6 Stocks to Sell Before Everyone Else Does

June may be the beginning of the summer slowdown for many people. But if you want to take advantage of index funds and other big institutional investors, June brings you an early Christmas present: advance warning of massive sales of unwanted stocks.

Ever year, Russell Investments makes changes to its benchmark indexes, adding some new stocks and taking out ones that no longer make the grade. The indexing giant is probably best known for its small-cap Russell 2000 index, but according to Forbes, institutional investors have $4.2 trillion in assets that are benchmarked to various Russell indexes, with the bulk tied to the large-cap Russell 1000 index.

Falling from glory
Although the process won't be complete until Friday, Russell has already announced some of its prospective additions and deletions from its indexes. As it happens, many well-known companies will have to say goodbye to Russell's broadest measure of the U.S. stock market, the Russell 3000. Many of the deletions are based on market cap, but bigger companies get the boot if their share prices fall below $1 or move to foreign countries. Here are a few of them:

Stock

Market Cap

1-Year Return

Sirius XM (Nasdaq: SIRI  )

$1.35 billion

(80.1%)

Blockbuster (NYSE: BBI  )

$142.3 million

(70.6%)

Ingersoll-Rand (NYSE: IR  )

$6.6 billion

(45.0%)

Capstone Turbine (Nasdaq: CPST  )

$160.3 million

(79.6%)

Finisar (Nasdaq: FNSR  )

$283.6 million

(55.3%)

Fannie Mae (NYSE: FNM  )

$707.0 million

(97.2%)

Sources: Russell Investments, Yahoo Finance.

Meanwhile, some up-and-coming stocks will find their way into the Russell indexes, such as Hemispherx Biopharma (AMEX: HEB  ) .

What it means
The most important thing about major changes to indexes is that because so many institutional investors work hard to match index returns, changes result in a flurry of trading activity during the transition period. With most indexes, though, including the S&P 500 and the Dow Industrials, changes aren't made on a regular basis. Instead, substitutions are made more on an as-needed basis, which limits the opportunity for traders to take advantage of index funds and other index-tracking investors.

The Russell reconstitution, however, is remarkable because of its regularity. Many investors rush to buy shares of newly added companies in an attempt to beat the index funds to the punch. To try to reduce the impact of the changes, Russell lengthens its process to give institutional investors more time to make trades and realign their portfolios to match up with the new lists.

Can you profit from the changes?
Nevertheless, the predictability of the changes imposes a cost on those who follow the index's changes strictly. Past research has concluded that the forced behavior that index changes impose on the funds that follow them costs investors an average of 2 percentage points every year.

A more recent look at this year's stocks suggests that those conclusions continue to be true. According to a Goldman Sachs study, stocks expected to be added this year have outperformed the overall index by 3.4 percentage points between April 1 and May 4. Stocks to be removed, on the other hand, have underperformed by 6.5 percentage points over the same period.

Nevertheless, some index-trackers prefer not to deal with Russell's annual process. Although the iShares Russell 2000 (IWM) tracks Russell's small-cap index, the Vanguard Small-Cap ETF (VB) chooses to follow a different index, the MSCI small-cap index. That helps the Vanguard fund avoid the June madness.

What to do
With so many hedge funds and sophisticated investors trying to take advantage of the short-term impact on stocks affected by the Russell reconstitution, you're unlikely to cash in with a swing trade. However, that doesn't mean you should ignore the process entirely.

If you own shares of companies that are slated to be removed from the index, then you might want to sell shares before the final reconstitution on June 26 in order to avoid the selling pressure resulting from the index changes. Alternatively, if you really think a stock has good long-term prospects, make sure you're prepared for a potential drop on that day -- and don't panic-sell after the fact.

Conversely, if any of the stocks on the prospective list of additions are attractive to you, you might want to buy sooner than later. If being included in the index pushes share prices higher, you'll be glad you didn't wait.

