For small-caps, the Russell 2000 reconstitution can be a big day. In fact, it can ignite a share price rally of immense proportion, especially for newly added low-float companies. The excellent news for AMMO, Inc. (NASDAQ: POWW) investors is that their inclusion sits at the 99% confidence level. In fact, with the company making it to the preliminary list published on June 4th, its inclusion is almost 100% certain.
While investors sent the stock 4% higher after the news broke on Monday, more detailed analysis shows there is room for the stock to run substantially higher. And with the index being weighted, it's now a matter of positioning that could be the next catalyst to drive its share price higher. Remember, demand for AMMO shares will come from outside the Russell index. They will also get demand from copycat funds that create portfolios that mimic the Russell index. Based on some modeled evaluations, our analysis expects roughly 30% upside once the index is officially announced later this month. Here's why:
A few calculations, several risk-adjusted assumptions, and an overview of the current index listings indicate that AMMO should slide onto the index with room to spare. Taking the balance of the index and then applying several screens that limit potential "noise" in the calculations, we expect that to make the cut for the 2021 Russell 2000 index, the median market cap will fall in the range of $240 million. For reference, in 2020, the index reconstituted with a median market cap of $580 million. As of this morning, AMMO is posting a market cap of $762 million. Thus, as of Monday morning, we think their inclusion is statistically certain.
Making The Cut
The next step is to see who they might replace. There, expectations are for at least 180 companies to leave the index. As of May 8th, when the current list was revealed, the low stock in the index was hovering at a $94.8 million market cap. Obviously, that's well below the expected cut. But, if it represents near the low end of the rankings, it's better news for AMMO.
What's important about the index ranking is that it helps determine how many shares of stock will need to be purchased in a newly listed company. Since its a weighted index, screens and models can provide an accurate model of where companies will post and what percentage of shares gets allocated toward a 100% representation of the index.
Keep this in mind, though. While the Russell 2000 index sets the standard, other retail and institutional funds create ETF's that track the index. Therefore, they need to purchase these stocks as well. Admittedly, they don't always buy every stock in the index. Still, they always buy a closely associated representation of the Russell index, especially if they are marketing its fund that way. Thus, volume typically comes pouring in from iShares, Vanguard, Direxion, and ProShares, to name only a small few. Retail brokers like Schwab and Edward Jones also run a proprietary index that tracks the Russell family of funds. Therefore, an explosion of volume is typically created from numerous sources.
Massive Impact On Volume
Now, we get to the best part, especially for AMMO, Inc. shareholders. With the initial May ranking period and June 4th preliminary list published, investors now know that AMMO reached the next milestone of being included in the index.
As expected, AMMO stock got a boost on the announcement by 4% thus far. However, Monday could be the start of a slow but sustained increase in value for the next three weeks. Keep in mind, unlike most retail investors, professionals take their time, cost average, and have patience. Remember, the official reconstitution doesn't happen until after the market closes on June 25th. And that date is the countdown clock for investors wanting a position in AMMO stock at or near current levels.
Keep in mind, as days tick by, those that use similar models will be nibbling at shares. Thus, heading into the second week of June, AMMO stock could start to see some meaningful appreciation. But, at 3:55pm on June 25th, have your Level II screen open. And if you have it set on POWW, you will likely witness a share price rally, accompanied by volume, like never before.
Purchases Drive Value
In fact, extrapolating last year's numbers, we expect that POWW will generate buying interest of at least 4.2 million shares. That number is arrived at by taking AMMO's expected ranking and implying an expected weighted average in the index. The explanation is perhaps over-simplistic, but we trust that we get statistically reliable data after using historically accurate analyses.
Of course, those 4.2 million shares are from its addition to the Russell 2000. Expect similar buying pressure from many other ETF funds that track the same portfolio. Thus, in theoretical terms, AMMO could see more than 25 million shares exchanging hands during the last ten minutes of June 25th, 2021 trading. So, how can that interest affect the AMMO share price? Probably in a big way.
Already, AMMO stock has been responding well to a series of recent announcements. The company beat its own guidance by 51% to post $41 million in Q1 FY2022 revenues, completed a $240 million acquisition of GunBroker.com, and published its first profitable quarter in its history in that same period. Thus, investors have been provided an opportunity to see how good news and volume can influence the share price.
The month of May provided excellent insight and showed news-related volume impacted shares positively between 3%-8%. Keep in mind, volume on those days was strong but still only added about 50% to its current 1.32 million shares a day trading average.
Big Volume, Big Gains
Thus, factoring in the move from that level of volume, we expect that a 25 million share day can deliver upwards of 46% by the close of trading on June 25th. That could put the share price at $9.32. This isn't a prediction; it's speculation—however, good data in, good data out. Thus, we are confident in the model representations.
Remember, reconstitution days come with violent share price swings, and cast-out stocks don't get treated too well. So, be careful in checking your own lists and portfolio. But, for the new additions, they get welcomed with open arms. And even if ETF's only hold for the short term to get the stock on its books, their buying still contributes toward an enormous day of trading for newly included companies.
Here's the best part. On its own, AMMO offers an outstanding investment opportunity as a company with near and long-term potential. Moreover, its transformative acquisition of GunBroker.com on its own could be worthy of a 30% share price increase. Thus, combining the two (Russell and GinBroker.com) could add fuel to a bullish run.
For proactive investors, trading ahead of the now 99.99% inclusion can benefit from the best of both worlds- appreciation from being included in the Russell index and organic share price increases from AMMO, Inc. continuing to execute at an extremely high level.
In both cases, AMMO, Inc. could be one of the most compelling investment opportunities in the small-cap sector. Its market, products, and history of success make this company attractive on multiple levels. And its near-term value appreciation opportunity could offer substantial returns in the coming weeks.
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