Top 10 Plays For Next Week's Russell Rebalancing

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 |  Includes: BPTH, CFNB, CRRS, HBCP, HIFS, IBCP, ITCI, LCNB, NM, NNA, OLBK, SIF, TAT, TIPT, TSRE, TWMC
by: Mark Gomes

Summary

This past weekend, Russell Investments released its preliminary list of additions and deletions for its annual reshuffling of the Russell 2000.

PTT Research's proprietary process has enabled us to uncover and rank the prospects most likely to make the list and deliver the greatest profits to investors.

This article provides five long and short candidates to trade between now and the official reconstitution on Friday, June 27.

Last weekend, Russell Investments released its preliminary list of additions and deletions for its annual reshuffling of the Russell 2000. This annual event represents a juicy opportunity for investors who can identify the winners (and losers) before they are selected.

Over the past several years, PTT Research has developed a proprietary process to navigate Russell Investments' extensive methodology. It has enabled us to uncover and rank the prospects most likely to make the list and deliver the greatest profits to investors. The reward for being right has been a perennial money-maker for our readers, delivering documented annualized returns in excess of 100% each year.

We are pleased to announce that each of the prospects for our latest Spring Portfolio made it onto Russell Investments' preliminary lists, including three that we provided to Seeking Alpha readers. Old Line Bancshares (NASDAQ:OLBK), Tiptree Financial (NASDAQ:TIPT), Trade Street Residential (NASDAQ:TSRE), Independent Bank Corporation if Michigan (NASDAQ:IBCP), and Bio-Path Holdings (NASDAQ:BPTH) are all slated to be inducted into the Russell next Friday. Meanwhile, Home Bancorp (NASDAQ:HBCP) will be ejected, consistent with the prediction we made last week.

In this article, we are offering a Top 10 countdown of five new additions and five new deletions that will be most impacted by next Friday's rebalancing. As you digest this list, understand that these selections are probably best-suited for nimble traders. Many arbs are playing the same game, which introduces the risk of any given pick being overplayed in either direction.

In other words, the timing of entries, exits, and stops will likely be critical to maximizing gains. That is not our expertise (our strength is in uncovering facts before the market does). But make no mistake, five of our six 2013 trading selections made for easy money for Seeking Alpha readers in just six days last year:

Company

Ticker

Date

Initial Price

Final Price

Profit / (Loss)

Berkshire Bancorp

BERK

6/19/2013

7.96

8.04

1%

Intevac

IVAC

6/19/2013

5.36

5.68

6%

MTR Gaming Group

MNTG

6/19/2013

3.55

3.76

6%

eGain

EGAN

6/23/2013

7.63

8.77

15%

Marketo

MKTO

6/23/2013

20.88

22.34

7%

Planet Payment

PLPM

6/23/2013

2.85

2.71

-5%

Averages

6 Days

5%

Click to enlarge

OK, without further ado, let's start the countdown:

Russell Addition #5: Intra-Cellular Therapies (NASDAQ:ITCI) - "Intra-Cellular Therapies, Inc. is a biopharmaceutical company. The Company is engaged in discovery and clinical development of innovative, small molecule drugs that address underserved medical needs in neuropsychiatric and neurological disorders" (Morningstar). Intra-Cellular is one of several successful biotech IPOs that have occurred over the past year. The company is still in development stage, but investors have been drawn to the company's large cash balance of $145.6 million and research related to the treatment of schizophrenia (currently in phase 2), as well as Alzheimer's disease (currently in phase 1).

The company's market cap of $489 million made it a clear choice for the Russell 2000. Russell 2000 ETFs will soon be accumulating shares of Intra-Cellular to correct their holdings of the index. At the stock's average daily volume of 65,534 shares, this equates to 29 days of trading in a much shorter period of time.

Russell Addition #4: Navios Maritime Acquisition (NYSE:NNA) - Navios Maritime "owns a large fleet of modern crude oil, refined petroleum product and chemical tankers providing world-wide marine transportation services. The Company's strategy is to charter its vessels to international oil companies, refiners and large vessel operators under long, medium and short-term charters" (20-F filing). Navios' 5%+ yielding dividend has become very attractive to income investors looking for a solution to today's low interest rates. Navios Maritime Acquisition is also 50.5% owned by Navios Maritime Holdings (NYSE:NM), a separate and larger company. This has given the stock some level of safety.

We see plenty of promising signs out of the company's latest earnings call. CEO Angeliki Frangou announced, "We have grown our company to be one of the top five largest publicly listed tanker owners among our U.S. and European peers with one of the youngest underwater fleets. In fact, so far this year, we grew the fleet by four vessels and we expect six additional vessels to be delivered in 2014. We are proud of our responsible growth strategy as we have been able to expand the fleet while protecting our balance sheet and stakeholders."

Addition to the Russell 2000 should spur significant buying in a short period of time as Russell ETFs load up.

Russell Addition #3: TransAtlantic Petroleum (NYSEMKT:TAT) - TransAtlantic Petroleum is "an international oil and natural gas company engaged in acquisition, exploration, development and production" (10-K filing). TransAtlantic has become a cash flow king recently, raking in $77 million in operating cash flow over the last 12 months and positive free cash flow for the first time in 2013. The stock is up 28.24% this year with more to come, as 2013 proved the company can generate serious cash. Also working in TransAtlantic's favor is a fresh $150 million credit facility announced in the company's May earnings call.

