Kulshan Capital worked with Seattle Business magazine this year to construct an online index at Seattlebusinessmag.com that tracks the performance of stock prices of Washington-based corporations as a way of following business conditions in the local economy. Before the Seattle Business Washington 60 Index (SBW 60), no such instrument had existed in spite of the rapid growth of exchange-traded funds (ETFs) that follow such subsectors as technology, biotechnology and banking. The closest proxy for Washington is the Davidson 99 Regional Stock Index, which covers a broader area, including the entire Northwest and northern Rocky Mountains.
Although well over 100 listed companies are based in Washington, many are small-capitalization stocks that trade in low volumes and can obscure the performance of an index. Our target was to identify stocks with at least $100 million of market capitalization and relatively strong trading volume to construct both a representative and investable index of Washington-based companies. We decided to pick the top 60 by capitalization. The index is limited to companies headquartered in Washington, but we chose to make an exception for The Boeing Company, because of its overwhelming importance to the economy here.
There are many ways to weight stock indices. The S&P 500 Index, for example, is weighted based on market capitalization. In such a system, Microsoft alone would account for more than 40 percent of our index. To give the index a more balanced view of performance across the state, we decided to assign equal weight to each stock. Finally, we rebalance the index quarterly to account for shifts in market value and trading liquidity.
Nine of the 10 major-industry Bloomberg subsector classifications are represented in the SBW 60. Not surprisingly, roughly a quarter of the index hails from the technology and communications sectors. They include Amazon, F5 Networks, Expedia and Clearwire. Well-known consumer cyclicals such as Costco, Starbucks, Paccar, Nordstorm and Alaska Air also figure prominently, and the index lists a number of local financial institutions that are generally of a small-cap nature, such as Sterling Financial, Columbia Banking and West Coast Bancorp.
How has the index been performing recently?
During the financial market distress of the past several years, the SBW 60 has fared quite well relative to the major market indices. For example, from the end of 2007 through the end of last year, it outperformed the price performance of the S&P 500 by 63 percent. However, in 2011 the index has underperformed slightly, owing to weakness in technology stocks and small caps in general.
What have been some recent changes?
ZymoGenetics was acquired by Bristol-Myers Squibb October 13 of last year for $9.75 per share, and Isilon Corp. was purchased by EMC Corp. on December 21 for $2.25 billion. After delisting these merger targets, we added eMagin Corp. and First China Pharmaceuticals.
Although in many respects Washington state has been less affected than a number of other American areas during the financial crisis and economic slowdown of the past several years, our region has not been without its own casualties, such as Washington Mutual and Eddie Bauer, both of which used to be significant members of the SBW 60 Index. However, given Boeing’s recent string of successes, the recovery of the United States consumer sector and Amazon’s expansion, the Washington state business climate seems to be on track for a sustained economic recovery. Given this improving climate, I would expect to see the SBW 60 match or exceed the returns of the S&P 500 Index during the balance of this year.
Nicholas Waltner is the managing principal at Kulshan Capital Management LLC, a Seattle-based investment management adviser.
COMPANIES REPRESENTED IN THE SBW INDEX
Alaska Air Group
Ambassadors Group Avista
Barrett Business Services
Columbia Banking System
Craft Brewers Alliance
First China Pharmaceutical Group
Fisher Communications Flow International
McCormick & Schmick’s Seafood Restaurants
Plum Creek Timber
Red Lion Hotels SeaBright Holdings
Schnitzer Steel Industries
Washington Banking Co.
West Coast Bancorp