The Buckingham Report

It is that time of year again! On Friday, the Frank Russell Company will post to its website, russell.com, the preliminary listing of additions and deletions to the Russell 3000 index. Here is the schedule of the Russell Reconstitution process, straight from the horse’s mouth.

2005 Schedule for Index Reconstitution

May 31: U.S. stocks ranked by capitalization

June 10, 17, and 24: Preliminary lists of additions and deletions to the Russell 3000 and Russell Microcap posted

June 24: Newly reconstituted Russell U.S. indexes becomes effective at the close of the U.S. markets

July 1: Final membership lists (in alphabetical order) for the Russell 1000, Russell 2000, Russell 3000, and Russell Microcap Indexes posted

While Russell now asserts that some $450 billion is invested in funds that rely on its 21 stock indexes, the Russell 2000 is the most widely used, as it is the proxy for small-cap companies. Friends of The Prudent Speculator newsletter are keenly aware that we have recommended numerous small-cap stocks, so the annual Russell Reconstitution is certainly an important event, especially as many short-term-oriented traders are scrambling to guess which companies may be added to the index and which may be deleted. Last year, more than 300 new stocks were added to the Russell 2000.

We offer our research on the topic below, but only with the caveat that we have no plans to try to take advantage of short-term Russell-related moves by jumping in or out of our small-cap stocks. Clearly, there will be volatility in individual names over the next few weeks, but longer term the Russell Reconstitution should have little impact.

Though we have not performed an exhaustive analysis of the matter, as there were more than a handful of companies that merged, changed symbols or went kaput, our down-and-dirty analysis of the 2004 additions and deletions is eye-opening. Utilizing FactSet Research Systems data and excluding those companies that did not have pricing information available last night, last year’s deletions were up 0.9%, compared to a loss of 4.3% for the additions. The data are based on simple price change (i.e. no inclusion of dividends) from June 10, 2004 (the last day of trading before last year’s preliminary additions and deletions were announced) through June 7, 2005. During that same time span, the actual Russell 2000 Index was up 9.6%.

Because Russell outlines the addition/deletion criteria in great detail, it is really not that difficult for anyone with access to a good database to make some fairly educated guesses about what may be added or removed. Of course, it certainly does not hurt that our own Mark Mowrey is a whiz with Excel and FactSet. Essentially what Mark did was screen the FactSet database for the 3000 largest companies in terms of market capitalization, keeping in mind that stocks numbered 1001 to 3000 will be members of the Russell 2000 and stocks numbered 1 (General Electric) through 1000 will be members of the Russell 1000. Last year, stock number 1001 (the largest company in the Russell 2000) was Energen Corp. with a market cap of $1.6 billion and stock number 3000 (the smallest company in the Russell 2000) was Microtune Inc. with a market cap of $176 million.

Now the computations are not quite as easy as they may first appear, as Russell specifically states that it excludes stocks trading below $1.00, pink sheet and bulletin board issues, closed end mutual funds, limited partnerships, royalty trusts, non U.S. incorporated stocks, foreign stocks, ADRs and Berkshire Hathaway. Russell also adjusts shares outstanding for cross ownership and privately held shares to reflect shares available for trading .

Just as he did last year, Mark has come up with our addition and deletion candidates and our master list is available by clicking here: For those interested in the 470 or so stocks that have been recommended and not closed out in the pages of The Prudent Speculator, we detail a subset of the master list below.

Prudent Speculator Russell 2000 Additions

CKCM - Click Commerce Inc.

DXYN -  Dixie Group Inc.

ECOL -  American Ecology Corp.

GEMS - Glenayre Technologies Inc.

HBP - Huttig Building Products Inc.

SYM -  Syms Corp.

EGY -  Vaalco Energy Inc

Prudent Speculator Russell 2000 Deletions

APN - Applica Inc.

ATN - Action Performance Cos. Inc.

AVNX - Avanex Corp.

CAPA - Captaris Inc.

DCO - Ducommun Inc.

DFS - Department 56 Inc.

DHOM - Dominion Homes Inc.

ESST - ESS Technology Inc.

FSII - FSI International Inc.

INFS - InFocus Corp.

IOM - Iomega Corp.

NTOP - Net2Phone Inc.

NWK - Network Equipment Technologies Inc.

OMN - Omnova Solutions Inc.

POP - Pope & Talbot Inc.

The information contained herein is believed to be reliable. However, such information has not been verified by us and we do not make any representations as to its accuracy or completeness. Neither the information, nor any opinion expressed, shall be construed to be or constitute an offer to sell or a solicitation of an offer to buy any securities. Opinions expressed are those of John Buckingham, which are subject to change and are not intended to be a forecast of future events, a guarantee of future results, nor investment advice. Past performance is no guarantee of future results.

The Russell 2000 index is an index measuring the performance of the 2,000 smallest companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks. The Russell 2000 serves as a benchmark for small-cap stocks in the United States.

Al Frank Asset Management, Inc. is committed to assisting our customers build wealth. We are a leading resource for value-based investor information in the financial community, where we combine our simple, proven philosophy of buying under valued securities for their long-term appreciation with our experience, hard work, and intensive research to give you actionable investment information that can be used on a daily basis.

For information on separate account management, please call us toll free at (888) 994-6827. Or, visit us at www.alfrank.com.