The Russell 2000 Rebalancing Act
- Posted by ZorTrades
- on June 16th, 2011
UPDATE, JUNE 17, 2011 1:50pm due to circumstances that I can’t control, I sold $SIX +$1.64
Over the last few years post bankruptcy equities have done extremely well, I’m always amazed how a company could go bankrupt, then come out of bankruptcy and have a great performing stock. $SIX (SIX FLAGS) is one that comes to mind because I have a client who owns a decent size position in the low $30′s. The stock now trades at $70 and he believes it goes to 120 in the next 2 years, but that is a story for another time. What got me excited about $SIX was an article about some re-org equities that might be or will be added to one of the Russell indexes, here is an excerpt:
On June 10th, Russell announced their annual reconstitution preliminary additions and deletions. You can view the data here: Russell Reconstitution. On Friday, June 24th the reconstitution will go into effect.
We know over the past year that a number of post re-org equities have been listed on the exchanges. With that said, we would expect to see a number of post re-org equities in the addition column on the Russell indexes and that’s actually what we see. Here are the list of post-re org equities, and the associated Russell (either 1000 or 2000) indices they are being added to:
- BKU – BankUnited (Russell 1000)
- GM – General Motors (Russell 1000)
- CHMT – Chemtura (Russell 2000)
- CHTR – Charter Communications (Russell 1000)
- FRP – Fairpoint (Russell 2000)
- LYB – Lyondell (Russell 1000)
- SEMG – SemGroup (Russell 2000)
- SIX – Six Flags (Russell 2000)
- VC – Visteon (Russell 1000)
What compounds the problem on some of the smaller stocks above, is that the free float may be a very small percentage of total shares outstanding. As some bankruptcy plan support agreements require fulcrum security holders to hold onto their stock for a certain number of days, the true liquidity of a stock may be quite small. Furthermore, there may be no equity holders, that participated in the bankruptcy, ready to sell the stock because a lack of value realization.
Let’s take Six Flags as an example. Bloomberg lists 27.575M shares outstanding. The new proposed weighted in the various indices (Russell 2000, Russell 3000, and Russell 2500) will require a purchase of approximately $111M worth of shares, or approximately 1,500,000 shares as of today’s close. Since the end of the 1st quarter, the average volume of the stock is approximately 160,000 shares. This is 9 days worth of volume just on the passive side. Rehan Jaffer’s H Partners, a well know event-driven hedge fund, owns 6.6M shares or ~25% of the shares outstanding. If he (and BHR Capital, the #2 holder) decides to not sell into the passive investor’s hands, there could be a squeeze for the shares pushing the price artificially higher.
If I was running one of those hedge funds, I would probably let the passive investors drive up the price, and if I wanted to sell the stock I would sell it into their lift. The stock is off about 10% of its 52 week high, so it has held up well, and with the Russell 2000 addition catalyst this stock is worth a strong look.
POSITION: LONG, WITH A TIGHT STOP AS ALWAYS.
Read the entire piece here: DISTRESSED DEBT INVESTING
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.
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Frank Zorrilla is the founder and chief investment officer of Zor Capital LLC.He began his Wall Street career 10 days after his 20th birthday when he became a Series 7 licensed stock broker. More »
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