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Technology Stocks : Small Cap Stocks -- a huge future ahead? -- Ignore unavailable to you. Want to Upgrade?

To: diddlysquatz who wrote (3)	7/2/1998 9:04:00 AM
From: Brad Rogers	Respond to of 18

Analysts say small-caps are poised for recovery Here are the catalysts that could bring it about Second in a two-part special report (see part one) By Michael Brush moneydaily.com In a market where a lot of fund managers don't want to mess with any stocks they can't exit quickly in case there is a market crisis, small-cap stocks are suffering. In fact, because of their relative illiquidity, small-caps are at their lowest valuation levels since 1990. Does that mean they are a bargain right now? "I think it is worth noting that these valuation levels have always been followed by a strong rally for the group," says L. Keith Mullins, a small-cap stock analyst with Salomon Smith Barney. "The stocks are cheap, they've got earnings power, which is going to be of increasing value, and the sentiment is low. Historically, when these three conditions exist, there is strong performance. The problem is identifying the catalyst." No one knows, of course, if or when small-cap stocks will rebound. But Mullins and other strategists say you can expect any of the following events to serve as the needed catalyst to bring them back. * Worries about a Fed rate hike ease. Small-cap stocks typically lag when the markets think the Fed might raise interest rates. Once the economic data start to show that a Fed hike is not around the corner, money should flow back into the less liquid stocks, says Mullins. * Big-cap earnings decline. Analysts have already cut their earnings estimates for the big-cap stocks to the low single digits for the first half of the year. Yet expectations for the second half still remain in double digits. As estimates are slashed for the latter half of the year -- which is likely -- the superior earnings growth of the small-cap stocks will start to look a lot more attractive. "What we really need is for the big stocks to get their butts kicked," says Louis Navellier, of Navellier & Associates, which runs some small- and mid-cap funds. "But we don't want them to be massacred. Because if they go down too much, we will get murdered." Mullins points out that last year about this time, S&P 500 companies' earnings growth slowed down and investors became less worried about the Fed raising rates. These two events helped small-cap stocks take off -- because they made investors more willing to take on less liquid stocks. * Worries about Asia decline. When doubts are circulating about the health of the world financial system, this increases the "liquidity premium," or how much more investors are willing to pay for securities they can get out of in a hurry. When those doubts go away, the price investors will pay for liquidity declines, giving the less liquid small-cap stocks a boost. * Inflation returns. Yes, this might make the Fed raise rates, which would be bad for small-cap stocks. But it would help them on another front. One problem for small-cap stocks right now is that they tend to do better when there is inflation. They had a great decade in the 1970s, but have underperformed since inflation peaked in 1980. Why? Because when prices are going up, small companies can take advantage of one of their best weapons -- the ability to offer better prices than bigger companies. But when the name of the game in business is price cutting to gain market share, like now, the larger companies tend to have an edge. "When the big guys start playing the small-cap game and cutting prices, they just dominate," notes James Paulsen, the chief investment officer at Norwest Investment Management. Small-cap stocks would benefit from sustained inflationary pressure that is not quite high enough to bring the Fed back into action. No one knows, of course, whether these events or any others will bring small-cap stocks back. But one thing is clear. If you do believe small-caps are about to regain their vigor, now's the time to buy, says Mullins. Because once they catch fire, they move quickly and it is almost impossible to get them on the way up. "It's like a big rubber band waiting to snap," says Navellier.

To: diddlysquatz who wrote (3)	7/2/1998 9:14:00 AM
From: Brad Rogers	Respond to of 18

