- In May, Russell Investments will initiate the annual reshuffling of its Russell 2000 index. This annual event represents a juicy opportunity for investors who can identify the winners (and losers).
- OLBK's market cap now appears big enough to qualify for the Russell 2000. Inclusion in the Russell will spur an entire month's worth of institutional buying volume.
- Tiptree's market cap leapt from $70M to $300M when it secured major private financing last year. This move appears sufficient to complete TIPT's set of requirements for Russell membership.
- Trade Street Residential's downside risk is relatively limited. TSRE trades at just over book value ($244 million as of March 2014), and is expected to grow earnings by nearly 50%.
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.
After the market closes today, 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.
Here are a few candidates to make today's cut:
Tiptree Financial (NASDAQ:TIPT): Despite a major overhaul in its capital structure, Tiptree remains a low-float stock, with just 8 million shares outstanding. Thus, if selected for inclusion in the Russell 2000, the resultant institutional demand will likely exert significant force on TIPT's share price. Historically, companies with TIPT's profile have experienced a material (bullish) shift in the demand for their shares after being selected for admission into the Russell.
Fundamentally, TIPT took a big step 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. Yahoo Finance incorrectly lists TIPT's market cap in the $100 million range, but most other sources, including Seeking Alpha, provide more reliable data. We estimate that $170 million will be the cut-off for Russell consideration, so TIPT looks good on that front.
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.
Overall, TIPT's progress means that the downside risk for investors is relatively limited. However, if selected, the upside for Tiptree shareholders between now and June 27 could be explosive.
Old Line Bancshares (NASDAQ:OLBK): Believe it or not, bank stocks have been an incredibly profitable staple within our Spring Portfolios. Last year, LCNB Corp. (NASDAQ:LCNB) delivered a 24% return in ten weeks, while Palmetto Bancshares (NASDAQ:PLMT) returned 14% in just two month. That represents annualized returns of 189% and 114%, respectively.
Similar to TIPT, the fundamental risk for shareholders is relatively limited. OLBK's book value has been rising fast -- from $70M as of 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 last May (including several buys in December). The company seems to be well-run and recovering very nicely from the Great Recession.
As a result, OLBK's market cap now appears big enough to qualify for the Russell 2000. Inclusion in the Russell will spur an entire month's worth of institutional buying volume. Thereafter, its daily volume/liquidity will rise to match its place in the Russell, making it attractive to a wider range of investors.
Trade Street Residential (NASDAQ:TSRE): Trade Street Residential is a unique pick for the Russell 2000. Until recently, the company was the empty shell of an old company. It traded under the name Feldman Mall Properties at a market cap of less than $500,000, with only a single parcel of land that was almost worthless.
In 2012, it acquired Trade Street Capital LLC in exchange for all of its common shares. Trade Street's management took over the new company, and it was renamed Trade Street Residential.
Trade Street is now a publicly-traded REIT with a market cap approaching $300M. TSRE has been growing rapidly. In 2013, TSRE acquired 5 new apartment communities in the Southern United States, with 6 more added in the first 3 months of 2014 alone. The company also initiated a dividend, and now trades on the Nasdaq. These factors give TSRE a great shot at being added to the Russell 2000 in June.
If not, the downside risk is relatively limited. TSRE trades at just over book value ($244 million as of March 2014). It is expected to grow earnings by nearly 50% next year to $0.50 per share, resulting in a PEG ratio of 0.33, one-third of the 1.0 rule-of-thumb espoused by many top investors. The company also offers a fat dividend yield of 4.8%.
That's the downside. If TSRE makes the cut, institutional demand will be much greater than TSRE's average daily volume (55,000 shares) can handle. The shares would most likely be pressure heavily to the upside.
Stay tuned. Russell Investments will release its preliminary list of winners on June 13. In the meantime, opportunistic investors have the opportunity to choose from a number of low-risk bets and profit from the result.