Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

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

To: MJR who wrote (6)	7/3/1998 7:38:00 PM
From: Brad Rogers	Respond to of 18

On CNBC today (friday) there was a replay of a "Morningstar" mutual fund manager conference. Excellent. The theme, heard over and over again, was that small caps were the at the cheapest valuation in 7-10 years. One guy said he could easily construct a portfolio with a 100% forward EPS growth rate and 15 pe (perhaps a stretch). But over and over again, you did hear them say that small caps were selling at PE's half of their growth rates, and that big blue chips were selling at PE's twice their growth rates. At some point, something has to correct.

To: MJR who wrote (6)	7/15/1998 2:43:00 PM
From: Brad Rogers	Respond to of 18

TALKING POINT-Little guys lag in Wall Street rally By Marjorie Olster NEW YORK, July 15 (Reuters) - The narrow focus of Wall Street's blazing summer rally may be setting up a sharp decline in coming months unless smaller stocks start to chip in. While the three main stock market gauges -- the Dow Jones Industrial Average, the Nasdaq Composite and the S&P 500 -- catapulted in tandem to new records on Tuesday, small and mid-size shares remained well off their bests. In contrast, the Russell 2000 index of smaller stocks and the S&P 400 mid-cap index stayed well below their all-time highs and have trailed large cap indices significantly this year. ''The risk is that the blue chips are at new highs but the broader base is lagging and it's an unhealthy kind of divergence,'' said Richard McCabe, chief technical analyst at Merrill Lynch. As of Tuesday's close, the Dow industrials were up about 7 percent from a recent low on June 15 and have risen about 17 percent since the year began. The Nasdaq composite was up 15 percent from its June 15 low and 25 percent year to date while the S&P 500 gained more than 9 percent from the June lows and 21 percent so far in 1998. In contrast, the Russell 2000 index of smaller stocks was up less than 6 percent since June, only 5 percent since January and still stood 7 percent below its April 22 record high. The S&P400 mid-cap index is 3 percent shy of an all-time high. Market watchers caution the trend is unhealthy and if it continued, could serve as the prelude to a big setback. ''The theory is when the generals advance, you want to see the troops following,'' said Joseph Barthel, chief investment strategist at Fahnestock & Co. ''When you simply have the generals advancing, in the past other markets have ended poorly,'' Barthel said. ''Eventually what happens is the market usually suffers a sizable decline to bring everything back in order.'' Analysts like Barthel note that market breadth, a closely watched barometer of a rally's strength, has failed to match the record-breaking streak of leading stocks. Since the June 15 lows, the Big Board has posted about 4,000 net advances. But that is still 10,000 net advances below its most recent peak on April 3, Barthel said. Some disputed the significance of the current divergence. Jonathan Dodd, technical analyst at Morgan Stanley Dean Witter, said market breadth and smaller stocks often lag the market leaders on a move up and he didn't see the current picture as negative. ''You don't have to have things going together at the same rate at the same time,'' he said. ''This would have to go on for months more.'' Despite the ''unhealthy'' nature of the divergence, McCabe and others said the current rally has probably not peaked yet and smaller stocks may still catch up, restoring the kind of market harmony that puts investors' minds at ease. For one thing, interest rates remain low and may go lower still, providing a key buttress for stock prices. ''As the underlying environment remains as good as it is, which is a neutral or accomodative Fed and stable or declining rates, you have a better than average chance of seeing these kinds of divergences resolve themselves to the upside,'' said Charles White, managing director at Avatar Associates. Bill Meehan, chief market analyst at Cantor Fitzgerald, said the narrow focus of investors will hinder further gains. ''It will be difficult to power the market higher with fewer and fewer stocks doing it,'' he said. Analysts noted small cap and mid-cap stocks, while offering good value, have lacked a catalyst to drive them higher. One possibility would be falling short-term interest rates. Unlike larger companies which can issue debt in the corporate bond market, smaller cap companies often rely on banks to borrow at rates linked to official short-term rates. And while long term interest rates have come down significantly this year, short-term rates have been locked in a narrow range. ------------------------------------------------------------------------ Related News Categories: US Market News

