street sense
It's Time to Play the "Russell Game"
Each May, hundreds of new stocks are added to the Russell 2000 Index. They're often good investments.
By Jerry Helzner

Most people look forward to springtime because, as the weather gets better, they can resume their favorite outdoor activities such as gardening, golf and tennis.

However, a growing number of investors also wait for the approach of spring so they can spend countless hours indoors poring over long lists of common stocks that have the potential to be added to the Russell 2000 Index at the end of May.

It's become sort of an annual game, ferreting out the stocks of undervalued companies that are going to be added to the Russell 2000 Index. In this article, I'll tell you why playing the "Russell Game" can be a profitable exercise.

	PHOTOGRAPHER: DUNCAN SMITH/PHOTODISC

The Russell is a Key Index

For most of us, our only knowledge of the Russell 2000 Index is that it's one of the stock averages whose daily fluctuations are reported on the nightly business news. Along with the Dow Jones Industrials, the NASDAQ 100 and the Standard & Poor's 500, the Russell 2000 Index is one of the four most frequently followed stock indexes.

The Russell 2000 differs from the other major indexes because it's solely made up of smaller companies, those whose market valuations can range from about $120 million to almost a billion dollars.

The Russell 2000 is pretty much an equal opportunity index. For a U.S.-based company to gain admission to the Russell, its common stock only has to have a market valuation above a certain arbitrary threshold set by the Russell Company on May 30 of each year. For example, in 2003 the threshold to gain entrance to the Russell 2000 was approximately $120 million. So if XYZ company had 25 million common shares outstanding, with each valued at $5 on May 30, 2003, it qualified as a new addition to the Russell 2000. On the other hand, if ABC company had 25 million shares valued at $4 a share on May 30, 2003, it didn't get into the index.

Admission Brings Buyers

Why is gaining admission the Russell 2000 so important?

For many smaller companies, admission to the Russell 2000 is the first step in developing an institutional following for that company. Because the Russell 2000 is a real index, a number of mutual funds are set up to mirror the performance of the Russell. These mutual funds have to actually purchase shares of the new companies that are added to the index each year. Simply stated, being added to the Russell 2000 puts many smaller companies on money managers' "radar screens" for the first time. That's a big achievement.

Once a company is in the Russell 2000, it can attract more coverage from securities analysts and know that its quarterly performance is being closely followed by Wall Street. If the company continues to perform well, it can expect its stock to rise with the good news.

It Can Be a Profitable Game

Those investors who play the "Russell Game" each year attempt to select some promising companies that will be added to the index and then buy them before the actual Russell additions are announced. By being in these stocks early, they hope to maximize any rise that accompanies a stock's addition to the Russell 2000 Index. In many years, gains in stocks being added to the Index have been considerable.

Brokerage firms such as Merrill Lynch and Smith Barney often put out lists of potential Russell 2000 additions. These lists can at least help you get started in playing the "Russell Game."

Ophthalmology Management Senior Associate Editor Jerry Helzner has written more than 50 articles on stock investing for Barron's. He has been a regular stock market columnist for other business publications and was a member of the equity research department of a major regional brokerage firm. E-mail your stock market questions to him at helznergi@boucher1.com