J. Bollinger's sites, large stocks vs small stocks...
Hi (~)^(~) & Terry!
Di
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John Bollinger:
..."Growth Versus Value by Size", 2/6/02
bollingerbands.com
..."Equity Trader--Stock Ideas"
equitytrader.com <---registration required
..."Trendex Buying and Risk Index for Very-Long-Term Institutional Investors (S&P 500)"
bollingerbands.com
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quote.bloomberg.com
>>> Fund Managers Move to Smaller Companies: Taking Stock (Update2)
By Robert Dieterich
New York, April 24 (Bloomberg) -- Donald Ross calls it ``a stealth bull market.''
While the Standard & Poor's 500 Index has declined about 4 percent this year, the benchmark's loss masks gains by most U.S. stocks, said Ross, who oversees $28 billion as chief investment officer for National City Investment Management Co. in Cleveland.
Two-thirds of the S&P 500 stocks have advanced since year- end, and investors have driven the S&P 600 Smallcap Index and the S&P 400 Midcap Index to record highs.
``The breadth of the market is phenomenally good,'' said Ross.
Money managers shifting out of the largest companies are betting on faster earnings growth at smaller ones. Investors also say finances of smaller companies are easier to understand, an increasingly important consideration after the collapse of Enron Corp.
The slump in large stocks runs counter to two years ago when gains by a few companies such as Cisco Systems Inc. and Microsoft Corp. drove indexes to records. Those two stocks alone have lost more than $550 billion in market value since the end of 1999.
``There's a pretty significant asset allocation shift going on, out of the mega-cap stocks'' said Robert Streed, manager of the $1 billion Northern Select Equity Fund. Streed has cut back on General Electric Co., which has fallen 18 percent this year, to buy Fastenal Co. and W.W. Grainger Inc., distributors of industrial supplies that have both touched all-time highs.
Biggest Companies' Declines
Throw out the 15 biggest stocks in the S&P 500, including International Business Machines Corp. with its 28 percent loss, and the benchmark is unchanged for the year.
Because the S&P 500 is capitalization-weighted, bigger companies exert greater effect on its performance. The 10 biggest stocks in the S&P 500 have dropped an average of 9 percent this year. Microsoft, the biggest software maker, has fallen 19 percent and American International Group Inc., the largest insurer, is off 14 percent.
Weighting each stock equally, the average return for all the stocks in the S&P 500 is 3.2 percent since the end of last year, according to Bloomberg data.
Among the 10 S&P 500 stocks that started the year with the smallest market capitalization, forest products company Louisiana- Pacific Corp. has rallied 31 percent and engineering firm McDermott International Inc. has added 36 percent.
The S&P smallcap index has returned 9.5 percent. The midcap benchmark added 6.9 percent. They reached record highs April 16. The 1,514 stock funds tracked by Bloomberg that focus on small- and medium-sized companies are up 2.4 percent this year, while 1,255 large-company mutual funds are down, on average, 4 percent.
`Big is Beautiful' No More
``It's no longer, `Big is beautiful,''' said Miles Seifert, chairman of Gray, Seifert & Co., which oversees $800 million. ``People can't wait to drop their large-cap stocks because they don't see the earnings potential.''
Seifert has loaded his Legg Mason Financial Services Fund with regional banks such as North Fork Bancorp and Texas Regional Bancshares, while avoiding larger rivals such as J.P. Morgan Chase & Co. The fund has climbed 9.6 percent this year.
Small stocks sell at a 44 percent discount to large stocks based on price-to-sales ratios, according Satya Pradhuman, Merrill Lynch & Co.'s small-cap strategist. While the discount was deeper two years ago, it is still wider than at the start of a small-cap bull market in the early 1990's.
This discrepancy persists because the gap in valuation created by ``the incredible run-up in large cap shares into 1999'' hasn't yet been unwound, Pradhuman said. The outperformance by small stocks could easily last another two years or more, he said.
Managers' Latitude
Managers who specialize in stocks of a certain size often have some latitude. A large-cap manager such as Streed can add smaller large-caps. He said that he keeps at least half of his funds invested in stocks that are bigger than $10 billion to meet the expectations of institutional clients.
Fastenal has a $3.1 billion market value, and Grainger has a capitalization of $5.1 billion, compared to $326 billion for GE, the largest market capitalization of any company.
A company must have a market capitalization of at least $4.5 billion to be considered for inclusion in the S&P 500, according to Standard & Poor's. A company between $500 million and $4.5 billion range qualifies as mid-cap, and less than $500 million is small cap, S&P said.
Winona, Minnesota-based Fastenal is currently expected to boost its profits by 20 percent per year over the next five years, while Lake Forest, Illinois-based Grainger's earnings growth rate is 12 percent, according to analyst forecasts tracked by Thomson Financial. Investors are no longer convinced GE can meet a forecast 16 percent growth rate, Streed said.
Still, Eugene Profit, who oversees $85 million as president of Profit Investment Management in Silver Spring, Maryland, says piling into small-cap stocks now means most of the potential for gains has gone.
``Perhaps everybody flooding into small and mid-cap stocks may be joining the party late,'' he says. <<< |
