How to Spot Small-Cap Winners Before the CrowdVIEW IN BROWSER The World Cup has captured the attention of soccer fans around the world as 48 national teams compete for the sport’s biggest prize. But no team gets there by accident. More than 200 national teams spend years fighting through regional qualifying matches. Every win, loss and draw affects the standings. And those standings decide who gets a shot at the trophy and who gets left watching from home. Yesterday, Wall Street finished its own version of qualifying. Through the Russell Reconstitution, thousands of smaller companies get promoted or left behind in the Russell indices. But the real story here isn’t who made the cut. For some investors, that may not sound like much. But it matters. Because when a company moves into a major Russell index, mutual funds and exchange-traded funds that track that index may be forced to buy shares. That can send billions of dollars moving through the market at the same time. But the real story this year is not just which stocks made the cut. It is what those moves can tell us about where institutional money may be headed next. So, in today’s Market 360, I’ll explain how the Russell Reconstitution works, why you should pay attention to it now and how I look for the early signals that may reveal tomorrow’s market leaders.
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What Is the Russell Reconstitution?Every year in June, Russell reviews thousands of publicly traded companies and ranks them by size. Over several weeks, Russell released updated rankings showing which companies were moving up and which were moving down. The largest 1,000 companies are then placed in the Russell 1000. The next 2,000 make up the Russell 2000. The final rankings were released yesterday. And beginning Monday, the changes will officially take effect. That’s when it’ll get interesting. Many mutual funds and exchange-traded funds (ETFs) are designed to track the Russell indices. So, when a company is added, those funds have no choice but to buy shares. And when billions of dollars move at the same time, the market notices. But the Russell Reconstitution is about more than the buying it can trigger. It’s one of the few times each year when investors get a clear look at which companies are moving up in the ranks. And this year, those rankings matter more than usual. Why You Should Pay Attention NowThe market is changing faster than before. That’s why, for the first time since 1988, Russell is moving to a semi-annual schedule. Instead of updating its small-cap indices once a year, it will now do so twice – once in June and again in December. Here’s why. According to FTSE Russell, recent market volatility, a widening gap between winning and losing stocks and the growing amount of money tied to its indices highlighted the need for a “more regular and responsive approach” to reconstitution. In other words, Russell believes investors need a more up-to-date picture of what’s happening with small-cap stocks. The reaction to last year’s reconstitution helps explain why. When last year’s final list was released, a record $102.5 billion in shares were traded on the NASDAQ, while another $114.7 billion was traded on the New York Stock Exchange. And in some cases, that surge can have a noticeable impact. Take Power Solutions International, Inc. (PSIX) for example. I recommended it to my Accelerated Profits subscribers in January last year. Power Solutions makes engines and power systems used in heavy equipment, commercial vehicles and backup power applications – and increasingly, in data centers. At the time, it showed a history of posting big earnings surprises and increased analyst estimates. So, I had to make sure my subscribers could get in. Five months later, it was added to the Russell 3000 during last year’s reconstitution. Once it became official, PSIX climbed 21% in the first week. That’s a big move in just a week. All told, we ended up making a 121% gain on PSIX by the time we sold it in May this year. But it also raises an important question. How do you identify companies like that before everyone else does? How I Find Tomorrow’s Market LeadersJust as World Cup teams have to qualify for the tournament, companies have to earn their place in the Russell indices. And I have my own way of deciding which stocks deserve my attention. I call it my Precursor Intelligence system. P.I. is my way of finding the companies that are already starting to qualify before Wall Street updates the official standings. I use it to analyze roughly 6,000 stocks and rank them based on eight fundamental signals and one quantitative money-flow signal. Those eight fundamental signals help me determine whether a company has the kind of sales growth, earnings growth, cash flow, margins and management efficiency institutions want to own. The ninth signal helps me detect when institutional buying pressure may already be building. Without a system like this, a stock like PSIX might not even be on the radar for most investors until after the buying pressure has already shown up. That is why I recently put together a special report called Four P.I. Trades for 400% Gains. Inside, I reveal four companies my Precursor Intelligence system is flagging right now. These are stocks where I believe the same kinds of signals that showed up in PSIX may already be forming. You can get the details here. Sincerely, |
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