The Russell purge

Russell rebalance

Before we dive into our thematic updates, we’d be remiss if we didn’t touch on the Russell rebalance this Friday. This is one of the few calendar events where fund flows overwhelm fundamentals.

David Einhorn famously used the example of jelly donuts: one is good, two are ok, and a dozen is fraternity pledging haze. Two decades ago, your typical index fund was probably a better option than giving money to an active manager. Fees were lower, and most managers couldn’t beat the index anyway, so why not be the index itself? That concept has gone so far that owning an index fund ought to give you the same bellyache as eating a dozen donuts.

Think about it: depending on the stock, index funds are 10-30% of the float. Closet index funds account for a large share of what’s left over. The signal-to-noise ratio is downright bastardized. Even worse, these entities buy based on certain mechanical rules that ignore fundamentals. Maybe this works for large liquid stocks. Who the hell is on the other side when an index fund dumps 20% of the float of an illiquid stock?

Well, we are.

On Friday, more than $200 billion will need to cross in the closing auction. Starting early in the second quarter, you had a pretty good idea of what they needed to sell. These stocks started collapsing as arbs pressed their shorts and longs stepped away. Who would buy before the index was finished selling?

Look at some of the charts below; the damage is gruesome. We’re not saying that some of these businesses aren’t challenged, but they didn’t all get dramatically worse at some point in April. Index funds may have worked fine when the index owned a few percent of the company. Now the index fund is the largest shareholder and cannot enter or exit without wrecking the chart. It’s like the good old days of clean-up prints. Even worse, they tell you exactly how to make money off them.

 

The Russell can’t keep its winners

But while the Russell gets a lot of flak for pre-announcing what it will sell, it’s also incapable of holding onto its winners. In an index where over half of the companies lack profitability, structural compounders are rare. But when they do exist, Russell will be sure to give them the boot the moment their market cap reaches the $5 billion upper bound.

It is no surprise that the Russell 2000 has been a popular funding short for many funds.

This year, that might well be different.

Given the recent rally in small caps, some companies such as Bloom Energy (BE) have run up to an $80b market cap before the Russell had time to boot them from the index. In total, 43 Russell 2000 companies, or 16% of the index, will migrate upward. Many of those companies this year seem to be either complete stock promotions or otherwise cyclical companies at peak multiples.

We saw the same movie with Super Micro (SMCI). It graduated to the Russell 1000 near the highs, only to implode months later following the Hindenburg report and the auditor’s resignation. The Russell escaped the inevitable move down, and all relative performance investors lost out. This year feels similar, just at a much larger scale.

So how do we play this? Finding companies that are about to be included in the Russell 2000 can be a profitable trade, but this trade was many months ago, at the start of the year. All that’s left to do now is wait until 4 pm on Friday, when more than $200 billion in trades will need to be crossed. That usually leads to some last-minute fireworks, but that’s not what we’re here for.

We’re here to find the few live bodies in the aftermath. The few companies that aren’t on their way to bankruptcy. The select few that are worth owning. This is a small-cap game, so we will all have to do our own work, but if it’s got a strong balance sheet and it’s a business model that we are familiar with (SNWV, GAIA, JYNT, FTLF), we are definitely updating our models ahead of the cleanup print this Friday.

 

Russell 3000 Deletions and Additions.

R1 top ADV to buy

Ticker	Company	Index	Newly Added (Y/N)	Shares to be traded	Shares as % of ADV	Market value (M)	Market cap (M)	Return (YTD) (%)	Return (since effective) (%)
SUNB	Sunbelt Rentals Holdings Inc	Russel 1000	Y	13,607,222	548%	1,079.9	34,854	–	6%
ULS	UL Solutions Inc	Russel 1000	Y	2,937,451	422%	284.4	18,354	16%	-6%
GFL	GFL Environmental Inc	Russel 1000	Y	9,745,604	417%	346.1	12,454	-20%	-3%
ASND	Ascendis Pharma A/S	Russel 1000	Y	2,565,630	375%	539.9	14,435	9%	11%
ALM	Almonty Industries Inc	Russel 1000	Y	11,198,892	242%	182.7	5,192	108%	12%
AU	Anglogold Ashanti Plc	Russel 1000	N	5,590,734	235%	470.3	45,285	8%	6%
AUGO	Aura Minerals Inc	Russel 1000	Y	2,125,187	222%	128.4	5,217	26%	3%
SPG	Simon Property Group Inc	Russel 1000	N	3,282,022	220%	690.2	68,994	17%	2%
CHYM	Chime Financial Inc	Russel 1000	Y	9,933,695	200%	173.6	6,601	-31%	-1%
JAN	Janus Living Inc	Russel 1000	Y	1,735,744	175%	43.6	6,690	–	2%
SOLS	Solstice Advanced Materials In	Russel 1000	N	3,318,792	159%	268.9	13,525	76%	5%
JBS	JBS NV	Russel 1000	Y	12,222,797	147%	149.6	12,920	-10%	-1%
ROK	Rockwell Automation Inc	Russel 1000	N	1,141,447	145%	509.9	52,786	23%	6%
FIGR	Figure Technology Solutions In	Russel 1000	N	4,871,557	132%	138.8	6,060	-33%	-4%
GLXY	Galaxy Digital Inc	Russel 1000	Y	7,002,602	128%	176.0	13,426	54%	37%

