Diamonds in the rough
Westphalia's Cardillo believes in small caps
By Stacey Tisdale, CBS MarketWatch
Last Update: 11:55 AM ET Apr 11, 1999 NewsWatch
Thom Calandra's StockWatch
NEW YORK (CBS.MW) -- Talk about not living up to the hype, small-cap stocks have been expected to come on strong for the past three years. Still waiting!
Though the sector hasn't participated in the recent record run on Wall Street, it has its proponents. Peter Cardillo, chief investment strategist at Westfalia Investments, spoke with CBS MarketWatch.com about how small caps could make an impression this spring as the bull rally in the big names like IBM and Merck hits a ceiling.
What do you think of the overall market?
Cardillo: I think the market is probably going to trend higher here, I'm looking for the market to reach probably about 10,300, 10,500 on the Dow ($dj: news, msgs) before we see a pullback, then head to 11,000 by the end of the year. I believe the market will pull back in the latter part of April, beginning of May, I think we could be headed for a substantial correction of about 10 to 15 percent, and I think that will occur in the large-cap stocks, particularly in the market leaders like IBM (ibm: news, msgs) and Merck (mrk: news, msgs). I do believe there's a lot of play in the small-cap stocks, a forgotten group. I think these troops will catch up with the generals somewhere down the line here. I think when the large-cap stocks correct, we'll see investors turn to some of the little companies.
Small-cap stocks have consistently not lived up to their expectations, why do you think that will change?
Cardillo: I don't think that they have not lived up to their expectations, they're a lot of small cap stocks that are reporting good earnings, but they're just not in play. This market that we've had for the past several years has been very narrow as you know, and has basically been in the large cap stocks, and as a result of that, investors are just ignoring these small companies, and I think one of the reasons for that is because the mutual funds and the index funds have continuously concentrated on the big names, and forgotten some of the little ones. But someday that's going to change, and I think that's going to change very soon.
Why?
Cardillo: I think the large cap stocks are over-valued, and the valuation problem is going to get even greater for them. As the market corrects, people are not going to pull their money out of the stock market. I believe the long-term bull market will continue over the next two to three years. We're not going to see a derailment of this bull market. As the larger-cap stocks correct, I think investors will turn to the smaller-cap stocks. See MicroCap Moment.
What are some of your favorite smaller cap stocks?
Cardillo: In the Internet play I like Alpha Microsystems (almi: news, msgs), I like National Technical Corp, I like Matthews Studios (matt: news, msgs), another Internet play, I also like Palatin Technologies (pltn: news, msgs), a biotech company over the counter. I'm long quite heavily in most of these stocks.
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