DraftKings Stock Gets Russell Rebalance Lift, Caesars, Penn Could See Selling Pressure

Posted on: June 7, 2021, 09:56h. 

Last updated on: June 7, 2021, 10:58h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

More details are emerging on the looming rebalancing of FTSE Russell equity benchmarks, and there appears to be good news for DraftKings (NASDAQ:DKNG) stock.

DraftKings stock
Traders on the floor of the New York Stock Exchange. DraftKings stock could benefit from Russell rebalancing. (Image: Reuters)

Shares of the sportsbook operator are higher by more than four percent in midday trading after Jefferies published research today indicating DraftKings will be one of 10 names to see buying pressure in advance of the Russell rebalance on June 25.

The one confusing part of the Russell rebalancing is that FTSE Russell determines size and inclusion based on May 7 prices, thus the top and bottom ends of the indexes today reflect appreciation/depreciation of stocks over the last month,” said Jefferies equity strategist Steven DeSanctis in a note to clients.

DraftKings stock is lower by 10.41 percent over the past month, and the gaming name shed 29.15 percent from its March highs. Jefferies forecasts a 2.8 percent decline for the consumer discretionary sector — where DraftKings resides — in the widely followed Russell 2000 Index. But the research firm estimates nearly $806 million of the shares will be purchased as a result of the index provider’s annual rebalance.

Russell rebalance
DraftKings stock could be gobbled up due to Russell rebalancing. (Chart Courtesy: Jefferies)

Why It’s Important for DraftKings Stock

About 14 months removed from its debut as a freestanding public company, DraftKings is part of an array of active and passive funds, including 66 exchange traded funds (ETFs). But the stock isn’t yet part of the Russell 2000 or any of the related style indexes, including growth and value.

The gaming equity’s participation in the imminent rebalance is important because, at this time last year, over $9 trillion in global assets were allocated to FTSE Russell equity gauges. Inclusion in the Russell 2000 and the related growth or value benchmarks puts DraftKings into a broader assortment of ETFs and passive funds. It also means the stock will be purchased by a wider audience of institutional investors that track the Russell indexes the shares enter.

Currently, DraftKings isn’t a member of any of the major domestic equity gauges. But in addition to its potentially imminent debut in the Russell benchmarks, the gaming equity could join the widely observed Nasdaq-100 Index (NDX) when that basket of stocks is reconfigured in December.

More Impact for Gaming Equities

Jefferies identifies DraftKings as the only gaming name that could experience buying pressure as a result of the Russell rebalance. But as the chart below indicates, Caesars Entertainment (NASDAQ:CZR) and Penn National Gaming (NASDAQ:PENN), could be sold off.

russell rebalance
Caesars and Penn National could see selling pressure as Russell indexes rebalance. (Chart Courtesy: Jefferies)

Currently, that pair are the largest and fifth-largest components, respectively, in the Russell 2000. But due to ascents in their market values and the reduction of consumer discretionary exposure in the index, Caesars and Penn are likely to take on smaller weights in that benchmark.

At least for today, investors don’t seem to mind, as both gaming equities are trading higher. Earlier today, Deutsche Bank analyst Carlo Santarelli raised his price target on Caesars to $132 from $126, citing impressive second-quarter performances at the operator’s Las Vegas Strip and regional gaming venues.