To: MJR who wrote (6)	10/29/1998 8:39:00 AM
From: Brad Rogers	Respond to of 18

a good piece on small cap recovery. NEW YORK (CBS.MW) -- Although smaller stocks cooled Wednesday, they've still wildly outpaced their bigger brothers the past two weeks. One money manager says the once-moribund sector will continue showing signs of life over the next month. News "My gut feeling is that this is the beginning of an outperformance of small-cap stocks," said Rob Lutts, the chief executive at Salem, Mass.- based Cabot Money Management. Since bottoming out on Oct. 8, the Russell 2000 has jumped about 19 percent, but edged down 0.87 to 360.63 Wednesday afternoon. The Russell 2000 Index, which serves as a barometer for smaller companies, had eight consecutive winning sessions until being broken on Tuesday. Still, the Russell 2000 is down about 15 percent since the beginning of 1998, compared to a 10 percent gain for the S & P 500 "I think we'll have another 5 to 10 percent move (higher) in small caps just to get to a more reasonable relative valuation," Lutts said. "The small caps have been just trashed and still have some catch up to do." Lutts said the rally started after the Federal Reserve cut interest rates earlier this month, and money managers "concluded, hands-down, that there are huge opportunities (in small caps)." "The trick is now to find those companies that offer really great growth prospects that are now reasonably priced, and there are a lot of them out there," Lutts added.

To: MJR who wrote (6)	10/30/1998 8:32:00 AM
From: Brad Rogers	Read Replies (1) \| Respond to of 18

TACOMA, Wash. (CBS.MW) -- Investors have scorned small-capitalization stocks for the better part of the 90s. But lately there are signs that smaller companies may be regaining favor with money managers. gNews "In the very recent past there seems to have been a jump in enthusiasm," about small cap-stocks, says Carl Wittnebert, research director at California-based Trim Tabs Investment Research, which tracks money flows. "Starting in mid-October, there's been a noticeable increase," he says. Net asset values in the small-cap funds monitored by Trim Tabs have increased by 18 percent between October 9th and October 26th, Wittnebert said. For the past eight years, investors have stayed away from smaller companies, instead putting money into the stocks of larger companies, which they perceive to be more liquid, of higher quality and less risky, says Karen Vesely, an analyst at, an investment and consulting firm. The Tacoma, Washington-based firm, which manages about $42 billion in assets, is known for its family of market indexes, including the index of small-cap stocks, which is widely used as a performance benchmark. Market capitalization, which is the price of the stock times the number of shares outstanding, is a way of measuring a company's size and market value. Big is better? For the past several years, investors have favored larger companies believing that "even if the economy tanks, these stocks will go on forever," Vesely says. "Small-caps seemed to hit bottom on October 8. Since then we've seen a rebound of almost 20 percent in the Russell 2000," she says. "The question is, is this a full recovery or just a strong bounce?" Change in sentiment? Vesely points to another sign that things may be looking up for smaller stocks. Valuation spreads -- or the difference in the price-to-earnings ratios of large and small stocks -- are at their widest in 8 years, she says. In the third quarter, the price-to-earnings ratio of the Russell 2000 was 20.6. For the Russell 1000, which is a large-cap index, it was 24.1.What that number shows is that large-cap stocks are more expensive -- when historically, the reverse has been true. "The last time the valuation spread was so wide was in 1991. After that, we saw a recovery in small-caps. They started performing better than or in-line with large caps," the analyst says. Why the change in sentiment? "Investors may realize that though large caps as seen as less risky, small caps have almost no exposure to Asia, Vesely says. "Also, if they think of stocks moving in cycles, it makes more sense to get in when those stocks out of favor," so an investor is in a position to take advantage of an upswing. Still, Trim Tabs' Wittnebert says investors will have to wait a bit longer to see if a small-cap rebound has begun in earnest. "It's too premature to tell whether [October's jump] represents a permanent change in people's attitudes toward small-caps.

