Small Cap earning prospects:
Posted in the Wall Street Journal Interactive edition dated 10/15/96
" Monday's millennium mark on the Dow was accompanied by a record for the
technology-laden Nasdaq Composite Index, which rose 8.09 to 1256.36. The
Russell 2000 index of small-cap stocks rose 1.11 to 349 leaving it 15.61
points below its high of 364.61. But these highs have largely stemmed
from larger, more-liquid stocks, while many small and microcap stocks
have been out of favor with many investors. As a result, "small caps
have got plenty of room to move, assuming the market is going to hold
together," predicts Jack Baker, head of trading at Furman Selz.
Small-cap stocks fell off many investors' radar screens after the summer
drubbing that left them fearful of illiquid small stocks and seeking
liquid blue-chip names. "When you see your holdings drop 30%, you don't
rush to get back in," says Rudi Van Den Eynde, portfolio manager for
Belgium-based bank Credit Communal de Belgique SA.
But many small-cap watchers predict that as those big names become more
and more overpriced in this overdrive bull market, investors will soon
begin seeking out the values among the less-liquid small-cap names.
"They will come back, because that is where the values are," says James
Melcher, president of Balestra Capital.
Indeed, the backdrop appears pretty strong for small caps. Mutual-fund
cash levels are strong, and investors have resumed pouring money into
funds. Although investors took out some cash in the most-recent three
days tracked by Mutual Fund Trim Tabs newsletter, they have been
ratcheting up their investments in U.S. equity funds for the past three
months from July's lows, says Charles Biderman, the newsletter's editor.............
U.S. dollar will likely benefit small companies, which derive less of
their revenue from overseas operations and won't suffer from unfavorable
currency translations. Finally, small caps are widely projected to turn
in stronger earnings growth than larger stocks, a real plus in an
environment in which investors ruthlessly batter stocks that fail to
produce ever-stronger earnings............
Still, the valuations of whole segments of the small-cap sector haven't
reinflated after this summer, so they have a shorter drop should they
disappoint investors this time around. "We are far removed from what was
going on in May and June," when investors drove the price-to-earnings
ratios on many stocks to speculative levels in their frenzy over small,
illiquid stocks, says Claudia Mott, director of small-cap research at
Prudential Securities.
And as it turns out, small caps appear to have much rosier prospects for
earnings growth than the big stocks that are leading the current charge.
Securities researchers at First Call Corp. note that analysts' earnings
projections for the companies in the Russell 2000 call for an average
third-quarter earnings growth of 7.4% over 1995's third quarter. Large
caps, meanwhile, are projected to add only 4.8%. For all of 1996,
Russell stocks are expected to have 11.3% earnings growth, compared to
8.3% for the S&P 500 stocks. And in 1997, the Russell stocks are
estimated by analysts to grow by 28.8% over this year, compared to 14.6%
for the S&P 500 stocks."
"We're talking about growth next year of almost twice as much, year over
year, than the big companies," says Charles Hill, director of research
at First Call. "Based on expectations, we're going to see some really
strong gains in the Russell compared to the big stocks."
While technology is expected to continue to set the pace of continuing
broad-market gains, there may not be as many hypergrowth stocks in the
small-cap arena as in the mid-cap and larger sectors. "You will see tech
stocks among the best performing stocks in any period" in the future,
predicts Roger McNamee, general partner with Integral Capital Partners. ..........
Unlike large-cap stocks, the best performers among small techs have come
from takeovers and initial public offerings, he says. But for those
looking for growth, he expects the opportunities to be in the areas of
networking; client-server companies; personal-computer software,
especially those related to Microsoft's Windows NT application;
occasionally specialty semiconductor companies; and the coming
generation of IPOs for 3D chip sets. |
