Editor’s Note: The stock market will be closed next Monday, May 29, for the Memorial Day holiday. The InvestorPlace offices and customer service department will also be closed on Monday. We hope you enjoy the long weekend!
This year, the seven largest technology stocks have received the majority of Wall Street’s attention: Alphabet (GOOG), Meta Platforms, Inc. (META), Microsoft Corporation (MSFT), Netflix, Inc. (NFLX), NVIDIA Corporation (NVDA) and Tesla, Inc. (TSLA). These seven stocks now account for approximately 25% of the capitalization weightings in the S&P 500 and 55% of the NASDAQ 100.
The most amazing statistic, though, regarding the capitalization bias on Wall Street is the fact that both Apple’s and Microsoft’s individual capitalizations are bigger than all the stocks in the small-cap Russell 2000 index. Specifically, FactSet recently reported that Apple had a capitalization of $2.714 trillion, while the entire Russell 2000’s capitalization is $2.208 trillion.
Three of these tech giants – GOOG, MSFT and NVDA – are benefitting from all the artificial intelligence (AI) buzz. NVDA is the clear leader right now, up a whopping 165% year-to-date following its 25% pop on its first-quarter earnings results for fiscal year 2024 on Wednesday. (I reviewed NVIDIA’s earnings in Friday’s Market 360. In case you missed it, you can catch up here.) In comparison, GOOG and MSFT are up 41% and 39%, respectively, year-to-date.
But before you unload all your small-cap stocks in favor of large-cap stocks like Apple or Microsoft, there are two things you should be aware of: The Russell 2000 is now characterized by historically low price-to-earnings (PE) ratios, and a big catalyst is primed to propel select small-cap stocks higher over the next month.
I’m talking about the Russell Reconstitution. And in today’s Market 360, I’ll explain what the Russell Reconstitution is and the best way to play it.
The Russell Reconstitution
Every June, the Russell indices are rebalanced. In other words, the underperforming stocks are removed, and new stocks that are more representative of the current market environment are added.
The 35th annual Russell Reconstitution kicked off last week, with the first round of the preliminary add/delete lists published on May 19 and then followed up with another release on May 26. Updated add/delete lists will be released on June 2, June 9, June 16 and June 23. The add/delete lists will be finalized on June 23, and the new rebalanced Russell indices will begin trading on June 26. With 192 companies set to leave the Russell 2000 in this year’s rebalancing, it’s opening the door for a lot of stocks to be added, too.
This is important for one simple reason: The realignment of the Russell 2000 creates forced buying pressure under small-cap stocks in the days following the preliminary add/delete lists. And on the Russell Reconstitution day, the trading volume can be explosive. According to FTSE Russell:
During this highly anticipated market event, the breakpoints between large, mid, small, and micro-cap are redefined to ensure market changes over the last year are captured. Companies are also reevaluated to determine where they rank along the investment styles spectrum. With approximately $12.1 trillion in investor assets benchmarked to or invested in products based on the Russell US Indexes, the Russell Reconstitution concludes with traditionally one of the highest trading volume days of the year on major US equity exchanges.
Stocks have been known to move anywhere from 10% to 20% due to the Russell Reconstitution alone, as institutional investors who follow the indices try to sync up their portfolios.
Interestingly, the Russell used to add all the small-cap stocks on one day, which would cause the index to shoot up 7% in the day. However, they don’t do that anymore because the markets are too fragile. Instead, they fine-tune the list and finalize it in late June.
The bottom line: I am anticipating that the Russell Reconstitution could trigger an institutional stampede into the new stocks that are added to the Russell indices.
So, now is a great time to invest in small-cap stocks before the Russell lists are finalized.
Pick These Small-Cap Stocks First
But which small-cap stocks should you invest in first?
Whitney Tilson and I, who sat down together on Tuesday for our 2 Legends Predict 2023 event, believe that your best bets for profits are in hyperscalable stocks – those that can massively grow revenues while minimally growing the costs associated with producing – that also master AI.
So, we put together a model portfolio that features eight hyperscalable stocks with 10X potential right now. (Click here for full details on how to access this portfolio.)
And if you haven’t already, be sure to check out our 2 Legends Predict 2023 event. During this event, we explained…
- Why the bear market of 2022 has created an unusual opportunity for ordinary investors.
- Why it could soon create a wave of millionaires on a single investment, thanks to today’s historically low prices.
- And why some stocks will crash as a result.
We also revealed a free stock pick to play it all. If you missed Tuesday’s briefing, click here to watch the replay now.
P.S. On Tuesday, Whitney Tilson and I unveiled a historic event in Las Vegas and how it could create a wave of millionaires on a single investment if you get in now, while prices are still cheap this year. This is unlike anything we’ve shared before.
The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owns the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below: