Micro Caps For Russell 2000 Inclusion In 2024

Micro cap stocks that get added to the Russell 2000 see forced buying by ETFs and mutual funds. This is also a trade that hedge funds front run to get the bounce. The stocks I have picked are also great investments intermediate to long term.

Micro cap stocks are those typically defined at around $300 million in market cap or less. Companies of this size are often duds, but, others are super high growth with the potential to fulfill Peter Lynch’s prophecy on small companies…

“Big companies have small moves, small companies have big moves.”

Peter Lynch from One Up On Wall Street

Note: Micro Cap picks are normally reserved for RARE Investing members, but given an influx of new Sustainable Growth Investors, I am giving you access to this list. however, as of April 25th, I made this available to Investing 2020s Blog readers. Originally published March 6, 2024 as a quick note for members. Deeper research and trading notes available to paid members.

Russell 2000 Inclusion Impact On Share Price

One of the best trades I have made over my nearly 3 decade career has been finding companies about to have their stocks added to the Russell 2000 small cap index after having been microcaps. This is a lot like when a mid size company gets added to the S&P 500, except more impactful.

When a microcap gets added to the Russell 2000, its stock sees forced buying by iShares Russell 2000 ETF (IWM) and other Russell 2000 following index funds. That forced buying is usually accompanied by a large jump in share price. Some of the rise comes on anticipation by sophisticated investors who scan for this type of trade (like me) and then the FOMO that follows after the forced buying by ETFs.

Index inclusion also enables many other institutions to invest in the stock that were otherwise prevented by the charter rules they follow, such as, index inclusion. That adds further demand for the stock.

There is an ancillary benefit to small companies that are added to the Russell 2000 index. The rising share price helps lower the cost of capital for smaller companies. In many cases, as the share price rises, companies become freer to issue equity or warrants on debt deals. Cheaper capital is a huge benefit to a growing company.

Russell 2000 Inclusion In 2024

Russell inclusion is based almost exclusively on market cap of a company. There are a few other minor factors and moving parts, but for the most part, market cap is what you are looking at.

In 2023, there were 296 companies added to the Russell 2000 with the smallest company having a $170 million market cap. The index value has risen a since the last rebalance and we expect the smallest company to be about $190 million in 2024. To be safe, I’m aiming for $200 million because there is a banding around the limit market cap that prevents some stocks from falling off the Russell 2000 and others getting added.

The first valuation date for 2024 Russell 2000 inclusion is April 30th, 2024. Russell will generate an initial list of expected inclusions for the June 30th reconstitution. They will update the list throughout May and June before final rebalancing.

Most of the stocks added will be selected on April 30th. A dozen or two other additions will happen based on market cap changes in the home stretch to the rebalance. The stocks that get added late are generally on big rallies post April 30th. If we can pick some of the companies just outside the Russell 2000 range, those are often steep winners.

Kirk’s Micro Cap Picks 2024 Russell 2000 Inclusion

Microcap growth stocks are highly volatile. It takes a lot to get to the Russell 2000 and most micro caps do actually fail. That’s why so few people invest before Russell 2000 inclusion. If you do not have the stomach or appropriate financial condition for high volatility, then skip micro cap investing.

If we can find the companies that can make it the Russell 2000, then we can do very well. I only invest in micro cap stocks that I think have a likelihood of Russell 2000 inclusion this year or next year. Anything less is too speculative for me.

I expect most of the stocks I have picked based on a combination of fundamentals, technicals and market cap inclusion to the Russell 2000 to double or better within a year or two. Of course there are no guarantees, but with careful selection, many do very well.

I generally scale into these stocks over a period of months. Very aggressive investors can buy small July and January 2025 call positions in addition to a core stock holding, otherwise. Less aggressive growth investors should scale in small bites looking for upward momentum to add on initially and then sell into as momentum fades, holding onto long-term core positions as it fits your strategy.

Remember, I pick my stocks based on the following:

  • Secular Trends
  • Government Policy
  • Company Fundamentals
  • Technical and Quant Stock Price Analysis

Without further ado, here are my 7 favorite micro caps for 2024.

