While many investment professionals are enjoying slower summer days and extended vacation time, a subset of traders are now scrambling to prepare for the biggest trade of their year.
Stocks are added to and removed from the current Russell indices, which creates opportunities in each individual name as they are either removed from an index (typically a negative event) or added to an index (typically positive).
Emotional movements, increased volume, and large imbalances in buying and selling can create opportunities for those with the capital, speed and fortitude to react to the shifts. Making hundreds of thousands or even millions of dollars in just minutes or days is far from unheard of -- hence the buzz among trading desks during this time.
One of the most widely used "Russell reconstitution" strategies is to trade a basket of stocks leading up to the actual date of rebalancing, which is finalized after the bell on Friday, June 27. This can require significant capital and risk to pull off properly, and the payout is not always promised.
Fortunately, there are a number of ways to slice and dice the rebalance to fit your risk appetite, buying power and desired holding period. With that in mind, I've used the reconstitution as a framework to uncover some up-and-coming equities with promising yields that just might get a bump up from being added to a Russell index.
Collectors Universe (Nasdaq: CLCT) stands out on the list of potential additions primarily for its sky-high dividend yield of 6.3%. The company helps clients determine the authenticity and grading of high-value coins, memorabilia, trading cards, and so on. With a market cap of only $180 million, I wouldn't normally include CLCT in one of my screens, but it has to meet Russell's requirements for liquidity and investability to even be considered for addition, so it gets the green light from me as well.
The stock has been on a tear over the past 12 months, up 64%, and I'm hoping its potential inclusion will continue that growth. I think the company's foray into China this time last year will continue to boost its bottom line, as the local market for coin-grading has proven to be substantial. An endorsement from Forbes as one of America's best small companies doesn't hurt, either.
CBS Outdoor Americas (NYSE: CBSO) operates in an industry that might seem old-fashioned: billboard advertisements in high-traffic areas. However, the offshoot of the media giant of the same name is one of the largest lessors of such advertising space in North America, operating in iconic locations such as Times Square and Sunset Boulevard. CBS (NYSE: CBS) currently owns 81% of the outdoor advertiser after launching the CBSO IPO in March this year, with the new issue returning over 16% since then.
That ownership will soon change, however, as CBS (which my colleague Crista Huff profiled recently) will be divesting its ownership in CBSO, with CBS Outdoor subsequently being turned into a real estate investment trust (REIT). Sell-side analysts see this is a positive move, given the tax benefits for shareholders that REITs allow. CBSO's dividend yield is hovering around the 5% mark.
Risks to Consider: The "Russell reconstitution" is an ongoing process -- while an updated list of additions and deletions is current as of June 20, the final membership list won't be posted until June 30. Use this time to research any potential additions that catch your eye, but wait to execute until the final listing is made public.
Action to Take --> Being aware of how markets are constructed and how indices are weighted can help to uncover investments that would not otherwise fall under your radar. Digging deeper into events like these can unearth gems such as CLCT and CBSO. My advice is to be patient before entering and keep the long term in mind for these two prospects.