Three months ago, we offered picks that we claimed would beat the market by 15% before July. These selections were based on a proprietary research method that took four years to develop. The objective was to identify the most explosive stocks that portfolio managers will be forced to buy and sell when the Russell 2000 (R2K) is reshuffled at the end of June.
These trades will officially occur after the market closes on Friday. If you see massive volume spikes, you'll know why. As you can see below, each stock pick we presented was selected to enter (or exit) the Russell 2000. This 10-for-10 performance tops the 5-for-6 record we established back in 2011. All data as of market close on June 26.
With an average holding period of less than three months, this year's picks gained an average of 34%. Our longs gained 43% and rose as much as 52% as a group. Our shorts earned 20% with a peak average return of 24%. Our top performer, Media General, announced a merger agreement, which effectively amounted to a buyout. The shares jumped 34% on the news and nearly doubled from our initiation price.
MTR Gaming Group
With an average holding period of just one week, our selections gained an average of 5% in the midst of a highly volatile market. Our longs gained 6% and rose as much as 10% as a group. Our shorts earned 4% with a peak average return of 8%.
So, What's Next?
Believe it or not, with just hours to go before this year's changes actually take place, we believe it is time for investors to take profits on each of the selections we have provided. The reason is simple. According to our research into recent trading patterns, we believe arbitrage-focused investors are still placing initial bets on most of our names, anticipating profitable moves after the bell Friday. The time for placing these bets was when we first presented them, not now.
History has shown that this sort of "gaming" action often leads to an unprofitable buy-the-rumor/sell-the-news result. If investors (in aggregate) end up holding more shares than the Russell portfolio managers need to buy (or have shorted more shares than the PMs need to sell), the resultant imbalance will result in losses. In other words, better safe than sorry.
So, with that we officially close the book on this year's Russell Reconstitution coverage. We look forward to providing you with our top selections for the 2014 Russell Reconstitution (beginning in March). Stay tuned.
Disclosure: I am long EGAN, MKTO, PLPM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.