According to data provided by S&P Global Market Intelligence, shares of 22nd Century Group (NYSEMKT:XXII) rose 16% in June, boosted by the company's addition to the Russell 2000, Russell 3000 and Russell Global indexes. Shares also benefited from the Food and Drug Administration's plan to require nicotine in cigarette tobacco to be reduced to minimally or nonaddictive levels, something 22nd Century Group has been working on for a while.
The share price of companies often increase after addition to indexes -- especially when they're as small as 22nd Century Group -- because all the exchange-traded funds and mutual funds following the index need to buy shares. But that increase in buyers is only temporary, and being in the index doesn't change the underlying valuation, so index-addition bumps are often short-lived.
Fortunately for 22nd Century Group, the company also has been developing strains of tobacco that may meet the FDA's requirements for low nicotine levels. The FDA's open comment period was extended to July 16, but early comments suggest that 22nd Century's Spectrum Very Low Nicotine cigarettes contain less nicotine than the level some experts recommend as the "minimally addictive" level.
We'll have to wait and see what nicotine level the FDA sets as its target to know whether 22nd Century will be able to use its current offerings or need to do some more research. Either way, the company looks in good shape to benefit from the FDA's proposed rules, although timing is still uncertain.
As a fairly small company with a valuation that is likely being propped up a little by its forays into marijuana -- it's developing cannabis plants with no THC and optimized levels of other medically important cannabinoids -- investors should avoid putting too much of their portfolio into 22nd Century Group until there's more certainty over the FDA's proposed rules.