Popaf
As small and small caps have been weak for a couple of years now, the pain has increased for those who have not managed positions and position size well. For those who can overcome short-term hurt, I have never seen better long-term opportunities Identify small-cap companies.
We’re just a few weeks away from the annual rebalancing of the Russell 2000. This is often the biggest trading day of the year as dozens of stocks are added to the index.
The Russell 2000 inclusion list has been updated each of the past three weeks. Final listing will take place at closing on June 28th. There is minimal change from week to week, but a small number of businesses will be added to the inclusion list and some will be removed. So, at the edges, there is room to switch.
5 beanie hats What I’m buying or holding is currently on my end-of-month Russell 2000 inclusion list. I covered more about companies in a previous article entitled Microcaps to buy ahead of potential Russell 2000 listing. Today, I’ll add quick notes about the companies currently on the Russell 2000 inclusion list.
Forced purchase of ETFs
When stocks are added to an index, there is “forced buying” by the ETFs and mutual funds that track that index. The most well-known forced buying occurs when the S&P 500 Index (SPX) adds stocks to its ranks.
Over time, the impact of the S&P 500’s inclusion has diminished significantly. This likely comes from two things. First, indexes actively attempt to defuse the impact of index inclusion. Second, many analysts, myself included, believe this is likely due to investors wanting to manage the consolidation process.
Standard & Poor’s 500 inclusion (Dow Jones and Morningstar)
Russell deliberately gave investors leeway to adjust to upcoming additions and deletions. Therefore, every stock added or deleted from the index may see the price movement affected before or after the listing date to varying degrees.
I try to find logic in the mathematical effect. Through algorithmic thinking, it makes sense to consider the float of a stock, the demand of the index, and the short position of an issue. Stocks with heavy short positions, low float, and high demand from index funds appear poised to perform best in the short term.
I also take the contrarian view that stocks that move early may not continue to move later, and that stocks that fail to move early may move later. In the long run, the market will be a weighing machine based on how well a company performs.
As such, I look for companies that have long positive levels of their business, are out of favor now, have low float, and in many cases are heavily shorted now.
I’ve been using the Cantor Fitzgerald Russell Inclusion Calculator to figure out how many “forced buy” stocks there are in each version of ETFs and other index funds. It’s very useful.
Aemetis (AMTX) is a double position
Aemetis is included in the Russell 2000 inclusion list. Cantor says he expects to force buy 4.5-5 million shares. Short interest in the stock right now is significant at about 5.5 million shares (according to Fintel) on 44 million shares with about 25 days to cover.
Aemetis is my top choice because…
- It is out of favor now.
- It has low float.
- It was severely shortened.
- It has a bright future from high demand for SAF, renewable gas and biodiesel, as well as carbon capture, all of which are tax incentivized.
I did a full write-up about the stock here:
Aemetis is growing, paying down its debt, and promises more in 2024
Aemetis is double position for me at the typical 7-8% threshold. The net cost per share after trading the options and the premium received is less than $1. I expect to retain most of my Aemetis business long-term while it builds the SAF and renewable diesel refinery in Northern California. I would selectively sell covered calls at sharp rises and perhaps trim if the stock exceeds about $2 billion in market cap before it produces a SAF.
Spire Global (SPIR) is a full position
Spire Global is on the Russell 2000 inclusion list. Cantor says to expect about 3 million shares of forced buying. Short interest now stands at about 2.23 Million shares outstanding out of 24.32 Million shares with about 9 days to cover.
I like Spire Global because…
- It has been corrected after high school with higher transfer prices.
- It has low float.
- It has been moderately shortened.
- It has a bright future in unique RF satellite data monitoring and analysis.
I interviewed the CEO around last Labor Day when we “backed the truck” on this stock at ~40% lower prices.
Interview with Spire Global CEO Peter Platzer (video and text)
I currently have a full position of 3-4% and rate the stock as a strong buy for medium to long term investors. My cost basis is less than $5, so I expect to hold the majority of the position until space stocks become popular and surge. At this point, I would look to monetize some profits by reducing the position and selling covered calls.
The American Superconductor (AMSC) is a double start
American Superconductor is included in the Russell 2000. Cantor says to expect about 4.6 million shares of forced buying. Short interest narrowed to 1.85 Million shares based on 37 Million shares for two days of coverage. The stock has risen since the initial inclusion listing came out a few weeks ago.
I like American superconductors because…
- It’s gathering momentum right now.
- It has low float.
- It has a very bright future as it helps to improve a smarter and cleaner grid.
I currently have a double start, or just over 1%, in AMSC shares. My cost basis is about $16. I expect to take some profits in the stock’s next run and hold the rest of the stock for the long term. I also expect to trade back on the inevitable declines in clean energy stocks. But I like it in the long run, because clean energy and a smarter grid are secular trends. So, I have a basic position that I need to maintain over the long term and perhaps add to. I’m also planning a trading post.
Applied Optoelectronics (AAOI) is a dual start function
Applied Optoelectronics is a Russell 2000 inclusion. Cantor says he expects about 5 million shares of forced buying. Short interest is large at about 10 million shares traded for 39 million shares for about 13 days to cover. The stock has been tanking since its initial listing.
I like applied optoelectronics because…
- The stock has a consolidating pattern that looks ready for a breakout.
- It has low float.
- It was severely shortened.
- They hold leadership positions in the secular positive industries of optical components, lasers used in communications, wireless, sensors, and data centers.
- Both insiders and analysts are showing a bullish sentiment on the stock.
I currently have a double start, or just over 1%, in AMSC shares. My cost basis is about $12. I will add to this the situation regarding the execution in the company or the stock price that starts to attract the attention of the public. I expect this position to be pyramid based so that I can make some profits later at higher levels. I rate the stock a buy for new investors.
QuickLogic (QUIK) is the starting position
Quick logic is in the Russell 2000 inclusion list. Cantor says he expects about 1.8 million shares of forced buying. Short interest is moderate at around 1.3 Million shares for trading of 14 Million shares for approximately 13 days of coverage. The stock has fallen since its initial listing, erasing some of its gains from last year.
I like QuickLogic because…
- The stock has a PEG ratio as low as 1.26
- The arrow pattern indicates a bullish reversal soon.
- It was severely shorted with very low float.
- It operates in a secularly positive industry in AI-powered semiconductor platforms for audio and sensor processing. QuickLogic’s eFPGA for AI hardware acceleration and preprocessing is an integral part of SoCs (System on a Chip).
I only have a junior position in this stock, but I intend to add to it this week or next before listing. The company is profitable and growing, and I believe it will likely announce a large order soon. I can see this company being acquired at a 2-3x higher price sooner rather than later.