To: MJR who wrote (6)	2/2/1999 7:36:00 PM
From: Brad Rogers	Respond to of 18

From O'Shaunnessy funds: January 1, 1999 The philosopher Soren Kierkegaard said that "life can only be understood backwards; but it must be lived forwards." The same is true of the stock market. Today's market events or conditions often blind us to the bigger picture, preventing us from focusing our long-term investment goals. So let's take a look backwards, review what's happened in the market recently, compare it to the past, and see what history can teach us as we move forward. Where We've Been Since 1994, the stock market has been extraordinarily biased toward big-cap growth stocks. Virtually all of the returns generated by the S&P 500 this year are due to the stunning performance of just a handful of big growth stocks--the top 10 performers in the index accounted for 56% of the S&P 500's returns through the end of November. If your large-cap stock wasn't a Microsoft, Pfizer or Lucent, chances are it was flat for the year. As for stocks outside the big-cap growth arena, this year's market has been a virtual wasteland. Value and small-cap stocks have suffered terribly. According to the December 27, 1998 New York Times, "If it seems that your value stocks are spinning their wheels, it probably isn't a reflection of your stock-picking prowess. Last month, the difference in 12-month performance between the S&P/Barra Value and S&P/Barra Growth Indexes was the largest in 11 years." In other words, value stocks really stunk in 1998. The December 28, 1998 Barron's headline on the Dogs of the Dow Strategy (a large-cap value component of our Dogs of the Market Fund) was even less encouraging: "Bound for the Pound? Dogs of the Dow lag sadly behind for the third straight year." Yes, after just a few years of underperformance, the folks at Barron's are ready to screw the pooch. So what if the Strategy has been a stellar performer since 1928. It's always: What have you done for me lately?! And if you want to see really bad, all you have to do is take a look at small-cap stocks. Those laggard big-cap value strategies look positively wonderful when compared to the plight of small-cap stocks. The small-cap Russell is down more than 7% as of December 24, 1998. And even that figure masks the true shellacking the average small stock has endured--25% of the stocks in the Russell are down more than 50% from their highs this year! And if you look at our O'Shaughnessy Small-Cap Universe (7,964 stocks with market-caps below $1 billion), you'll see a median loss of 15.07% between January 1, 1998 and November 30, 1998. (In contrast, our small-cap Cornerstone Growth Fund was flat through the end of November.) With this sad state of affairs in the value and small cap categories, some wonderful opportunities have been created. The PE differential between the Russell and the S&P 500 is at an historic low of .78 (it usually trades at a much higher premium of 1.1 or more). This means small-cap stocks are extremely cheap compared to large-cap growth stocks. -------------------------------------------------------------------------------- "Don't worry about people stealing your ideas. If the ideas are any good, you'll have to ram them down people's throats." ~ Howard Aitken ~ -------------------------------------------------------------------------------- It's been a long and lonely draught for small stocks. Even though history shows that small capitalization stocks outperform large stocks over almost all long periods of time (someone investing $10,000 at the start of 1929 would have $18.5 million more if he simply held small stocks rather than the S&P 500) there are some long periods where the patience of Job is required. Luckily, I believe we're near the end of big-cap growth's out-sized performance and a renaissance for value and small-cap strategies. Why? Look at history. Where We're Going I believe this week marks a historical opportunity for small stock investors. For the first time since the mid-1960s, large stocks will outperform small stocks over the 20-year period ending December 31, 1998. So, rather than be distraught about the market, I find myself delighted! For if history is a good guide, we can expect small cap stocks to embark on a multi year rally that will send them soaring above their bigger, better known brethren that currently dominate the S&P 500. What's