Monday, June 20, 2011

Investors Guru Small Cap Stock Observer

(Amex/TSX: URZ) Uranerz Energy – Uranerz To Be Added To Russell Indexes

Last month's article outlined our observations of the market effects each May and June as a result of the Russell Group's annual indexes reconstitution. For more established large-cap stocks these effects are usually minimal, maybe a bump up or down within an index, or a weighting change.

However for small-cap stocks the effects on trading volumes, and as a result share prices, can be very significant as market participants from day traders to index funds bid-up or sell-off shares in anticipation of which companies may be added-to or deleted-from the widely followed Russell 2000 index. As these indexes get finalized at the end of June, index funds must update their holdings to reflect these changes, resulting in one of the stock market's highest volume trading days each year, with wild share price swings for some of the stocks most affected.

To demonstrate this point we looked at the past performance of our Featured Stock (Amex/TSX: URZ) Uranerz Energy, which had been added to various Russell indexes for the first time in 2009. These included the Russell 3000, Russell 2000, Russell Microcap, and Russell Global indexes.

Our charts showed that Uranerz's shares were up 49.40%, from $1.39 on April 30, 2009 to $2.13 on June 26, 2009. Normal URZ trading volume back then was a few hundred thousand shares per day, which spiked to over 5-million shares as the Russell 2000 was finalized on Friday June 26, 2009.

Similarly, our charts showed that URZ was down 41.83%, from $1.59 on May 3, 2010 to $0.91 on July 8, 2010. Volume again spiked to over 4-million shares as the company was removed from the Russell 2000 on Friday June 25, 2010.

Uranerz Energy is a good case study of the potential addition and deletion effects during the Russell indexes June reconstitution. Other than being added to the Russell indexes, can you find anything else in the company's May-June 2009 news releases to explain why URZ was up almost 50%, with its volume up 18 fold - or in May-June 2010 to explain why URZ was down over 40%. I can't!

There is another reason why Uranerz Energy is an interesting study going into this year's Russell indexes reconstitution. Hint: last month's article was entitled, "Will Uranerz Energy Be Inducted To The Russell 2000 Index Next Month?"

Traders and fund managers are closely watching this timeline, from Russell Group's website:

Uranerz Energy selected as a preliminary addition to Russell indexes

As of June 10, 2011, and again on June 17, 2011, the Russell Group's website still lists Uranerz Energy as an addition to the Russell Global index and the Russell 3000 index. The Russell 3000 index measures the performance of the largest 3000 U.S. companies, based almost entirely on market capitalization at the end of May.

The Russell 1000 index and Russell 2000 index are subsets of the Russell 3000 index. Basically the largest 1000 companies makeup the Russell 1000, and the remaining companies makeup the Russell 2000. The Russell 2000 index is the key benchmark for small-cap companies, small-cap fund managers and small-cap index funds.

For Uranerz Energy, being added to this year's Russell 3000 and Global indexes appears to be a done deal at this point. The question now is will Uranerz also make this year's final cut for the widely followed Russell 2000 small-cap index?

Traders potential sweet spot before final posting of the Russell 2000 small-cap index

While there may be a few surprises, from those stocks preliminary listed as compared to the final lists, these are usually limited to mathematical errors or technical issues such as weighting adjustments, as I understand it. This might be a concern for a company close to an index's market-cap cut-off line, or when operating in a crowded business sector, for example.

This doesn't seem to be an issue for Uranerz Energy. Of the 186 preliminary additions to the Russell 3000 index, only 18 of these are in the Materials & Processing sector that Uranerz is classified under. (Amex/TSX: URZ) Uranerz Energy is a uranium company, and the only other uranium additions I can find are (Nasdaq: URRE) Uranium Resources and (Amex: URG) Ur-Energy. Far from crowded!

Also, the table above indicates the market capitalization range for the Russell 2000 index from $130 million to just under $3 billion. On May 31, 2011, URZ closed at $3.20 on the NYSE/Amex. My quote screen shows 76,604,074 shares outstanding, putting the company's market capitalization at over USD $245 million - over $100 million more than the bottom of this range.

FYI: Uranerz Energy also trades on the TSX, symbol T.URZ and on the Frankfurt, symbol U9E:FF.

Based on last year's Russell 2000 membership list and sampling market-caps of smaller companies on this year's preliminary Russell 3000 list, this might put Uranerz Energy around 100 companies above the cut-off line. Please keep in mind this is just a very rough estimate, to get a feel for how much margin of error URZ might have to make the cut into this year's Russell 2000 index.

Unless my calculations are way off, Uranerz Energy should easily qualify for the Russell 2000 index.

The potential sweet spot for traders is that most index funds can't, or don't, update their holdings until the Russell Group formally posts their final indexes membership lists on June 27. That is the main reason for all the trading volume spikes seen on the last Friday of June, as index funds buy the additions and sell the deletions.

In other words there is a small window of time currently when keen traders can usually figure out who these additions and deletions are - before the index funds have to update their holdings.

Dundee Capital Markets, June 15, 2011 Uranerz Energy Update

This report updates Uranerz and another uranium company, entitled, "To Be Added To The Russell Index - We Believe History Predicts A Stock Pop."

For brevity and to avoid repetition here are some snippets: "It is not every day that investors get handed a potential trade where they have strong potential for share appreciation over a short period of time. Based on stock performance over past years, this appears to be what is currently happening with URZ... Russell indices are widely used by investors for index funds and ~$3.9-trillion in institutional assets currently are benchmarked to them.

While the impact of reconstitution may be noticeable for large-cap stocks, the impact on small-cap names has often been immense. Most index investors are going to wait until another preliminary list is announced on June 17, and the final list announced on June 24, before they are bound to the inclusion by June 27. This gives some time for the speculators to buy before we see the likely bump in trading on June 24th." ... Dundee can provide the full 7-page report with its Uranerz Energy stock rating and price target.

Sign-up at for our newsletter or URZ's News by Email. Free!

Please note that nothing in this report should be taken as a recommendation in any way, and that everything from is subject to the terms of our Privacy Policy and Disclaimer.

1 comment:

  1. I really appreciate your post and you explain each and every point very well.Thanks for sharing this information.And I’ll love to read your next post too.
    commodity tips