Why small-caps are still suffering The answer, in many cases, is liquidity - but analysts say the situation will change soon Part one of a two-part special report By Michael Brush moneydaily.com Small-cap stocks rallied Thursday as the Russell 2000 Index tacked on better than a half a percent to close at 451.74. But by any measure, these small fry are still in the dumps. Indeed, investors have been hammering small-cap stocks so badly in the past month that they're at levels not seen since the bleak days of last two major market corrections in 1990 and 1987, if you measure by trailing price-earnings ratios. As of Tuesday, the average NASDAQ stock was 30% off its twelve-month high. "There is a lot of blood in the market," notes John Manley, the chief equity strategist at Salomon Smith Barney. All this seems odd, if you consider that small-cap stocks -- typically defined as those with a market cap of $1 billion or less -- offer decidedly stronger earnings growth than their larger counterparts. "Small-cap stocks have their best growth to price-earnings ratio since 1990, while big-cap stocks are grossly overvalued," says Louis Navellier of Navellier & Associates, which runs several small-cap funds. Need some numbers? Consider these. The Russell 2000, a common small-cap index, is priced at about 19 times forward earnings -- earnings that are expected to grow about 20.6% in the next twelve months, points out Navellier. The S&P 500, meanwhile, is trading at 22 times forward earnings, even though those earnings are only expected to grow by a much lower 10.2% over the next year. The faster growth of smaller companies is not unusual. They typically grow more quickly, in part because they are starting from a smaller base. Sell two units instead of one, and you have 100% growth. And right now, they have the added advantage of less foreign exposure, meaning they probably won't be hurt as much by Asia or the strong dollar. Despite these advantages of faster growth, valuations near historic lows, and less foreign exposure, investors these days still look at small-cap stocks as if they were real estate next to Chernobyl, says L. Keith Mullins, a small-cap stock analyst at Salomon Smith Barney. Cheap, yes. But no one wants it. Why are investors paying so much more for large-caps when they're getting less? It boils down to the deeper liquidity of larger stocks -- meaning that fund mangers can get in or out of them without moving prices as much. "The last place you want to be, in a world where there could be a crisis at any moment is in an illiquid, small company," says James Paulsen, the chief investment officer at Norwest Investment Management. In the last decade, seasoned investors have seen crises sparked by Asia, Mexico, derivatives, U.S. banks and war in the Middle East -- and they are wary another problem could strike soon. They are also on tenterhooks because of worries about the Fed raising rates or corporate earnings falling short. Investors know that getting out of the smaller stocks if another problem breaks out means having to take a big loss -- since their liquidity is so low. A little selling pressure drives their prices down dramatically. Indeed, Paulsen thinks that if you adjust the higher growth of small-cap stocks for their volatility, often used as a proxy for risk, then the larger companies have a better risk-adjusted growth rates in the eyes of many investors. Another reason small-cap stocks are underperforming, points out Prudential Securities small-cap stock analyst Claudia Mott, is that a lot of the recent capital inflow to U.S. equities comes from foreign investors, who tend to go for the big-cap names. What's more, individual investors have been selling small-cap funds in favor of bigger-cap funds. "This is unfortunate," says Mott. "Because they are all going to be cleared out of their small-cap funds right as those funds are about to rebound. It is rare that you see this kind of a spread between small- and large-cap profits." "The average investor is just chasing last year's performance and buying the index funds," agrees Navellier. "But every major strategist is saying: 'Small, small, small.' You just need something to spark them. I am waiting and very patient." For a review of some potential catalysts that might rekindle small-cap stocks and give Navellier some company in the small-cap end of the market, see tomorrow's Money Daily. Send your comments to Michael Brush ÿÿÿBusiness Headlines Fortune Business Report Time Daily MarketwatchClosing numbers for Thursday, June 4, 1998 (Click for latest figures) Dow Jones Industrial Average: ÿÿÿup 66.76 (0.76%) to 8870.56 Money 30 Index: ÿÿÿup 33.16 (2.08%) to 1630.49 New York Stock Exchange ÿÿÿAdvances: 1623 ÿÿÿDeclines: 1243 ÿÿÿVolume: 574 million shares NASDAQ Composite: ÿÿÿup 27.64 (1.59%) to 1769.95 S&P 500 Index: ÿÿÿup 12.10 (1.12%) to 1094.83 Russell 2000: ÿÿÿup 2.58 (0.57%) to 451.74 30-year Treasury bond yield: ÿÿÿup 3 basis points to 5.81% London gold (afternoon fix): ÿÿÿup $0.40 to $292.80 Search News search: Find up-to-the-minute wire stories and press releases on any company. ToolsReal Time Quotes: Get up to the second pricing information on any stock. Hyperquotes: Prices, graphs, fundamentals and more for any stock or fund Earnings reports: See the latest earnings report for the company of your choice. 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