On June 10, Russell Investments will release the preliminary list of companies that will be added and deleted from the Russell 2000 index. This is an annual event that represents a juicy opportunity for investors who get in early on the stocks that will be added to the index. When the new selections are made, ETFs and other mutual funds will be forced to sell off the deleted stocks and buy the new additions. This will create millions of dollars of demand in the lucky companies’ shares.
Barring an increase in selling pressure (which could be catalyzed by a stock market correction, poor earnings, or other bad news), the stock prices of these companies are strong bets to increase in value between now and late June, when the new index will be finalized.
Figuring out who the winners and losers might be takes work, but isn’t very difficult. Russell Investments makes its inclusion/deletion criteria public. As such, we can use its rules to figure it all out.
Market cap is a major determinant. This year, I believe that most companies that have grown to $140M in market cap (via acquisition or stock price appreciation) will be great bets to be added. However, dozens of stocks meet this criterion. In order to narrow the field, I estimated how many shares of each company will need to be purchased once they get added to the Russell, then compared that to each company’s average daily volume.
This yielded a list of the companies whose shares will be toughest to acquire in large quantities. In other words, these stocks will have the highest amount of demand relative to the number of shares that are typically available for sale. Therefore, these stocks are the best bet to rise significantly over the next eight weeks.
Focusing on the ones that have already announced earnings (so we avoid any possible bad news), here are my top five picks as of today:
* As of 5/3/2011
* Est'd # of days worth of volume required to satisfy anticipated demand.
You should note that BONE is sitting below the $140M safety line. However, $129M should be good enough for inclusion. If BONE is among the stocks selected, an incredible amount of demand will flood into its shares. I also happen to like the company’s prospects for success, so it made the cut in my book.
You should also note that Glu Mobile announced strong earnings on Tuesday night. Considering its position in the exploding mobile and Facebook gaming markets, its shares could be off to the races whether or not it gets selected by Russell Investments. I’m betting it will.
Finally, for the most part, there will be a loser for every winner. Companies will be deleted from the Russell to make room for the new additions. These stocks will be sold off by Russell-related funds and therefore make good bets to sell short. At this stage, my favorite is P.A.M. Transportation Services (PTSI).
In conclusion, these stocks may not go up as much as my favorite “stocks that are poised to triple”, but they are all a very good bet to generate strong returns in a very shorter timeframe (eight weeks).
I will update this list as new candidates hit my radar screen, so "follow" me at SeekingAlpha.com and stay tuned.
Disclosure: I am long BONE, HBIO, TWER, ICLK, GLUU.
Additional disclosure: I am also short shares of PTSI.