On June 28, Russell Investments will be completing its annual index reshuffling. This may not sound like exciting news, but this event will produce some big winners (and losers) as it pertains to its Russell 2000 index. This is because dozens of portfolio managers are required to own the Russell 2000 members. They are also required to sell any stock that gets deleted. This will spur millions of dollars of buying (or selling) for the winners (or losers), all on one day.
Back in March we offered picks that we claimed would beat the market by 15% before July. As reported in our latest update, those picks have returned an average of 25% to investors. The next two weeks offer the opportunity for further gains. On Friday, Russell Investments released its preliminary list of stocks to be added (and deleted). Each of our selections made the list. In addition to those, few pending deletions stood out:
Berkshire Bancorp (BERK) - BERK has a market cap of $115 million, which compares favorably to its book value of $137 million. However, due to low interest rates, the company has been producing lackluster profits. Consequently, the shares have lagged the market's performance, which has led to its pending removal from the Russell 2000.
The potential impact on its share price is substantial. Last year, before BERK was added to the Russell, its shares rose 40% in just 2 months. At present, the company has virtually no short interest and very little institutional support. Thus, we believe the shares could come under great pressure between now and month's end.
Intevac (IVAC) - Intevac primarily manufactures equipment used by hard drive (HDD) vendors like Seagate (STX) and Western Digital (WDC). Over the past few years, IVAC's revenues have declined. This is a direct result of HDD unit sales, which have been impacted by a shift in demand as storage transitions away from PCs and into the Cloud.
The company has future potential. However, for now, the company's financial performance continues to suffer. Consequently, the shares have fallen from a 52-week high of $8.27 to a low of $4.06. As a result, IVAC will almost assuredly be removed from the Russell 2000 at month's end.
We'll discuss its opportunities at a later date. As for the immediate future, the next few weeks could be challenging for the stock. According to our calculations, being deleted from the Russell will result in over a million shares of forced selling. This represents over four weeks of trading based on its average daily volume. This may result in an unfavorable supply / demand imbalance when the company is officially deleted from the Russell 2000 in two weeks. We'll revisit its fundamental merits at that time.
MTR Gaming Group (MNTG) - MTR Gaming Group is a hospitality and gaming company that owns and operates racetrack, gaming and hotel properties in West Virginia, Pennsylvania, and Ohio.
The company has a book value of $13 million and nearly $600 million in debt. Not the most favorable metrics when compared to its $100 million market cap. In addition, the company's President and Chief Executive Officer Jeffrey J. Dahl, resigned from the company on March 27 (which became effective on May 27). On the flip side, the company is trading at 9x this year's earning's estimate. In addition, judging by its most recent earnings transcript, the company is doing reasonably well.
On balance, MTR possesses a fair mix of positive and negative attributes. However, over the next couple of weeks, the company's shares could be subjected to selling pressure. We calculate that over 1.5 million shares will be sold by mandate on June 28 when MTR is officially removed from the Russell 2000. This could be a tall order since 1.5 million shares represents 25 trading days of volume.