These successes have led Russell to include TransAtlantic in the Russell 2000 after its annual reshuffle. We expect much more buying before Russell ETFs have adequate holdings.

Russell Addition #2: Corporate Resource Services (NASDAQ:CRRS) - Corporate Resource Services "is a national provider of diversified staffing, recruiting, and consulting services with a focus on delivering [their] customers temporary staffing solutions for professional services, administrative and light industrial positions" (10-K filing). Corporate Resources has exploded in growth, from just $57 million in revenue in 2009 to $677 over the last 12 months. During this growth period, the stock price has appreciated by over 1000%, leading to its inclusion in the Russell 2000.

At an average daily volume of 153,968 shares, we expect that ETFs will have to tackle 65 days of average trade volume to build their holdings. A long position should reap the benefits of this buying spree.

Russell Addition #1: SIFCO Industries (NYSEMKT:SIF) - SIFCO Industries "is engaged in the production and sale of a variety of metal working services and products produced primarily to the specific design requirements of its customers" (10-K filing). SIFCO has reported strong book value growth for years, and recently reported free cash flow of $12 million for the past 12 months. The company is also in the process of shifting its attention away from defense contractors toward other commercial applications. A Seeking Alpha article reports, "The company's greatest risk is likely the issue of a contracting military segment; however, it appears that the organization is adequately mitigating this risk through the transitioning into the commercial sector, and given its strong track record as a producer of high-quality products it is likely that future growth will be experienced."

ETFs will need to power through 70 days' worth of average volume in a short time to account for SIFCO's inclusion in the Russell. This presents a juicy opportunity to get in before the ETFs bid the stock up with their massive buy orders.

Russell Deletion #5: LCNB (NASDAQ:LCNB) - LCNB "is a full service community bank offering a wide range of commercial and personal banking services. Deposit services include checking accounts, NOW accounts, savings accounts, Christmas and vacation club accounts, money market deposit accounts, Lifetime Checking accounts (a senior citizen program), individual retirement accounts, and certificates of deposit" (10-K filing). LCNB has created itself a 10 year track record of nonexistent growth. Since 2004, net income, cash flow, and dividends have been a constant flat line for the company. After we correctly predicted that LCNB would be added to the Russell last year, it has become clear that its merger with Citizens National Bank was not enough to spur growth.

Failure to grow has caused Russell to oust LCNB in favor of more successful banks. As ETFs are forced to get rid of LCNB, we estimate approximately 34 days would be needed to empty their holdings at an average volume of 17,612 shares. We should see a significant decline in share price as a result.

Russell Deletion #4: Hingham Institution For Savings (NASDAQ:HIFS) - Hingham is "a full service community bank headquartered in Hingham, Massachusetts" with "11 branches located on Massachusetts' South Shore, in Boston's South End and Beacon Hill, and on Nantucket" (Hingham site). Hingham is simply a bank that has failed to keep pace with its retail bank peers and has been ousted from Russell as a result.

At an average volume of 3,146 shares, it would take around 44 days for Russell ETFs to sell their stakes in Hingham. A price/book ratio 41% higher than the industry average means investors and ETFs alike will have no problem selling off this name over the next few weeks.

Russell Deletion #3: Trans World Entertainment (NASDAQ:TWMC) - Trans World Entertainment "operates retail stores and three e-commerce sites and is one of the largest specialty retailers of entertainment products, including video, music, electronics, trend, video games and related products in the United States" (10-K filing). In reality, Trans World's retail brands like "f.y.e." are dinosaurs that continue to sell music CDs in an age of digital dominance. It's no surprise the company has seen yearly revenue declines from $1.47 billion in 2007 to $387 million over the last 12 months.

We estimate it would take ETFs 49 days at average volume to empty their holdings. When this happens in a short timeframe, short investors should benefit from both the company's decline and ETFs selling off quickly.

Russell Deletion #2: California First National Bancorp (NASDAQ:CFNB) - California First National is in the business of "leasing and financing capital assets… participates in the syndicated commercial loan market, provides business loans to fund the purchase of assets leased by third parties, and offers commercial loans directly to business" (10-K filing). California First National has been in freefall in revenue, net income, and book value since 2010 with little hope in sight. Average volume of only 4,351 means this freefall will be complemented by 159 days' worth of selling by Russell ETFs to rid themselves of the bank.

Russell Deletion #1: Bear State Financial (NASDAQ:BSF) - Bear State is "a community-oriented financial institution offering a wide range of retail and business deposit accounts, including noninterest bearing and interest bearing checking accounts, savings and money market accounts, certificates of deposit, and individual retirement accounts" (10-K filing). In addition, Bear State appears highly overvalued by its price/book ratio. Price/book, which is vitally important to assessing banks, is 2.3 for Bear State, compared to the industry average 1.2. On top of that, the company is sitting at negative free cash flow and hasn't notched a year of revenue growth since 2008. This is a name investors and ETFs will both be exiting in droves.

At an average volume of only 7,669 shares, we estimate approximately 167 days of demand to empty the company from Russell ETFs.

Stay tuned to my PoisedToTriple blog for updates next week!

Disclosure: The author is long BPTH, CRRS, OLBK, SIF, TIPT, TSRE. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Aspects of this article appear in the June 20 edition of the PTT Insider newsletter. Mr. Gomes' investment Methodology serves as the basis of his selection process, asset allocation, and trading decisions. Investors who wish to receive a free subscription to the PTT Insider or act on his research should first read his Methodology at PoisedToTriple.com. I am also short NGPC and MDCI.