GameStop (GME) joining the Russell 1000 index, rebalancing set for after the market close

Published June 25, 2021 12:25 PM, by Captain Business

The ongoing meme stock Reddit rebellion is in its sixth month, and many investors are always on the lookout for the next catalyst. GameStop shareholders actually have a real catalyst coming to the stock this afternoon when the company is added to the Russell 1000 Index. This is a promotion from its current Russell 2000 membership, and many institutions are going to have to buy and sell shares in the next few hours as the index rebalances its holdings.

Russell US Indexes Reconstitution and Rebalancing - How it works

Here's a breakdown of how stocks get added to and removed from Russell US Indexes:

May-ranking month

• May is a "ranking" month when all eligible US companies are sized up to form a preliminary Russell Reconstitution portfolio. 
• In 2021, the rank day was May 7.

June-transition month

• The entire month of June is used to give institutions and the market a heads up about the preliminary reconstituted portfolio.
• Each Friday in June, preliminary lists are provided to the marketplace with updates coming on June 4, 11, 18, and 25.
• The newly constituted indexes take effect after the market close on June 25, 2021.

Market Capitalization Ranges

• Russell 3000
  • 3019 securities in the index
  • High market cap limit of $2.172 trillion
  • Low market cap limit of $257.1 million
  • All encompassing stock index
• Russell 1000
  • 1026 securities in the index
  • High market cap limit of $2.172 trillion
  • Low market cap limit of $3.6 billion
  • Index tracks the highest-ranking 1000 stocks in the Russell 3000 Index
• Russell 2000
  • 1993 securities in the index
  • High market cap limit of $7.3 billion
  • Low market cap limit of $257.1 million
  • Viewed as the small cap market index

What does all of this mean for GameStop shareholders?

GameStop (GME) shares valued the company at a $11.2 billion market capitalization on May 7, putting it above the high range for Russell 2000 membership. The stock's fate was set that day as the rebalancing process began in June. Interestingly enough, shares of AMC are not being promoted to the Russell 1000 Index because the company was only valued at $4.3 billion on May 7, 2021. Even though AMC is currently valued at nearly $28 billion, it will not be added or removed form the Russell Indexes. GameStop is currently valued at around $14 billion, which definitely will confuse some AMC longs today, but the rules explained above address their concerns.

Analysts believe that GameStop will face some selling pressure over the next few days. GameStop had grown to be one of the largest stocks in the entire Russell 2000, and it will comprise a materially smaller fraction of the Russell 2000. Jeffries analyst Steven DeSanctis told Barron's that he estimates a total of 5 million shares of GME will be sold as a result of the Russell rebalancing. "Large-cap managers don’t need to own the smaller names,” said DeSanctis, “While in Russell 2000, because it’s a bigger name, small-cap managers have to pay attention to the stock.” 

This could lead to a divergence in the performance of AMC and GME shares, which up until June had been two peas in a very demented pod. It's definitely interesting to see GameStop back in the same stock market index as megacompanies like Microsoft and Apple, but after its mammoth run from the lows of 2020, investors shouldn't be surprised by anything.

It remains to be seen how GameStop's stock will respond to today's Russell rebalancing, so keep it locked on Shacknews for more financial news as it breaks.

This article is only meant for educational purposes, and should not be taken as investment advice. Please consider your own investment time horizon, risk tolerance, and consult with a financial advisor before acting on this information.