Beating the S&P 500 (NYSEARCA: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, in 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.
At PTT Research, this is one our specialties. Dating back to 2011, we have provided a slate of annual Spring picks on Seeking Alpha. On average, they have generated annualized returns in excess of 100%. You can see the complete performance of our past Spring Portfolio selections (including links to our initiation articles) by visiting PoisedToTriple's Portfolio Tracker.
This year, as always, ETFs and other funds will be obligated to buy Russell Investment's new additions (and sell the stocks that get deleted). This will create millions of dollars of demand in each of 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.
Understanding the process is important. On May 30, Russell will rank all companies based on their market caps. Between June 1 and June 13, they will review the rankings list to eliminate any and all companies that don't meet their other (and extensive) criteria. On June 13, they will announce the constituents of their new indexes (most notably, the Russell 2000). After the market closes on June 27, all changes will be made official.
This year's competition to get into the Russell will be intense. The stock market was up substantially last year, so the market cap requirement is much greater this year. Also, there were approximately 230 IPOs in 2013. Most of these stocks have already been admitted, making it even tougher for all other companies.
That being said, we have still found some exciting prospects to be added. Our first 2014 pick, Old Line Bancshares (NASDAQ:OLBK), is already up more than 10% from our initiation price and appears set for more gains before the June 27 reconstitution. Here's our second pick of the 2014 Spring Portfolio season:
Tiptree Financial (NASDAQ:TIPT)
Tiptree Financial took a big step in its growth process by securing a listing on the NASDAQ exchange in August. Just as important was Tiptree's leap from a market cap of $70M to a market cap of $300M when it secured major private financing last year. These developments appear significant enough to give the company the size and legitimacy requirements it needs for Russell membership.
When we look at Tiptree's liquidity, we find a similar story to Old Line Bancshares. Based on its recent daily volume averages, it would take ETFs and institutions 166 days to obtain the required number of shares. Thus, inclusion in the Russell 2000 index would be a significant shock to TIPT's liquidity. Historically, companies with this profile have experienced a material (and bullish) shift in the demand for its shares after being selected for admission into the Russell.
We also see strength in Tiptree's management and insiders. Upper management has an average of 27 years of financial experience, insider ownership is over 20%, and we have seen an unusual number of insiders buy shares in the last 6 months (7 in total). These are all signs that the company is preparing for both short-term and long-term growth.
This started to be reflected in the company's 2013 performance, which yielded 88-cents of Economic Net Income per share. Economic Net Income is TIPT's non-GAAP financial measure of profitability. As the financial sector continues to recover from the recession of 2008, indexes like the Russell 2000 are including a growing number of strong, diverse financial institutions. For this reason, as well as the progress we saw from Tiptree in 2013, we believe that TIPT is likely to be added to the Russell 2000 in June.
Disclosure: I am long OLBK, TIPT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article also appeared in the April 18 edition of the PTT Insider, PTT Research's free weekly newsletter. Please visit PoisedToTriple.com for our Methodology and complete set of disclosures.