So Special About Big Stocks? Big stocks have been clobbering small stocks for years now, and some investment advisors are actually recommending stocks just because they are big! But big stocks aren't really such a big deal. In What Works on Wall Street, I showed that the S&P 500's returns over the last 45 years could be virtually duplicated by simply buying stocks with greater than average market capitalization's (i.e., large stocks). Had you invested $10,000 in the 25 largest stocks by market cap in 1951, your investment would be worth $2.2 million on December 20th, 1998. The same investment in the S&P 500 would be worth $2.4 million, a small difference, indeed. (Remember that $10,000 invested in a small-stock strategy like Cornerstone Growth turns $10,000 into $24.7 million over the same period.) -------------------------------------------------------------------------------- "Whenever you have a group of people thinking the same thing at the same time, you have one of the hardest emotional causes in the world to control." ~ J. M. Barker ~ -------------------------------------------------------------------------------- The same thing has happened over the last five years. Had you invested $10,000 in the 25 largest-cap stocks on December 31, 1993, your portfolio would have grown to $30,609 by December 20th, 1998, a compound return of 25.07%. At the same time, the S&P 500 had a 23.16% compound return--another pretty small difference, especially when you consider that the first portfolio contains 475 fewer stocks than the second! What Have You Done For Me Lately? Unfortunately, most investors focus on the trees rather than the forest. They look at what has performed best recently--and expect the trend to continue. Rarely do they study the past--and look what happened after big stocks have had their run. And that is the strategic investor's crucial advantage. By looking at history, we know that the last time large stocks outperformed small stocks for a 20-year period, the small fry went on to dominate for years. Since 1928, there were only four 20-year periods (out of a possible 51) when small stocks lagged large stocks. Someone understanding this important historic relationship between small and large stocks would see that small stocks are a great opportunity right now. -------------------------------------------------------------------------------- "The less a man knows about the past and the present the more insecure must be his judgment of the future." ~ Sigmund Freud ~ -------------------------------------------------------------------------------- Let's say you know that, over 20-year periods, small stocks almost never do worse than large stocks. And let's say you use such an occurrence as a signal to buy small stocks aggressively. The first time small stocks lagged large stocks for 20 years was in 1964. Over the ensuing 4 years, small stocks' performance exploded. Look at these returns: Year S&P 500 Ibbotson Small Stock Index Difference 1965 12.45% 41.75% +29.30% 1966 -10.06% -7.01% +3.05% 1967 23.98% 83.57% +59.95% 1968 11.06% 35.97% +25% Someone investing $10,000 in small stocks at the start of 1965 would have $32,901 at the end of 1968, a gain of 229% in just four years! The same $10,000 invested in the S&P 500 returned a comparatively modest 39%, with $10,000 growing to just $13,926. What Can Cornerstone Growth Do for Me? The potential of small-cap stocks is very exciting right now. But history shows that you can enhance small stocks' return by using a strategy like Cornerstone Growth. What if, rather than buying the Ibbotson Small Stocks Index in 1965, an investor used Cornerstone Growth? Here are the results: Year Ending: 25 Largest Stocks S&P 500 Ibbotson Small Stock Index Cornerstone Growth Strategy* 1965 8.84% 12.45% 41.75% 44.10% 1966 -10.21% -10.06% -7.01% -0.10% 1967 22.43% 23.98% 83.57% 83.30% 1968 6.70% 11.06% 35.97% 50.50% $10,000 becomes: $12,766 $13,926 $32,901 $39,713 I find the current valuations of small stocks extremely compelling. But no one rings a bell and announces it's time for us to move from big-cap growth stocks to small-cap stocks. It takes foresight and courage to buck the big-cap growth trend, yet that is what history is telling us to do. So, as if on cue for our investment philosophy, Winston Churchill said: "The further backward you can look, the farther forward you are likely to see."