More on how to invest like a pro:

If you follow small Russell 2000 stocks, you'll want to check out our Motley Fool Hidden Gems newsletter. Every month, you'll get new stock recommendations and analysis of current holdings. Click here for a free 30-day trial and see how Hidden Gems can show you a brand-new world of small-cap treasures.

Fool contributor Dan Caplinger finds index changes fascinating. He doesn't own shares of the companies mentioned. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy won't pull the rug out from under you.


Read/Post Comments (21) | Recommend This Article (69)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 24, 2009, at 3:52 PM, JimboUSMC17 wrote:

    Way to join the MF'ers "Bash SIRI stock" bandwagon. This is just another pathetic article trying to bring down SIRI. Even during a good day/week for Sirius. Especially with the upgrades it has received and positive outlook; you guys need to get over it.

  • Report this Comment On June 24, 2009, at 4:08 PM, detroitone wrote:

    I agree, stop nagging about SIRI and get on board. Everytime something good happens you have to open your mouths, then the worst comes to play, get a life.

  • Report this Comment On June 24, 2009, at 4:14 PM, USIRIUS wrote:

    Leave Fannie Mae alone. It is one of the best pump and dump stocks and you know it.

  • Report this Comment On June 24, 2009, at 4:26 PM, trammen0 wrote:

    You guys are a bunch of IDIOTS!!!

  • Report this Comment On June 24, 2009, at 4:34 PM, JRSmithman wrote:

    WoW these shorties are trying one last ditch effort to get Siri down again / well too late not going to happen. you shorties just lost your shorts when it comes to that stock. I think I will keep mine / and bask in the riches that this stock will bring me

    haha

    now its the long position turn to make all the shorties poor like they did with us back in 2008 bringing this stock down to its knees.

    Long for Siri

    This stock will be at .50 by next week like I said this will be at .40 by the end of this week

  • Report this Comment On June 24, 2009, at 5:17 PM, JimboUSMC17 wrote:

    Tootun, you forgot to add in your advice to noobs that the Fools on here just like to mention SIRI to get hits on their website.

    I normally stay quiet and don't comment on the useless MF article bashing SIRI but this one is just pathetic.

    Danny boy, you need to come on here and defend yourself and tell us some other reasons why you think people should sell SIRI.

    I am saving the link of this article to throw right back in your face when SIRI goes above $1!!!

  • Report this Comment On June 24, 2009, at 5:27 PM, karaokejb wrote:

    The whole article is short sited. The thought of the analysts just getting out now is laughable. I, for one would fire anyone working for me who invests just because the club the stock belongs. A strong company is a strong stock! Any manipulation by the short taking advantage of the missing short rules is only fleeting. The Economy is on the mend and so is a number of these of these target stocks. MF better reconsider the topic of their articles or really be considered FOOL in REPORTING! I believe in Warren Buffet! Be Greedy when others are fearful.

    MF stop being a fear monger, dig into the financials a little deeper.

  • Report this Comment On June 24, 2009, at 6:05 PM, tootun wrote:

    Well now they dumpedmy last post...I guess I hit a nerve....Good luck to all longs and Motley Fool is for Fools!

  • Report this Comment On June 24, 2009, at 6:29 PM, jbrt wrote:

    ha ha ha ha Ol' Loudmouth Howard ( you know who ) will do wonders to the bottom line !

  • Report this Comment On June 24, 2009, at 6:57 PM, rofgile wrote:

    If you haven't sold out of SIRI so far, why would you at this point? There is no rationale behind the selling statement in this article.

    On the plus side:

    SIRI went from a company headed to bankruptcy to one that has expanded its audience into the iPhone and internet distribution, its bonds recently got upgraded, and its stock recently has been upgraded.

    Short interest recently rose again, and has been getting hammered by the stock upgrades.

    This is a stock to hold till the $0.70-1.00 range, at the least now. If you have gotten in at a low price, be a buy-and-hold and don't let the media discourage you.

    Bad advice, bad timing - MF.

