Beating the S&P 500 (SPY) is a challenge for most investors (and even professional money managers). However, for nimble investors, there are many ways to stay ahead of the pack. For example, at the end of May, Russell Investments will initiate the annual reshuffling of its Russell 2000 index (also referred to as "the Russell" or R2K). This annual event represents a juicy opportunity for investors who can identify the winners (and losers) before they are selected.
When the new list of Russell stocks is announced, ETFs and other funds will be obligated to buy the new additions (and sell off the stocks that get deleted). This will create millions of dollars of demand in the lucky companies' shares (and tremendous selling pressure in the losers). Being early to buy, sell, or short the right names is a perennial money-maker. Predicting who will get in (or get kicked out) is not easy though. PTT Research employs several analysts to assist in navigating Russell Investment's extensive methodology.
To date, each of our portfolios has generated annualized returns in excess of 100%. You can see the complete performance of our past Spring Portfolio selections (including links to our Seeking Alpha initiation articles) via PoisedToTriple's Portfolio Tracker.
This year's competition to get into the Russell will be intense. There were approximately 230 IPOs in 2013. Most of these stocks will likely be chosen, making it tougher for other companies to compete than in most years. That being said, we have still found some exciting prospects to be added. Our latest highlighted selection is Old Line Bancshares (OLBK).
Believe it or not, banks have been an incredibly profitable staple within our Spring Portfolios. Last year, LCNB Corp (LCNB) delivered a 24% return in just 74 days (31% at its peak during that period) and Palmetto Bancshares (PLMT) returned 14% in just 63 days (33% at its peak). That represents annualized returns of 189% and 114%, respectively.
In fact, shares of OLBK have been outpacing the market since late 2011. At its current rate, its market cap should be big enough (about $180M) to qualify for the Russell 2000 before the June deadline. Inclusion in the Russell will spur a massive 140 days worth of institutional buying (based on its current average daily volume). Thereafter, its daily volume / liquidity will rise to match its place in the Russell, making it attractive to a wider range of investors.
Another reason is that OLBK's book value has been rising fast -- from $70M at 12/31/12 to $109M as of 9/30/13. Also, its free cash flow (FCF) has been a steady $12M annually, providing a solid FCF yield. Most interestingly, insiders have been doing nothing but buying since May (including several buys in December). The company seems to be well-run and recovering very nicely from the Great Recession.
Accordingly, I believe that OLBK is poised to be added to the Russell 2000.
Additional disclosure: Mr. Gomes’ investment Methodology is the basis of his selection process, as well as his asset allocation and trading decisions. Investors who seek to act on his research should first read his Methodology at PoisedToTriple.com.