Biotech Russell Rebalancing - Possible Additions and Deletions
by Andrew Vaino
Vaino's Biotech Corner
I watched the first bit of Jim Cramer’s Mad Money on Thursday. His shtick for the show was the impending rebalancing of the Russell 2000 index. The Russell indices are rebalanced once a year. That is, companies whose market caps have fallen below a minimum cutoff are removed, and companies that have increased their market cap are added. The clear benefit of being added to an index such as this is that mutual and exchange traded fund managers are required purchase these stocks for their funds. The stocks also benefit from greater analyst coverage.
I was initially skeptical that this was a viable way to make money. Cramer made it seem that one could make money just by correctly guessing which stocks will be added to the Russell 2000 this year.
Turns out, there is something to making money off of this rebalancing. A study published by Hsiu-Lang Chen from The University of Illinois at Chicago (Rev. Quant. Finan. Acc. 2006, 26, 409–430) found that for the years 1993-2000 stocks added to the Russell 2000 experienced a 7.6% abnormal return (i.e. above the broader markets) for a period of two days before the announcement date to 20 trading days after the reconstitution date. As well, he found that stocks dropped from the Russell 2000 experienced abnormal losses of 6.6% for the same time period. According to Russell.com they will add:
So, with this in mind I set out to look for biotech stocks that were not last year included in the Russell 2000 but, based on increases in market cap, are likely candidates to be added this year. Cramer cited a report by Prudential suggesting the cutoff this year will be a market cap of $233M (if I recall correctly). I used $300M as a cutoff for moves up and $200M as a cutoff for moves down as it’s impossible to know how accurate the $233M figure is.
I came up with 15 biotech stocks that I think are likely to be added (AKRX, ALTH, ARQL, AXCA, BMTI, GNVC, HALO, IMMU, MDVN, NRGN, PDGI, SGEN, TRCA, VNDA, XOMA) and 14 (ADLR, ANX, ANDS, AGIX, AVII, AVNR, BCRX, GTOP, GNTA, HNAB, NFLD, NUVO, RNVS, TRMS) that are likely to be removed. I think shorting any of the stocks on the way out is a bad idea. These stocks have already been hit pretty hard and, for the most part, are just languishing until they run out of cash: they’re also highly illiquid, so shorting them just isn’t worth the risk.
Of the stocks to be added I particularly like Arqule (ARQL) . Arqule started off as a “molecule mill”: basically a company that would produce libraries of compounds for other companies, in 1993. This business model was popular at the fin de siècle, but in the past five years—due in large part to competition from China and other low wage countries—has proved to be unprofitable. Offshoring of biotech research to China was the subject of a recent op ed in the San Diego Union Tribune (http://www.signonsandiego.com/uniontrib/20070509/news_lz1e9navarro.html). Arqule has recently shifted its business model to pursue its own proprietary drug discovery efforts, and discontinued their chemistry services operations in May 2006.
Arqule’s lead compound is ARQ 501 which, in a Phase 1 study presented at last year’s ASCO meeting, demonstrated good tolerability and even hints of efficacy. Note, the number of patients was small. ARQ 501 is currently being evaluated in three Phase 2 clinical trials. The company is scheduled to present data from two of these clinical trials at the upcoming ASCO meeting. Good results will move the stock completely independently of any bump from joining the Russell 2000 (which is not a sure thing), but an extra 7% in a month doesn’t hurt anyone.
Of the other companies I think will be added I am leery of ALTH and IMMU and a fan of TRCA and especially HALO.
Source: PeterNavarro.com
BioHealth Investor.com
______________________
Vaino's Biotech Corner
I watched the first bit of Jim Cramer’s Mad Money on Thursday. His shtick for the show was the impending rebalancing of the Russell 2000 index. The Russell indices are rebalanced once a year. That is, companies whose market caps have fallen below a minimum cutoff are removed, and companies that have increased their market cap are added. The clear benefit of being added to an index such as this is that mutual and exchange traded fund managers are required purchase these stocks for their funds. The stocks also benefit from greater analyst coverage.
I was initially skeptical that this was a viable way to make money. Cramer made it seem that one could make money just by correctly guessing which stocks will be added to the Russell 2000 this year.
Turns out, there is something to making money off of this rebalancing. A study published by Hsiu-Lang Chen from The University of Illinois at Chicago (Rev. Quant. Finan. Acc. 2006, 26, 409–430) found that for the years 1993-2000 stocks added to the Russell 2000 experienced a 7.6% abnormal return (i.e. above the broader markets) for a period of two days before the announcement date to 20 trading days after the reconstitution date. As well, he found that stocks dropped from the Russell 2000 experienced abnormal losses of 6.6% for the same time period. According to Russell.com they will add:
“…lists of probable additions and deletions to its website, www.russell.com/Indexes, after the markets close on Monday, June 11. Final index membership will take effect on Friday, June 22 and remain in place for the ensuing 12-month period.”
So, with this in mind I set out to look for biotech stocks that were not last year included in the Russell 2000 but, based on increases in market cap, are likely candidates to be added this year. Cramer cited a report by Prudential suggesting the cutoff this year will be a market cap of $233M (if I recall correctly). I used $300M as a cutoff for moves up and $200M as a cutoff for moves down as it’s impossible to know how accurate the $233M figure is.
I came up with 15 biotech stocks that I think are likely to be added (AKRX, ALTH, ARQL, AXCA, BMTI, GNVC, HALO, IMMU, MDVN, NRGN, PDGI, SGEN, TRCA, VNDA, XOMA) and 14 (ADLR, ANX, ANDS, AGIX, AVII, AVNR, BCRX, GTOP, GNTA, HNAB, NFLD, NUVO, RNVS, TRMS) that are likely to be removed. I think shorting any of the stocks on the way out is a bad idea. These stocks have already been hit pretty hard and, for the most part, are just languishing until they run out of cash: they’re also highly illiquid, so shorting them just isn’t worth the risk.
Of the stocks to be added I particularly like Arqule (ARQL) . Arqule started off as a “molecule mill”: basically a company that would produce libraries of compounds for other companies, in 1993. This business model was popular at the fin de siècle, but in the past five years—due in large part to competition from China and other low wage countries—has proved to be unprofitable. Offshoring of biotech research to China was the subject of a recent op ed in the San Diego Union Tribune (http://www.signonsandiego.com/uniontrib/20070509/news_lz1e9navarro.html). Arqule has recently shifted its business model to pursue its own proprietary drug discovery efforts, and discontinued their chemistry services operations in May 2006.
Arqule’s lead compound is ARQ 501 which, in a Phase 1 study presented at last year’s ASCO meeting, demonstrated good tolerability and even hints of efficacy. Note, the number of patients was small. ARQ 501 is currently being evaluated in three Phase 2 clinical trials. The company is scheduled to present data from two of these clinical trials at the upcoming ASCO meeting. Good results will move the stock completely independently of any bump from joining the Russell 2000 (which is not a sure thing), but an extra 7% in a month doesn’t hurt anyone.
Of the other companies I think will be added I am leery of ALTH and IMMU and a fan of TRCA and especially HALO.
Source: PeterNavarro.com
BioHealth Investor.com
______________________
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