Wilshire Small Cap Index adds some new names.

Three companies are added, one dropped in annual redo 

Three L.A. companies have been added and one dropped from the Wilshire Small Cap Index, a barometer measuring the stock market activity of companies with smaller capitalization.

The changes took effect last Monday (May 23).

Right now, the 250 companies that make up the index have a market capitalization that ranges from about $130 million to about $1 billion. Market capitalization is equal to the price of a company's common stock multiplied by the number of common shares outstanding.

Each year Santa Monica-based financial consulting firm Wilshire Associates restructures the index to better reflect the capitalization, liquidity and stock prices of companies in this sector of the market.

Twenty companies were replaced this year, mostly due to the increased capitalization of the firms, which bumped them up into another market sector, said Wilshire Associates analyst Thomas McLain. Last year 34 companies were replaced.

Included among the 20 additions to the list are three L.A. County companies: CWM Mortgage Holdings Inc.; Glendale Federal Bank, FSB; and Hollywood Park Inc.

CWM, a Pasadena-based real estate investment trust, is managed by Countrywide Asset Management Corp., a subsidiary of Pasadena's Countrywide Credit Industries Inc. At year-end 1993, CWM had assets of about $1.4 billion.

Glendale Federal is a Glendale-based thrift that had assets of $17.3 billion on March 31. Inglewood-based Hollywood Park Inc., which owns and operates Hollywood Park Race Track, had revenues of $63.2 million in 1993.

One L.A. county-based company was among the 20 firms dropped from the list: International Technology Corp., an environmental services company headquartered in Torrance.

"Its market cap was too low to remain on the index," explained McLain.

But capitalization is not the sole factor considered for index placement.

"The main criteria for selection would be a securities industry classification and average daily share volume for the past six months," said McLain. Average daily trading volume for the companies in the index ranges from 4,000 to 2 million shares per day. According to the PSE, stocks in the index are replaced if their average trading volume falls below 3,000 shares over a six-month period.

Liquidity is important, McLain explained, to help investors and other market participants who use the index as a trading tool by purchasing index-linked options contracts.

"It reduces risk by insuring that the securities in the index can be traded relatively freely," he said.

The index's diversity adds to its attractiveness. For instance, if an investor believed small cap stock prices were due to rise but couldn't decide which stocks to invest in, he or she could purchase a contract to buy units of the index.

The Wilshire Small Cap Index can also be used as a hedge vehicle. For example, if an investor who already owned a portfolio of small cap stocks believed these stock prices would suffer a short term drop, he or she could purchase an options contract to sell the index instead of liquidating the portfolio.

In that way, the money that the investor might make selling stocks through the options contract (and later buying them back at a lower price) could offset the short term losses incurred on the specific stocks in his or her portfolio.

The Pacific Stock Exchange has offered Wilshire Small Cap Index options contracts since January 1993, said Scott Stark, the PSE's director of new products. In 1993, he said, an average of 680 of these contracts were transacted each day.