P/E of 10.5 (not cheap for a company with its profile, but still fair). Unfortunately, BERK is simply too sleepy to keep up with its Russell peers (and the companies that are in queue to join the index).
Since recovering from the financial collapse of 2008-2009, the company's valuation has been capped under $130M. Last year, that was sufficient to earn membership in the Russell 2000. However, with its market cap hovering near Russell Investment's break point, BERK is at risk to miss the cut and could be deleted.
The potential impact on its share price would be predictable. The company has virtually no short interest and very little institutional support. With just 5,000 shares traded per day, it is largely subject to the whim of retail-investor sentiment. Last year, before it got added to the Russell, BERK rose 40% in just 2 months. Being thinly-traded can have its advantages…but that's a double-edged sword.
This year things could unfold in the opposite direction. The company is well aware of this, as evidenced in its 10-K:
"The price of our common stock may be volatile at times since our common stock is thinly traded and less than 30% of our outstanding shares are owned by non-affiliates. It may be difficult for a stockholder to sell a significant number of shares at a chosen time and/or price or for a third party to purchase sufficient shares on the open market to cause a change in control of the Company, all of which could depress the price of the Company's common stock."
More to come…
We'll be issuing many Russell updates in the weeks/months to come. To get the latest picks automatically, simply hit the "Follow" button under my picture at the top of the page.
Additional disclosure: I am long MEG and UNXL.