 

R1 top ADV to sell

Ticker	Company	Index	Newly Added (Y/N)	Shares to be traded	Shares as % of ADV	Market value (M)	Market cap (M)	Return (YTD) (%)	Return (since effective) (%)
HWM	Howmet Aerospace Inc	Russel 1000	N	6,080,103	239%	1,531.6	111,608	36%	11%
ABBV	AbbVie Inc	Russel 1000	N	14,102,782	232%	3,204.6	382,396	-4%	-5%
HLT	Hilton Worldwide Holdings Inc	Russel 1000	N	3,570,778	209%	1,225.1	80,334	23%	3%
AMP	Ameriprise Financial Inc	Russel 1000	N	1,259,037	194%	572.4	42,300	-4%	3%
VRTX	Vertex Pharmaceuticals Inc	Russel 1000	N	2,170,288	170%	969.7	114,737	0%	1%
LAMR	Lamar Advertising Co	Russel 1000	N	1,138,362	170%	172.4	15,123	20%	-1%
CPAY	Corpay Inc	Russel 1000	N	895,846	162%	311.3	22,634	15%	0%
BNY	Bank of New York Mellon Corp/T	Russel 1000	N	5,518,632	154%	785.8	99,010	25%	1%
PWR	Quanta Services Inc	Russel 1000	N	1,602,743	129%	1,114.1	106,487	68%	2%
UHAL/B	U-Haul Holding Co	Russel 1000	N	545,693	128%	28.1	10,923	18%	7%
AON	Aon PLC	Russel 1000	N	1,727,658	115%	567.6	67,977	-9%	-3%
BR	Broadridge Financial Solutions	Russel 1000	N	1,764,883	112%	267.1	15,834	-38%	-9%
KNSL	Kinsale Capital Group Inc	Russel 1000	N	365,006	111%	111.7	7,073	-21%	0%
EXEL	Exelixis Inc	Russel 1000	N	3,012,978	110%	158.8	13,093	19%	-1%
DECK	Deckers Outdoor Corp	Russel 1000	N	2,334,282	109%	252.4	15,274	6%	2%

 

R2 top ADV to buy

Ticker	Company	Index	Newly Added (Y/N)	Shares to be traded	Shares as % of ADV	Market Value (M)	Market Cap (M)	Return (YTD) (%)	Return (since effective) (%)
CAMP	CAMP4 Therapeutics Corp	Russel 2000	Y	4,269,729	5559%	17.5	216	-32%	1%
AVBC	Avidia Bancorp Inc	Russel 2000	Y	2,481,729	4962%	47.7	394	17%	2%
CHCI	Comstock Holding Cos Inc	Russel 2000	Y	486,729	3878%	8.1	152	28%	-10%
CMTV	Community Bancorp/VT	Russel 2000	Y	690,045	3852%	26.6	221	62%	2%
ISBA	Isabella Bank Corp	Russel 2000	Y	939,977	3469%	39.6	295	-19%	-5%
NERV	Minerva Neurosciences Inc	Russel 2000	Y	4,600,429	3385%	22.8	196	4%	-15%
FNRN	First Northern Community Banco	Russel 2000	Y	2,035,759	3245%	35.1	298	43%	5%
KORE	KORE Group Holdings Inc	Russel 2000	Y	781,924	3131%	7.2	162	118%	0%
METCB	Ramaco Resources Inc	Russel 2000	Y	950,139	3107%	11.2	876	-15%	-18%
CD	Chaince Digital Holdings Inc	Russel 2000	N	4,240,903	3053%	22.6	383	-3%	-10%
XFOR	X4 Pharmaceuticals Inc	Russel 2000	Y	10,951,966	2984%	41.9	394	4%	9%
ZSQR	Z Squared Inc	Russel 2000	Y	5,926,264	2679%	60.0	821	12%	58%
RDNW	RideNow Group Inc	Russel 2000	Y	2,127,654	2523%	15.5	286	34%	1%
BBUC	Brookfield Business Corp	Russel 2000	N	6,627,081	2470%	218.0	6,836	-7%	1%
SGP	SpyGlass Pharma Inc	Russel 2000	Y	1,497,320	2463%	28.1	616	–	-2%

