FNRG: ForceField Energy joins the Russell Microcap Index

Zacks Small Cap Research

By Steven Ralston, CFA


On June 27th, ForceField Energy (FNRG) joined the Russell Microcap Index as a result of the annual reconstitution process. Any portfolio manager of a passive or low tracking error microcap fund should be seriously considering the purchase of ForceField Energy, and if purchased, the position should be in strong hands for at least one year.

Initial inclusion in any of the Russell indexes is an important event, since these benchmarks are widely used by investment managers and institutional investors not only as a gauge to evaluate relative performance, but also as the primary universes for portfolios implementing passive and semi-passive investment strategies.

Having been a portfolio manager of multibillion-dollar equity portfolios under low tracking error mandates, I have first-hand knowledge concerning the significance of this annual reconstitution event. Additions to Russell indexes are carefully screened and often fundamentally analyzed in order to determine which of the stocks should be purchased for the portfolio.

A key insight into how a passive portfolio is managed is that one of the portfolio manager’s primary concerns is not the risk of owning a particular stock but rather is the risk of not owning that stock. In other words, if a specific stock has a higher than average probability of generating alpha, like ForceField Energy, a passive microcap portfolio manager takes on an inordinate amount of risk in not owning the stock.

ForceField Energy has many attributes that passive portfolio managers seek. First, the company is followed fundamentally by Zacks Small Cap Investment Research. Second, the company is pursuing multimillion dollar contracts with long lead-times. If one of ForceField’s major LED LOIs is converted into a definitive contract, the stock’s price appreciation can only be captured if a market-weighted position is already in the portfolio. Here is where the passive portfolio takes on excessive risk if this particular stock is not owned prior to the announcement. Third, through the acquisition of American Lighting & Distribution, the company has a growing revenue base. And fourth, ForceField’s stock has been remarkably resilient as the company has transitioned from solar energy to other emerging green energy and alternative energy markets, namely  LED lighting, ORC (Organic Rankin Cycle) technology and smart meters. For almost two years, the stock has traded between $5.00 and $5.50 plus-or-minus $0.50. The stock’s stability relays that shareholders are long-term investors with little disposition to sell.

Factoring these four attributes, in my opinion, portfolio managers of passive and semi-passive microcap portfolios are taking on tracking error risk if they are not adding ForceField Energy to their portfolios.


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