Spire Global (SPIR)

Spire Global is in the early innings of the space revolution. They have deployed the only RFID satellite network which is being used for tracking weather, ships, space junk and more. This is different that the imagery you see in pictures, these are radio wave data that can “see” through the clouds and deep into space. The company just turned profitable and has added significant recurring revenues the past years. The founder/CEO and other insiders are major shareholders and institutions have been adding. Share price started to turn up in August after their spectacular crash post SPAC merger. Spire Global’s market cap is currently about $270 million, well above the inclusion threshold for 2024. I own a full position in this stock (which I define as 3-5% of portfolio size).

Aemetis (AMTX)

Biofuels company heavily supported by long-term government support in the form of investment tax credits and production tax credits at the Federal level, Low Carbon Fuel Standard incentives in California and USDA 20-year low interest loans to build out their Renewable Natural Gas dairy digesters. Has about $7 billion in contracts for future delivery of biodiesel and Sustainable Aviation Fuel. Tax credits over the next 5-7 years are substantially higher than current market cap and expected capex. So, on net, additive to normal fuels margins. Financing has been falling in cost. Their risk is future financing costs if financial system seizes up. Currently at $140 million market cap, so needs to rally late to be added to Russell 2000. Earnings are March 7th and a key California Air Resources Board meeting are in late March. I expect good news or great news from the CARB meeting. Heavily shorted, if a rally starts, the squeeze will likely be bigger than summer 2023 squeeze. If not this year, then next in my opinion. I own a full position in this stock (which I define as 3-5% of portfolio size), and more in aggressive accounts.

QuickLogic (QUIK)

QuickLogic operates in fast growing markets for consumer IoT, security, industrial IoT and aerospace/defense. QUIK reported record revenue and a large new contract for its eFPGA IP. eFPGA IP allows SoC (system on chip) designers to easily program custom functions, hardware accelerators, and security capability after an SoC has been manufactured. It also enables hardware re-programmability. Insiders own over 8% and institutions just started buying standing at 26%. Small short percent so far. The company’s market cap is about $225 million right now, so just above the inclusion threshold. The stock has shown momentum to the upside since last summer more than doubling. I am scaling into this stock as part of a basket of companies that benefit from AI adoption.

Radcom (RDCM)

Radcom uses AI and machine learning to manage standalone 5G networks in the cloud for tier 1 operators such as Rakuten. Radcom’s GenAI applications improve customer experience and costs by monitoring and optimizing 5G networks, i.e. operator knows everything going on in real time and the AI manages the architecture. Their Radcom Ace system helps to build GenAI applications on cloud platforms. The company just turned profitable and has no net debt with net assets about $70 million, roughly half the market cap. The stock is nosing up against Russell 2000 inclusion. Insiders own a quarter of the company, institutions 40% and there is no discernible short interest. If not this year, then next in my opinion. I am scaling into this stock as part of a basket of companies that benefit from AI adoption.

Applied Optoelectronics (AAOI)

Applied Optoelectronics targets 4 end markets supported by high bandwidth demand growth: network-connected devices, video traffic, cloud computing and online social networking. Per their 10Q: “To address this increased bandwidth demand, CATV and telecom service providers are competing directly against each other by providing bundles of voice, video and data services to their subscribers and investing to enhance the capacity, reliability and capability of their networks. Our internet data center market is also experiencing substantial growth as hyperscale data center operators build and upgrade their infrastructure to support artificial intelligence (“AI”) applications which are compute and bandwidth intensive. As a result of these trends, fiber-optic networking technology is becoming essential in all four of our target markets, as it is often the only economical way to deliver the desired bandwidth.” — AAOI is handily above the Russell 2000 market cap cut off and is very likely to be added. It is currently 21% shorted so there are some doubters, but that could be fuel for a squeeze. I am scaling into this stock as part of a basket of companies that benefit from AI adoption.

American Superconductor (AMSC)

American Superconductor market cap is well into Russell territory around $495 million. They are doing a secondary to raise $60m in capital which is stalling upward stock momentum a bit. It seems like a good time to get involved. The company designs, develops and deploys power control systems for the grid and alternative energy, including wind and solar. Their Gridtec solutions provides the engineering, planning services and advanced grid systems that optimize network reliability, efficiency and performance. They seem to be in the right place at the right time and I expect high growth to continue for many years. Insiders own about 5% of the company and institutions about 45%. So, there is float to be absorbed and some short interest at about 5%. I am scaling into this name as clean energy stocks get a lot of volatility.

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