  • Report this Comment On June 24, 2009, at 7:12 PM, autoreply wrote:

    Soon the FCC will be after MF for their false stories, then we can all laugh. Don't be a FOOL and follow this advice, they just want to buy your shares at a discount.

    GO SIRI!!!

  • Report this Comment On June 24, 2009, at 8:40 PM, pooloperator wrote:

    You've been saying sell HEB - will you print retraction after stock rises over $20?

  • Report this Comment On June 24, 2009, at 9:51 PM, vinthetoolman wrote:

    Here is just a taste of what The Street will get their full portion of from Thomas K. Equels at HEB. A lot of us ask…Why don’t HEB stand up against Adam???..Well , Equels is a savvy lawyer just letting The Street fill his layer briefcase with plenty until the time is right. When the dust settles I can imagine there will be no more TSCM, no more Cramer, and a lot less of the corrupt talking heads on NBC/GE owned cable shows. Proof is in the link.. http://salesandmarketingnetwork.com/news_release.php?ID=2026...

    So argue as you wish bashers. The day of reconing will soon be upon your heros.

    -- Obtained a $26.8 million judgment in 2008 in a breach of contract action against Bear Stearns, for the Delaware Insurance Commissioner, related to an insolvent insurance company.

    -- Obtained a $15 million judgment in 2005 against boy band guru Lou Pearlman of Trans Continental Records, Inc.

    -- Obtained a $44 million judgment against Manuel Noriega for public money he misappropriated from the Republic of Panama.

    -- Recovered more than $100 million misappropriated and money laundered overseas by former insiders of a now defunct insurance company being liquidated by the State of Delaware's Insurance Commissioner.

    -- Obtained and collected a $10.6 million judgment against the FDIC for breach of contract involving a client's purchase of a national mortgage company owned by a failed savings and loan.

    -- Prosecuted a bank fraud claim against an international lender, which resulted in a jury awarding $2.6 million damages for fraud and an order invalidating a $9 million mortgage.

  • Report this Comment On June 25, 2009, at 7:40 AM, wuff3t wrote:

    Eh? Just how is this article bashing SIRI? The author merely states that its stock price has fallen a very long way and that it will be removed from the Russell 3000 as a consequence. All fact, surely, rather than opinion?

  • Report this Comment On June 25, 2009, at 9:27 AM, JimboUSMC17 wrote:

    Because every other article MF writes plugs in SIRI to get themslves hits. And most times they are bashing SIRI. that is why Wuff.

  • Report this Comment On June 25, 2009, at 12:54 PM, wuff3t wrote:

    Well, I don't read enough other articles on TMF about SIRI to be able to comment, but the content of other articles doesn't really have any bearing on this one. Just seemed to me that it was the people reacting to the article who were showing more bias, not the author.

  • Report this Comment On June 25, 2009, at 5:21 PM, timd209 wrote:

    SIRI has posted improvements every quarter and is paced to pay off all debts and be one of the most successful entertainment companies in the world. Why would anyone sell it at such low price?

  • Report this Comment On June 26, 2009, at 5:54 PM, garoseme wrote:

    You have an obsession with SIRI. Only logical explanation is that you are one of the shorties who are getting burned

  • Report this Comment On June 27, 2009, at 8:46 AM, Paulson545 wrote:

    First Fool says to sell Finisar; now they say its a buy.Which is it?

  • Report this Comment On July 01, 2009, at 9:59 AM, Zippy6 wrote:

    Well there was a sell off on June 26 and it recovered approx. 10 cents by the following Monday. Isn't that what the articles was referring, a marked sell off followed by a positive bump?

    So where's the ulterior loathing of the author coming from? Past prospective F-ups? Or just an unusual girl-hate of SIRI in general?

  • Report this Comment On July 01, 2009, at 10:43 AM, garnoblat wrote:

    Ingersoll-Rand (IR) made this list. 6 days later on the list to buy...

    http://www.fool.com/investing/dividends-income/2009/06/30/5-...

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 927999, ~/Articles/ArticleHandler.aspx, 12/18/2014 10:20:14 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement