Precisely along the lines of what I was thinking:
S&P 400 Midcap Index Poised for a Record
By Nick Olivari
NEW YORK (Reuters) - The Standard & Poor's 400 Midcap Index is poised to take out its old closing high as investors bet that smaller companies have better growth prospects than their large-cap counterparts.
And with analysts predicting that the S&P 500 companies may report an overall decline in profits this year while the Midcap's should still post growth, investors are confident that companies with a market capitalization of between $1 billion and $5 billion have more upside in the months ahead.
The S&P 400 Midcap Index (^MID - news) is up 5 percent this year, adding to its 16 percent gain in 2000, when it was among the best- performing of the major U.S. indexes. The S&P 500 Index (^SPX - news) fell 10 percent in 2000 and is down about 3 percent so far this year, according to Reuters data.
The S&P 400 rose 9.21 points to 539.99 at Tuesday's close, putting it within striking distance of its closing high of 548.60 set on Sept. 1, 2000.
``There is still a migration of cash from large-cap (stocks) down to mid-cap, as a lot of these stocks have better growth prospects,'' said Gerry Sandel, portfolio manager at Milwaukee-based Heartland Advisors Inc. which oversees $1.5 billion in mid- and large- cap equities. ``It's easier to grow a smaller business than a large one.''
SMALLER FIRMS TEND TO BE AGILE
Smaller companies typically have less bureaucracy to cut through in implementing decisions and can adapt their companies to changing circumstances faster than larger firms, money managers say.
That will help them benefit the most from the five half-point interest-rate cuts the Federal Reserve (news - web sites) has made this year, and the 25-basis-point rate cut expected at the Fed's next meeting in late June.
``Investors are moving away from the mega-cap companies because of the earnings disappointments coming from those larger stocks,'' said Eric Barden, portfolio manager at First Austin Capital Management Inc., which oversees $50 million in Austin, Texas. ``Mid-caps aren't bulletproof, but they have superior earnings growth prospects.''
Though analysts have reduced their 2001 aggregate earnings growth forecast for the S&P 400 companies to 3.1 percent from the 11 percent forecast on Jan. 1, they're expecting aggregate S&P 500 earnings to decline overall, according to Thomson Financial/First Call.
Analysts expect the large-cap index of 500 companies to report an aggregate earnings drop of 3.3 percent a share, down from the 8.9 percent growth expected for the S&P 500 index on Jan. 1.
Barden's picks include consumer finance company AmeriCredit Corp.(NYSE:ACF - news), apparel designer and retailer Tommy Hilfiger Corp. (NYSE:TOM - news), and natural gas producer Western Gas Resources Inc. (NYSE:WGR - news).
MID-CAP STOCKS COST LESS
And despite the S&P 500's 16 percent drop since its closing high of 1,527.46 on March 24, 2000, mid-cap stocks are still less expensive than the shares of large-cap companies. The S&P 400 index trades at 20.8 times 2001 expected earnings, according to Thomson Financial/First Call, compared with 24.3 times 2001 earnings for the S&P 500 index.
``The valuation differential still favors mid-caps and there is that interest in them -- a trend that started last year,'' said Heartland Advisors' Sandel.
To be sure, the S&P 400 came close to breaking its record closing high on May 21, when it closed at 547.06, less than 2 points from its September high, before slipping back to less than 515 nine days later.
But investors say it's only a matter of time before it breaks thought its old record.
``As much as they corrected in 2000, mid-caps did not get annihilated (as much as large caps) and people are putting more money in the things that are working,'' said Edward Hemmelgarn, chief investment officer at Shaker Investments, which oversees $1.75 billion.
Shaker's picks include specialty semiconductor maker Microchip Technology Inc.(NasdaqNM:MCHP - news) and retail industry software provider Retek Inc.(NasdaqNM:RETK - news).
Among the best-performing stocks in the index this year, according to Markethistory.com, a research firm, are: e-business security software maker Network Associates Inc. (NasdaqNM:NETA - news), up 259 percent; graphics semiconductor maker NVIDIA Corp.(NasdaqNM:NVDA - news), up 185 percent, and a maker of storage management software, Legato Systems Inc.(NasdaqNM:LGTO - news), up 107 percent.
To be sure, it was not all smooth sailing for mid-caps. Dragging the index down, also according to Markethistory.com, were: a maker of amplifiers for mobile phone base stations, Powerwave Technologies Inc. (NasdaqNM:PWAV - news), down 77 percent in 2001; Web design software maker Macromedia Inc.(NasdaqNM:MACR - news), down 60 percent, and drug maker Sepracor Inc.(NasdaqNM:SEPR - news), down 57 percent. |
