By Jeff Mamera
NEW YORK, May 5 (Reuters) - The best bet now among small-capitalization stocks might be companies whose shares are
already on the rise. Analysts say investors buying such stocks, even 20 percent off their lows, would have both money flow and momentum behind them. They also might be able to reap profits faster than by
bottom-fishing out-of-favor stocks and holding them indefinitely.
"If the shares started to act well, that's when a small-cap would light my fire," said Al Goldman, head technical analyst at A.G. Edwards & Sons. "If you see something move up 10 percent you ought to have a reason not to buy it."
Other market experts agreed, including those known for identifying inherent value in small-cap companies, rather than jumping on stock-momentum plays. "I'm always mindful of valuation, but I just don't think that's the first thing people are looking at right now," said Claudia Mott, director of small-cap research at Prudential Securities. Mott called the current small-cap environment
"frustrating." Despite strong earnings growth and attractive
valuations, big money -- much of it foreign -- is sticking with
high-growth blue chips, she said.
So far this year, for example, the large-cap S&P 500 Index and Dow Jones Industrial Average <.DJI> were up about 16 percent each, but the Russell 2000 Index <.RUT> of small-cap stocks was only up about 11 percent. Mott pointed to a recent finding by Morningstar, the mutual-fund data company, that while large-cap growth fund
managers had 12.4 percent of their portfolios' assets in small-caps in July 1996 by February 1998, that portion had slipped to only 2.1 percent. Based on data like this, many analysts call large-cap stocks overvalued, and say small-caps are poised to benefit from big-money's flight in a market downturn. Some argue small-caps are already showing signs of benefiting from the over-valuation of large caps. "Larger cap stocks have a valuation problem and there is now a shifting underway to smaller stocks on an individual basis," said Peter Cardillo, director of research at Westfalia Investments.
Analysts said, however, that such a shift will be increasingly determined by traditional technical-analysis decisions -- such as on signposts like money flow -- for individual stocks.
Gary Kaltbaum, a technical analyst at J.W. Charles, said he
has identified "a couple hundred" small-cap stocks gathering market momentum and ready to break out for big gains.
Among them are staffing companies Western Staff Services Inc. <WSTF.O> and On Assignment Inc. <ASGN.O>, as well as department store Ames Department Stores Inc. <AMES.O>.
Western Staffing shares closed at 29 Monday, while On Assignment closed at 34 and Ames at 25-1/16.
Other stock-pickers said network storage software maker Legato Systems Inc <LGTO.O> and applications software outsource company Information Management Resources Inc. <IMRS.O> are potential standouts. Legato closed at 31-6/16, while Information Management
closed at 29.
REUTERS
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