May 21 (Bloomberg) -- The smallest U.S. companies by market value are getting bigger. The Russell 2000 Index, after a record surge in 2003, will reflect that change next month in its annual revision.

``Everything gravitated upward and so does the benchmark,'' said Steven DeSanctis, Prudential Equity Group's director of small-cap research. Cal-Maine Foods Inc. and Orbitz Inc. are among stocks that may be added to the index, he said.

The smallest company in the Russell 2000 will be valued at $168 million, according to a May 3 note from DeSanctis, ranked as the top strategist for shares of small companies in a 2003 survey by Institutional Investor magazine. That cutoff would be 44 percent higher than last year, based on data from Frank Russell Co., the index's provider.

Changes in the Russell 2000, a measure of ``small cap'' stocks, affect mutual funds that use the index as a benchmark. These funds have $42 billion of assets, according to Frank Russell, which produces 21 U.S. indexes and is a unit of Northwestern Mutual Life Insurance Co. In all, $365 billion tracks the firm's measures.

The Russell 2000 climbed 45 percent last year, the biggest advance in its quarter-century history, as U.S. stocks had their first gain in four years. Technology companies led the broader rally, and analysts expect their representation in the Russell 2000 to rise.

Technology Shares

Computer-related shares will account for 20.3 percent of the Russell 2000, up from the current 18.6 percent, Citigroup Inc. analysts Nicholas Gulden and Steven Kreichman wrote in a May 7 report.

``Tech is the comeback story here,'' said Gulden in an interview. Information technology companies make up 30 percent of likely additions into the Russell 2000, the most of any group, he said.

Each year, Frank Russell calculates the 3,000 largest U.S. companies by market value, using the closing prices and shares outstanding on the last trading day in May. These companies go into the Russell 3000 Index, the firm's broadest measure. The top 1,000 by market value form the Russell 1000 Index and the rest make up the Russell 2000.

Frank Russell will release a preliminary list of changes on June 11. The new lineup will take effect on June 25, the last Friday of the month, rather than the last day of the month as in years past. This will give money managers more time over the weekend to adjust to any resulting increase in trading, the company said.

Stocks added to the indexes tend to rise and those deleted usually fall as funds buy and sell shares accordingly.

Cal-Maine, Orbitz

Citigroup's Kreichman and Gulden estimate that 366 companies will join the Russell 2000, of which 294 will come from outside the Russell 3000 and 72 will move down from the Russell 1000.

The average size of a Russell 2000 company will rise to $575 million, Prudential's DeSanctis estimated, from its current $500 million. The median market value of a company in the Standard & Poor's 500 Index is about $9 billion.

Cal-Maine, the largest U.S. egg producer, may join the Russell 2000 after its shares jumped fourfold in the past year, lifting its market value to $271.7 million.

Orbitz, an Internet travel agency owned mainly by the five biggest U.S. airlines, went public in December. The company has a market value of $857.2 million even though its shares have dropped 18 percent since they were first sold.

`More Comfortable'

A pickup in initial public offerings may also introduce companies such as Digital Theater Systems Inc. to the index, according to Albert Richards, another Citigroup analyst. From July 2003 to the end of March, there were 111 IPOs in the U.S., up from 38 in the nine months that ended in March 2003.

``It's an indication of the economy turning around and people jumping on the bandwagon,'' said Amy Schioldager, head of U.S. equity index funds at Barclays Global Investors in San Francisco, which has about $100 billion benchmarked to Russell indexes. ``Companies are more comfortable coming to market.''

Shares of Digital Theater, creator of the surround-sound technology used in films such as Steven Spielberg's ``Jurassic Park,'' have advanced 35 percent since they began trading July 9. The company has a market value of $385 million.

Changes in the Russell 2000's membership may help determine whether the index can beat the S&P 500 for the sixth consecutive year. Last year's advance in the small-cap benchmark was almost double the S&P 500's 26 percent increase.

Monthly Streak Ends

The Russell 2000 gained every month from October 2003 through March 2004 and climbed to a record close of 606.39 on April 5. Since then, the index has dropped 11 percent, including a 5.2 percent loss in April, its worst monthly performance since December 2002.

Investors such as Barry James, executive vice president of James Investment Research in Dayton, Ohio, expect the pullback to continue no matter how the revision affects the index.

``The market is set for further troubles ahead,'' said James, who helps manage more than $650 million, including about $90 million in small-cap stocks. At 25 times estimated earnings, Russell 2000 stocks are ``certainly not cheap,'' James said. By contrast, the S&P 500 has a price-to-earnings ratio of 17.

``We got aggressive last March when things looked pretty good, but we've pulled back and are sitting with some cash right now,'' he said. James added that he expects that the Russell 2000 may decline another 10 percent before turning higher.

To contact the reporter on this story: Ari Levy in New York at alevy5@bloomberg.net.

Last Updated: May 21, 2004 00:08 EDT