Next Friday, 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)…and each of our selections made the list. Aside from those, few other pending additions stood out:
eGain (EGAN) - eGain develops and sells software that enables companies to provide online customer service capabilities. EGAN once trailed RightNow in this market. However, ever since Oracle acquired RightNow, EGAN has come on strong and has taken over the top spot in Gartner's Magic Quadrant.
Last quarter's results were just okay, but still good enough for the shares to hold on to their sharp gains from earlier in the year. As a result, the company is set to be added to the Russell 2000 at month's end. Based on our calculations, combined with EGAN's average daily trading volume, portfolio managers will need to obtain a few weeks worth of shares at that time. Between now and then, there may be an upward lift for the stock as arbs look to capitalize on the forced purchasing to come.
Marketo (MKTO) - Marketo is a recent IPO. They provide cloud-based Marketing Automation and other related applications. According to our proprietary research, Marketo's software is very popular among its users. Not surprisingly, this popularity has spurred rapid growth. Recently, the stock was hit by Salesforce.com's (CRM) acquisition of ExactTarget (a MKTO rival). Many had believed that CRM would acquire MKTO. Instead, CRM will become a greater threat.
Nonetheless, in two weeks, MKTO will be added to the Russell 2000. This will require certain portfolio managers to accumulate a substantial stake in MKTO. Due to its high average trading volume, the shares may not incur major disruptions. However, despite its apparent liquidity, MKTO's IPO floated a relatively few number of shares. If there isn't enough supply between now and June 28, demand will drive MKTO's price higher.
Planet Payment (PLPM) - Planet Payment provides international payment processing and multi-currency processing services. They serve over 40,000 merchant locations worldwide. The company generates close to $50 million in revenue and is growing at a 20% pace. Earnings are expected to increase by 160% next year to 13-cents per share. This level of growth nicely justifies its forward P/E of 22. An earlier Seeking Alpha article provided a great and detailed overview of the company and its opportunities.
Based on our proprietary calculations, portfolio managers will be required to obtain several million dollars worth of PLPM's stock when it is officially added to the Russell 2000 next week. With an average daily volume of 85,000 shares, the buyers will be hard pressed to fill their positions at current levels. Further, we don't foresee any substantial news on the horizon. Thus, in the near term, PLPM should trade on the basis of supply and demand. Its addition was far from certain until Friday's announcement, so we believe demand should outstrip supply until month end.