When the Index Excludes: Finding Value in Small-Cap Outcasts

The Russell Small Cap Value Index, a bellwether for bargain hunters, periodically reshuffles its constituents—a process that can create opportunities for investors willing to look beyond the noise. While the June 2025 reconstitution of the Russell indexes did not explicitly name Everi Holdings (EVRI) as an exclusion, the broader dynamics of index removals offer a compelling lens to evaluate small-cap value stocks like EVRI. Whether or not EVRI was formally excluded, its recent performance and strategic shifts illustrate how companies on the periphery of indexes can become undervalued gems.

The Index Exclusion Paradox

Index exclusions are rarely final verdicts on a company's health. They are mechanical outcomes of rebalancing rules, sector rotations, or short-term underperformance. For instance, the Russell Small Cap Value Index's June 2025 rebalancing prioritized companies with improving fundamentals or shifting style profiles, such as a tilt toward growth metrics. Firms like Everi, which faced headwinds from weaker gaming markets and regulatory headwinds, might fall out of favor temporarily—even if their long-term prospects remain intact.

Consider EVRI's trajectory: Despite a challenging 2023–2024 period—marked by a 46.76% annual stock decline—the company rebounded strongly in late 2024 and 2025. A comparison reveals a sharp divergence. EVRI's shares rose 74.8% from July to June 2025, outpacing the Russell index's 10.2% gain over the same period. This turnaround suggests that exclusion from indexes can, paradoxically, create buying opportunities when fundamentals stabilize.

Why EVRI's Exclusion Matters (Even If It Happened)

If EVRI were excluded, it would likely stem from one or more factors:
1. Sector Dynamics: Gaming stocks often face cyclical pressure, and EVRI's reliance on casino operators—sensitive to economic downturns—may have triggered underperformance.
2. Style Shifts: EVRI's move into digital payment solutions (e.g., the PENN Wallet mobile platform) could have altered its value-style classification, making it less aligned with the index's criteria.
3. Index Rebalancing: The Russell's 2025 reconstitution emphasized liquidity and growth, potentially sidelining smaller-cap names like EVRI.

However, exclusion can be a blessing in disguise. Index-linked funds forced to sell their stakes often depress prices below intrinsic value, creating a margin of safety for active investors. EVRI's recent wins—a pending acquisition by Apollo Global Management, a 28.8% rise in Q1 2025 revenue, and a 74% year-to-date stock surge—highlight how such companies can recover once catalysts materialize.

The Small-Cap Value Playbook Post-Exclusion

1. Beware the Herd: Institutional outflows post-exclusion can create short-term dislocations. Use this to buy undervalued assets—like EVRI's 1.8x price-to-book ratio, well below its five-year average of 2.5x.
2. Focus on Fundamentals: EVRI's 18.5% operating margin and $1.2 billion in 2024 revenue demonstrate resilience. Its shift into digital payments (a $45 billion market) adds growth tailwinds.
3. Monitor Liquidity: Post-rebalancing, small-cap stocks face heightened volatility. EVRI's average daily volume of 1.2 million shares (up from 800k in 2023) suggests improving liquidity, reducing slippage risks.

Risks and Caveats

• Execution Risks: EVRI's pending Apollo deal faces regulatory hurdles and integration challenges.
• Sector Volatility: Gaming remains cyclical; a recession could pressure margins.
• Style Misalignment: EVRI's tech pivot may still clash with traditional value metrics.

Conclusion: The Exclusion Edge

Index exclusions are not death sentences—they're stress tests. For EVRI, the rebound post-2023/2024 underperformance underscores that exclusion can be a catalyst for value hunters. At current levels, EVRI trades at 8.2x forward earnings, a discount to its peers and historical multiples. Investors with a 3–5 year horizon—and tolerance for volatility—might find EVRI a compelling bet on gaming recovery and digital innovation.

As the Russell Small Cap Value Index evolves, remember: its rules are mechanical, not prophetic. The true value lies in companies like EVRI, where strategic shifts and underlying strength can turn an index exile into a comeback story.