The Russell 13 -- Barron's Article (Feb. 21, 2000)
By Rhonda Brammer
Extra! Extra! Read all about it! And, as a matter of fact,
you can -- in everything from U.S. News & World Report to
the New York Times. Small stocks are all the rage. See the
Russell 2000 roar ahead, leaving big-cap indexes in the
dust. Play the numbers, join the fun: The S&P is down 8%
this year. The Dow is off 11%. But the Russell 2000 is up a
blazing 8%.
So, why aren't we out there whooping it up for the little
guys finally getting their due?
Well, as we've had occasion to note more than once in
recent months, the bulk of the fuel for the Russell 2000 is
being supplied by a handful of not-so-small stocks that
have enjoyed spectacular runs, despite thin or nonexistent
fundamentals -- like earnings, for example.
But let's back up a moment and point out a couple of
reasons why, in any case, the Russell 2000 is hardly a
perfect proxy for small-caps.
Its components are selected each June in a pretty
straightforward way. The Frank Russell Co. takes the 3,000
largest publicly-traded U.S. equities and lops off the
biggest 1,000. Those issues constitute the Russell 1000,
and what's left makes up the Russell 2000.
That means -- since there are around 7,000 publicly traded
companies -- that more than half of all stocks are smaller
than those included in the index. The Russell 2000 also
increasingly reflects the behavior of larger stocks because
it's market-weighted.
Last month, we remarked on the narrowness of this small-cap
rally, with more stocks in the index declining than
advancing last year. And according to quant analyst Eddie
Cheung at Prudential Securities, that sorry trend is
continuing this year, with 56% of the stocks in the Russell
2000 losing ground.
We've also suggested that the awesome rise of the best-
performing issues -- one in seven Russell 2000 stocks more
than doubled in '99 -- was masking the dismal performance
of many others.
But until perusing more data, we had absolutely no idea
that so modest a handful of Russell constituents packed
such a mighty wallop.
From June 30 (when the index was last revised) through
February 11, the Russell 2000 appreciated 17% (exclusive of
dividends), versus 1% for the S&P 500. However -- and
here's the amazing thing -- of that 17% gain, a mere 13
companies contributed over half, a whopping 51% or so. For
this intelligence, we're indebted to the folks at Ned Davis
Research, source of the fascinating pie chart on this page.
Since June, again according to Ned Davis estimates, the top
20 contributors in the Russell 2000 have chipped in 63% of
the index's upswing. And this year, that elitist trend has
only intensified. Through February 11, the top 20 names had
generated a spectacular 70% of the Russell's advance.
(In making their estimates, Ned Davis et al. use total
shares outstanding, including insider blocks, and exclude
the contribution of any firm that drops out of the index
via, say, a merger or bankruptcy.)
The accompanying table, which provides a telling snapshot
of the aforementioned 13 power stocks responsible for over
half the increase in the index, plainly underscores the
fact that, in terms of cap, these companies are anything
but small. Their market values range from $5 billion to $14
billion. The table also points up that an ability to earn
profits is not prominent among their corporate virtues.
Among five biotech firms on the roster, the biggest spark
plugs powering the Russell have been PE-Celera Genomics, a
company that over the past 12 months lost $77 million on
sales of $24 million, and Millennium Pharmaceutical, which
lost $352 million on sales of $184 million. Also firmly in
the red and on the list: Human Genome Sciences, Affymetrix
and Incyte Pharmaceutical.
Software and Internet shares, communications and
semiconductor-related issues are represented in the
winner's circle. All told, of the 13 companies, eight are
losing money, while the earnings multiples of those in the
black range from 73 to 1,010.
In contrast to the favored issues featured in the table
that boast appreciation of 10-, 15-, even 20-fold, the
average small stock has gone nowhere. Since the beginning
of 1999, of some 6,000-plus stocks on an exchange or
Nasdaq, 53.5% have declined. Indeed, according to Ned Davis
Research, the median stock in that broad universe has
fallen 4%.
The brisk rise of the Russell 2000 -- since January 1999,
it's up 32%, 2 1/2 times more than the S&P -- owes
everything to the momentum mania that has gripped Wall
Street. The gap between the performance of growth and value
is yawningly wide. In the past 13-plus months, the Russell
2000 growth index has soared 67%, while the Russell 2000
value index has declined 3%.
None of this is to deny, of course, that lots and lots of
small-caps are incredibly cheap. Quite the opposite: As a
group, they are selling at an astonishing 55% discount to
big-caps, according to the Minneapolis-based Leuthold
Group, which ranked the largest 3,000 U.S. equities by
market value.
The Leuthold people discovered that the largest 100
companies are selling at a multiple of 32.1, while the
bottom 2000 are going for 14.6.
By way of comparison, the current 55% discount is nearly
twice the 25%-30% markdown that prevailed in late 1990,
just before small stocks took off. And though it's hard to
remember, there have been times, like mid-'83, when small
stocks actually commanded a nice premium.
Yet no matter how cheap many small caps are, we have yet to
see compelling signs that investors give two hoots. Why
bother with value stocks when shares of companies like PE-
Celera, VerticalNet and Incyte rocket from the teens to the
200s? Value will out, all right -- but more than likely,
only after the current speculative fever breaks.
Figure:
Small-caps appear to be outperforming thanks to a tiny
roster of rocketers. The top 13 contirbutors chipped in
51.4% of the gain in the Russell 2000 since June 30.
(SourceL Ned Davis Research)
Zeroing In On The Torrid Pacesetters
Symbol Company Recent Price* 52-Week Range** Market Value (billions) Trailing 12 Mos. Sales (millions) Price/Sales Trailing 12 Mos. Net (millions) P/E*** Industry
CRA PE-Celera Genomics 253 270-14 $6.6 $24 274 -$77 NM Biotech
MSTR Micro Strategy 168 169-7 13.1 205 64 13 1,010 Software
BVSN BroadVision 172 193-12 13.9 116 120 19 731 Software
MLNM Millennium Pharm. 213 238-28 7.9 184 43 -352 NM Biotech
HGSI Human Genome Sciences 150 166-14 6.9 25 277 -42 NM Biotech
VERT VerticalNet 213 290-17 7.5 21 357 -54 NM Internet commerce
OMPT Omnipoint 129 134-9 7.0 323 22 -696 NM Communications
AFFX Affymetrix 260 297-31 6.7 97 69 -23 NM Biotech
MERQ Mercury Interactive 79 85-10 6.1 188 32 36 168 Software testing
INCY Incyte Pharm. 183 200-16 5.2 157 33 -27 NM Biotech
AMKR Amkor Tech. 45 46-7 5.9 1,910 3 77 73 Semiconductors
AERL Aerial Communications 66 69-5 6.2 226 28 -169 NM Communications
LRCX Lam Research 140 150-26 5.6 894 6 58 97 Semi equipment
*Price on February 11, rounded to nearest whole dollar.
**Rounded
***Market value divided by net income Source: Market Guide
**************************
AMKR is ranked number one in the four categories: sales,
price/sales ratio, Net, and PE ratio.
AMKR is the top value play. |
