SMALL CAP INVESTORS SMELL A RALLY
By David Callaway, CBS MarketWatch
Last Update: 11:27 AM ET Apr 17, 1999
Socks to Watch
SAN FRANCISCO (CBS.MW) -- Nobody's saying it too loudly, because
they don't want to jinx it. But some fund managers smell a rally in the
long-beleaguered market for small-cap stocks.
After five years of watching the big-cap, blue-chip
stocks such as Gillette (g: news, msgs) and IBM
(ibm: news, msgs) dominate the market, and
following several false starts, small-cap stocks
posted one of their strongest performances in
months last week, with the Russell 2000 index rising
3.9 percent to its highest level since early February.
"The long-awaited small-cap rally has started,'' said
Stephen Janachowski of Brouwer & Janachowski, a
Tiburon, Calif.-based fund consultant. "All the
classic signs of the end of a long bear market are
there.''
Janachowski pointed to a surge in redemptions of small-cap funds in the
last few months, which he said indicates that investors -- and even some
small-cap fund managers -- grew so depressed about the performance of
small stocks in the last few years that the market may finally have bottomed
out.
The average small-cap fund was down 3.25 percent this year through April
14 and down more than 14 percent in the last 12 months, according to
Morningstar Inc., the Chicago-based fund researcher. These performances
came as the Dow Jones Industrial Average soared ever higher toward (and
then above) 10,000 and as the Standard & Poor's 500 index notched a 27
percent gain last year.
Some have managed to claw their way out of the red, however, by investing
in either middle-cap shares or small technology companies that could take
advantage of the Internet craze on Wall Street.
Among those are the Van Wagoner Post-Venture Fund (VWPVX), up 73
percent this year through April 14; the Van Wagoner Micro-Cap Fund
(VWMCX), up 48 percent; and the Robertson Stephens Emerging Growth
Fund A shares (RSEGX), up 40 percent, according to Morningstar.
About time
Raiford Garrabrant, an analyst with Van Wagoner
who focuses on the Micro-Cap Fund, said it's been
boosted by emerging-growth stocks such as
Concentric Networks (cncx: news, msgs), TeleBank
Financial (tbfc: news, msgs) and SDL
Communications (sdli: news, msgs).
"Over the last six months, we've seen the market at
least warm up on these types of stocks,'' said
Garrabrant. "As much as small-cap stocks have
underperformed over the past few years, it's
certainly their turn. Whether that was this week is
hard to tell.''
Garrabrant said that a few times since 1994, when
the Russell 2000 last outperformed the S&P 500
stock index, small stocks have had mini-rallies that
have lasted a few weeks or even up to a couple of
months. This time, though, he says the difference in
values between stocks of small and large companies
has grown so wide that it almost certainly has to
come down soon.
The only thing that could stop it: a big decline in the
entire market, which would take all stocks down with it, he said.
"If the market as a whole goes down from here, I don't expect small caps to
outperform,'' Garrabrant said. "Looking out over the next 12 months, though,
I would expect small caps to do better.''
David Callaway is managing editor for news at CBS MarketWatch.
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