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Every year, Russell Investments rebalances its Russell 2000 index by adding worthy companies and deleting ones it no longer deems worthy. 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 (as well as those who short the stocks that will be deleted). When the changes are made, ETFs and other mutual funds are forced to buy the new additions (and sell off the deletions), driving the shares involved up (or down).
A few weeks ago I published a list of 5 Likely Additions to the Russell 2000, along with one likely deletion. Here’s an update on how they have fared thus far:
All data as May 20, 2011
Long
Ticker
Initial Price
NASDAQ
Current Price
NASDAQ
Return To Date
NASDAQ
Delta
Bacterin International
3.40
2841.62
3.35
2803.32
-1%
-1%
0%
Harvard Bioscience
5.48
2841.62
5.14
2803.32
-6%
-1%
-5%
TowerStream
4.20
2841.62
5.08
2803.32
21%
-1%
22%
interCLICK
7.02
2841.62
6.88
2803.32
-2%
-1%
-1%
Glu Mobile
3.82
2841.62
3.91
2803.32
2%
-1%
4%

Short
P.A.M. Transportation
11.01
2841.62
10.25
2803.32
7%
-1%
9%

Averages
4%
-1%
5%
As you can see, the strategy is working well thus far. Our basket of 5 longs and 1 short have returned an average of 4% (over 100% annualized) versus a 1% decline in the NASDAQ. That being said, Russell Investments still hasn’t released the preliminary list of companies that will be added and deleted from the Russell 2000 index. That will happen on June 10th. Assuming that these companies are on the list, their stocks’ outperformance should continue until just before the actual rebalancing (on June 24th).
Market cap is a major determinant and all signs suggest that these companies are all well-positioned to meet this criterion. However, three of the six stocks have dropped modestly alongside the broad market (BONE, HBIO, and ICLK), while one has risen a modest 2% (NASDAQ:GLUU). For investors who have yet to make a play on the Russell rebalancing, these are likely the most attractive stocks to target in the weeks leading up to Russell’s June 24th rebalancing.



Disclosure: I am long BONE, HBIO, ICLK, GLUU, TWER. I am also short shares of PTSI.

Source: Winners and Losers of the Upcoming Russell Rebalancing