How the MSCI Index Realignment Impacted This Small-Cap Stock

We’re only a few days into June, but I’d say the stock market is off to a good start so far, especially the Russell 2000. The small-cap index is trading just below its record high of 2,360.17.

As I discussed on Tuesday, June is a decent month for the stock market. According to the folks at Bespoke, the Dow has posted an average gain of 0.41% in June over the past 100 years. In the past 50 years, the Dow has risen 0.12% in June, with gains 52% of the time. But looking at the past 20 years, the Dow has posted an average decline of 0.71%.

However, I look for June to be downright spectacular for fundamentally superior small-cap stocks this year.

The reality is the annual Russell 2000 index realignment will take place this month. On June 4, June 11 and June 18, the Russell will be announcing preliminary changes to its Russell 2000 and Russell 3000 indices, with the final change set to take place on June 25. So, high-quality stocks should see wave-after-wave of relentless institutional buying pressure as they’re added to the Russell indices. Given that my Breakthrough Stocks Buy List is filled with the crème de la crème of small- and mid-cap stocks, I look for them to be added, too, as they are well-respected and utilized around the world.

I’ll discuss this phenomenon and its impact on my Breakthrough Stocks more in-depth in this Friday’s Breakthrough Stocks June Monthly Issue, but let me give you a quick example now of how an index realignment can propel a stock higher.

The MSCI index, which tracks emerging markets, had its annual realignment last week. This boosted major Israeli, Taiwanese and Chinese stocks higher, including Futu Holdings Limited (FUTU), which I recommended to my Breakthrough Stocks subscribers in August 2020.

Based in Hong Kong, Futu Holdings Limited is a Chinese financial services company. Through its brokerage and wealth management platform, Futu Holdings provides stock trading, wealth management services, market data and information, margin financing and other interactive services. The company’s services are available in Hong Kong, China and the U.S.

The company’s main platform, Futubull, enables investors to trade stocks in several markets, as well as offers real-time stock prices, financial news and other market data. The platform also provides an interactive community for investors, which allows them to connect and share trading ideas. Futu Holdings’ Moomoo platform is geared for international investors, offering transaction services for stocks and options, as well as ADRs, ETFs and other financial products.

FUTU’s Q4 Earnings Results

FUTU had been growing its top and bottom lines nicely in the past year. For the fourth quarter, reported on March 16, the company posted blowout results. The Chinese online brokerage platform revealed that it had 516,721 paying clients at the end of 2020, or a 160.5% year-over-year increase. Its total number of registered clients jumped 97.8% year-over-year to 1.42 million, while its total number of users rose 58.6% year-over-year to 11.9 million.

Futu Holdings also reported total revenue of HK$1.2 billion, or a 281.6% year-over-year increase. Adjusted earnings surged to HK$552.9 million. In U.S. dollar terms, Futu Holdings achieved fourth-quarter revenue of $153 million and adjusted earnings of $71.3 million. Fourth-quarter earnings per ADS (American Depository Shares) surged 880% year-over-year to $0.49, up from $0.05 per ADS in the same quarter a year ago. That topped estimates for earnings of $0.45 per ADS by 8.9%.

Given the strong results, it was no surprise when company management announced on May 12 that this fundamentally superior stock would be added to the MSCI Hong Kong index on May 27. Last week, FUTU rallied nearly 14% ahead of the realignment.

FUTU Grows Earnings in Q1

The truth of the matter is FUTU has every right to be in the index, as it still boasts strong earnings and sales growth. Case in point: On May 19, the company reported triple-digit earnings and sales growth for the first quarter. Revenue soared 349.4% year-over-year to HK$2.2 billion, and adjusted earnings per share surged 634% year-over-year to HK$1.18 billion. In U.S. dollar terms, FUTU reported revenue of $283.6 million and earnings of $151.7 million. Earnings per ADS jumped 557% to $1.03.

The company added 273,000 paying users during the quarter, which brought its total paying client base to 790,000. That represents a 231% year-over-year increase. FUTU also noted that it now has about 1.96 million registered clients and a total of 14.2 million users.

Overall, FUTU is up more than 200% year-to-date, but I fully anticipate the stock to continue to climb higher as it benefits from the Russell realignment later this month. The same should be true for my other Breakthrough Stocks, considering that the average Breakthrough Stock is forecasted to post 83.7% annual sales growth and 497.5% annual earnings growth. So, I am very excited for what’s to come!

If you’re interested in realigning your portfolio for the Russell indices realignment later this month, then I encourage you to take a look at my Breakthrough Stocks service. And the reality is you couldn’t be joining at a better time. As I mentioned, I will be publishing my Breakthrough Stocks June Monthly Issue on Friday. In addition to further discussion on the coming Russell indices realignment, I will unveil eight new exciting buys, as well as my latest list of Top 5 Stocks. So, you’ll receive my latest commentary and recommendations while my Monthly Issue is still hot off the presses.

Click here for full details.

Note: The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owned the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below:

Futu Holdings Limited (FUTU)

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