 

R2 top ADV to sell

Ticker	Company	Dropped from Index	Shares to be traded	Shares as % of ADV	Market value (M)	Market cap (M)	Return (YTD) (%)	Return (since effective) (%)
SBFG	SB Financial Group Inc	Russel 2000	705,515	6646%	15.7	142	3%	2%
RVSB	Riverview Bancorp Inc	Russel 2000	2,514,281	6102%	14.2	117	16%	2%
CSPI	CSP Inc	Russel 2000	848,377	5921%	7.6	84	-33%	-6%
SLSN	Solesence Inc	Russel 2000	2,292,906	5513%	3.0	94	-17%	2%
FNWD	Finward Bancorp	Russel 2000	426,837	4603%	13.9	145	-4%	4%
SFBC	Sound Financial Bancorp Inc	Russel 2000	266,332	4597%	11.3	108	-3%	-1%
BSET	Bassett Furniture Industries I	Russel 2000	1,013,647	4436%	14.4	136	-4%	11%
AOUT	American Outdoor Brands Inc	Russel 2000	1,528,071	4354%	15.0	126	29%	2%
SIEB	Siebert Financial Corp	Russel 2000	1,755,268	4065%	3.3	80	-44%	4%
EML	Eastern Co/The	Russel 2000	714,712	3976%	15.4	137	16%	5%
KG	Kestrel Group Ltd	Russel 2000	330,436	3897%	3.9	88	10%	-6%
HFFG	HF Foods Group Inc	Russel 2000	4,994,041	3632%	9.3	102	-12%	2%
RPT	Rithm Property Trust Inc	Russel 2000	873,327	3612%	12.7	112	-9%	-1%
LFT	Lument Finance Trust Inc	Russel 2000	5,675,494	3475%	5.8	55	-23%	3%
VIRC	Virco Mfg. Corp	Russel 2000	1,407,377	3391%	8.2	98	-2%	7%

 

Gold, silver and all that glitters

As part of our mid-year thematic review, we want to revisit mineral drilling. Last week we covered Wound Care and introduced Trade Schools. This week, it is time to put the hard hats back on.

After a prolonged downcycle in the 2010s, life started to look better for gold bugs. Excessive Covid stimulus, inflation, and a growing list of geopolitical conflicts pushed investors back toward the yellow metal.

The war in Ukraine also reminded governments that keeping at least some reserves in gold instead of US dollars might not be the worst idea.

As you know, we have tried various ways to play the theme. Gold.com (GOLD) / formerly A-Mark Precious Metals failed to grow their earnings meaningfully as retail demand for gold languished, but their shares took off anyway when they changed their ticker to GOLD, which, to be fair, is a pretty cool ticker to have.

We also mentioned Sprott (SII) in our year-end review as a play on retail flows into gold ETFs.

Today, though, is about Major Drilling (MDI CN), the only publicly traded, scaled hard rock mineral driller and one of our preferred ways to play the theme.

We wrote in March of last year about Trump’s desire to re-energize the US mining industry. We updated on this theme in December when we saw the first signs of senior miners raising capital to blow on their next exploration adventure.

MDI reported earnings last week, and for the first time in what feels like three years, earnings weren’t terrible. FY2026 has been a disappointing year so far; despite the Explorin acquisition, MDI has been unable to grow its earnings.

Q4 might well have been the turning point. Growth was driven by the US and Canada, where revenue was up 67%. Encouragingly, pro-mining governments now run Peru and Chile, and Colombia might soon be headed in the same direction.

This is all about the miners’ ability to raise capital. If they can raise fresh dollars, there is no limit to what a Vancouver-based CEO with a hard hat is willing to pay for a drill rig, because a few promising drill results are often all that is needed to set up the next capital raise.

Importantly, global exploration budgets are still roughly 60% below the 2012 peak, before adjusting for inflation.

We have a long way to go.

While we expect revenue to grow rapidly from here, margins will likely continue to lag as the company ramps up hiring (job postings have gone vertical in recent months) and mobilizes for new projects. The real bottleneck is finding skilled labor willing to work in remote areas of the world and to operate a rig (maybe another UTI / LINC course incoming?).