Wednesday August 20 3:02 PM EDT
Blue chip profit woes prompt look at small caps
By Huw Jones
NEW YORK, Aug 20 (Reuter) - As U.S. blue chips ride a rollercoaster in the dying days of
August, some investors are being tempted to step off and hitch a lift with the smaller cap stocks.
Although there are no signs yet that big bucks are being poured into the smaller stocks, the
relatively neglected sector may enjoy a modest Indian summer, analysts said.
``The liquidity is back to the small-cap stocks,'' said Gary Kaltbaum, technical analyst at J.W.
Charles.
Wall Street has been twice rattled in the past two weeks after blue chips Coca-Cola Co (KO) and
Gillette Co (G) prompted earnings concerns that rippled through the market.
As investors question high valuations in large cap stocks with lower growth rates, they are turning
to smaller companies offering higher rates, Kaltbaum said.
The Russell 2000 index of small cap stocks failed to match the momentum which powered blue
chips to record heights in the past few months.
But the small caps suffered less of a fall when the Dow Industrials lost 247 points last Friday,
though analysts caution they were starting from a lower base.
The Russell 2000 hit an all-time closing high of 420.73 on August 6, up 16 percent for the year.
The Dow hit its record closing high of 8259.31 on the same day, up 28 percent for the year.
On Wednesday, the Russell 2000 was up about 4-1/2 points, or one percent, at 418 in afternoon
trade. Meanwhile, the Dow rose 52 points, or 0.7 percent, to 7970.
``They don't have that much to lose,'' said Jennifer Moran, associate to Donaldson Lufkin &
Jenrette's chief economist.
Abby Joseph Cohen, co-chair of Goldman Sachs' investment policy committee, said smaller and
mid-cap stocks have been able to outperform the broader market on occasions since last May due to
continued economic expansion without a buildup of inflationary pressure.
Cuts in capital gains tax also benefit smaller issues, Cohen said. In addition, ``earnings
disappointments announced by larger companies have exposed the gap in relative valuations,''
Cohen said in a report.
Kaltbaum said as money pulls out of big cap names such as Gillette, it can produce sharp gains in
small stocks because they have relatively few shares outstanding. ``It does not take much to move
them,'' he said.
Alan Ackerman, senior vice president and market strategist at Fahnestock & Co, added: ``Smaller
and mid-cap stocks seem to have developed a broader following at a time when some of the big cap
stocks are being carefully examined due to their high values.''
``The market is becoming increasingly rotational,'' Ackerman said.
Gruntal's analyst Joseph Battipaglia agreed: ``Investors are still looking for opportunities in mid to
small companies, and even big companies, particularly the pharmaceuticals.''
Wall Street Strategies' Charles Payne said there was no mad stampede to buy small caps despite
some blue chips appearing vulnerable.
``Selected ones are drawing attention, especially the ones that used to be high -- what we call the
fallen angels,'' Payne said.
Favored small cap stocks are those which have proprietary technology, or are in the entertainment,
leisure or telecommunications sectors, Moran said.
``Because we are so dollar averse and pricing averse, we have been looking for the type of stocks
that will benefit from being insulated from a decline in inflation and any dollar strengthening,''
Moran added.
Also driving the small cap shares are short-sellers having to cover positions and a general lack of
selling, Kaltbaum said. He listed among small caps he sees poised to break out P-Com Inc (PCMS),
a maker of millimeter wave radio systems for the worldwide telecommunications market, and
BENCHMARQ Microelectronics Corp (BMRQ). |
