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Churchill Downs (NASDAQ:CHDN) and DraftKings (NASDAQ:DKNG) are among the stocks that could be affected by the annual rebalancing of FTSE Russell equity indexes.
In a recent call with clients, Jefferies highlighted seven consumer discretionary names, including the pair of gaming equities, that could be on the move as a slew of benchmarks run by FTSE Russell are altered to reflect changes in components’ market values. The company is the provider behind well-known indexes, such as the broad market Russell 3000, the small-cap Russell 2000, and the Russell 1000.
This month marks the start of Russell rebalancing season, as stocks’ places in the provider’s various equity gauges are determined based on May 7 closing prices, market caps, and other inclusion criteria. That includes Churchill Downs and DraftKings.
“June is the month that the preliminary reconstitution portfolio is communicated to the marketplace. Beginning on June 4, preliminary lists are communicated to the marketplace and updates are provided on June 11, 18, and 25. The newly reconstituted indexes take effect after the market close on June 25,” according to FTSE Russell.
Like other gaming stocks, the racetrack operator and the daily fantasy sports (DFS) provider are slumping. But DraftKings’ slide is particularly pronounced. That name is off almost 22 percent over the past month, potentially signaling it will gain some benefit from Russell using its May 7 market capitalization, which was higher than today’s mark of $16.44 billion.
Why Russell Rebalancing Matters
Jefferies estimates that as a result of the Russell rebalancing, growth funds may have to boost exposure to large- and mid-cap consumer cyclical stocks by two percent and five percent, respectively.
Both Churchill Downs and DraftKings are considered growth stocks, and all consumer-facing gaming names reside in the consumer discretionary sector. The racetrack operator is part of the Russell 2000 and the Russell 2000 growth indexes — both small-cap benchmarks — but its market value on May 7 was firmly in mid-cap territory. That could signal that the stock is poised for entry into the equivalent mid-cap and mid-cap gauges.
Slumping DraftKings has been a standalone public company for just over a year, earning varying treatment from index providers over that time. Some benchmark issuers classify the sportsbook operator as a mid-cap name, while others include it in large-cap indexes.
It remains to be seen how FTSE Russell treats DraftKings post-rebalancing. But given the stock’s flirtation with a market capitalization of $20 billion around May 7, it could be a credible candidate for inclusion in the Russell 1000 and Russell 1000 Growth indexes.
No Guarantees of Upside
Jefferies mentions Churchill Downs and DraftKings as “buy” ideas on the Russell rebalancing, and the thesis is solid.
Globally, trillions of dollars are benchmarked to the provider’s gauges, and index promotions could put Churchill and DraftKings in front of a wider audience of professional investors.
However, index elevations aren’t guarantees of upside. For example, Penn National Gaming (NASDAQ:PENN) has been in a tailspin following March news that it was joining the S&P 500 – the most widely followed equity index in the world.
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