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Strategies & Market Trends : Three Amigos Stock Thread -- Ignore unavailable to you. Want to Upgrade?

To: Sergio H who wrote (7260)	7/28/1998 6:21:00 PM
From: Ditchdigger	Respond to of 29382

Sergio,wish I could use some of this years losses to offset last years gains<vbg>..I'm learning about taxes liabilities<g>..DD

To: Sergio H who wrote (7260)	7/28/1998 7:40:00 PM
From: Prof	Read Replies (1) \| Respond to of 29382

Sergio, maybe there's some hope on the near horizon for our small caps. Thought this article might bouy our spirits: Prof From: iionline.com Wake Up and Smell the Small Caps! by Tom Byrne With the help of my trusty intern, Jimmy Kow, and some background from Piper Jaffray (PJ) analysts Daniel Donoghue, Michael Murphy and Chad Mollman, I have uncovered some mordant facts about the future of small cap stocks. The PJ material was gleaned from a March '98 report titled "Small Public Companies: Hidden M&A Value." In recent years, a flood of small, private companies have raised capital through public offerings. Ten years ago there were 4,000 public companies. Today there are twice as many. But investors have shunned these new small, public companies (soon after their IPOs in most cases) due to their lack of analyst coverage and neglect by institutional money managers who need the liquidity that large caps offer. But is the dismissal of small caps warranted? According to Piper Jaffray, no. PJ thinks small cap stocks on a valuation basis look like the apple did to Eve. Earnings per share growth for the 4,000 companies brought public in the last ten years has averaged 18.6% per year for the last three years, versus 17.5% for all NASDAQ national market companies. But 69% of recent IPOs have posted price performance below the NASDAQ composite. Adding insult, when underwriters bring out their initial public offerings, they often give a 10-15% discount to attract investors to give their preferred clients an automatic profit (don't you hate that preferred client treatment?). Despite the discount in price and the high growth rate, no more than 52% of small cap companies currently trade at a higher stock price than their original offering price. This means that nearly half of all IPOs in the last ten years are now trading at a price below their initial value. This persuades me that there are a lot small cap stocks that are severely undervalued. Why are small caps so cheap, when historically they have had higher valuations compared to their large cap brethren? Two reasons are trading volume and market capitalization. Mutual funds and major institutional investors avoid companies with low trading volume and market caps. It's difficult for them to buy or sell relatively large quantities of a stock without causing huge swings in prices, and owning more than 5% of one company's stock is considered taboo in the maple oak hallways of old Wall Street money. Small caps have also performed poorly because they've lacked publicity, coverage and information (which is why Individual Investor exists; to bring information on great small cap stocks to the average Joe). They are slammed for poor performance in any one quarter, despite their positive performance in others and their ability to rebound quickly. When analysts see poor earnings growth, they usually remove the laggards from their active coverage list, even if that poor growth is short-lived. And if an underwriter drops coverage on a small cap, it's very hard for that company to gain coverage from other Wall Street firms. Plus, consider this conundrum. If a small cap is going great it has strong cash flows, a stable balance sheet, minimal debt, and ample credit line - it doesn't need any money. And if it doesn't need money, there's no investment banking business to be had and firms see no reason to cover the company. Kind of an oxymoron I know, but Wall Street is full of morons. Of course, brokers-dealers have other reasons to avoid recommending small caps. Some SEC policies on over-the-counter trading have made active trading of small companies less enticing for brokers. With trading volume too low to support an active market maker and low liquidity, it's difficult for brokers to make efficient client orders. With all the public avoidance of small caps over the last ten years, it is not surprising to find the stocks attractively valued. Of the small caps that went public in the past 10 years, half of the companies with available data trade at a P/E less than 80% of the S&P 500 multiple. These companies trade with a low P/E despite the expected higher growth rates from small caps. According to PJ, the 25% expected long-term growth rate for small caps is twice as high as the rate expected for the S&P 500. The value of small caps becomes more apparent when viewed in light of the mergers and acquisitions market. M&As have grown consistently in the past, and the EBIT multiples have grown fairly consistently within the past 10 years. Yet, more than one-quarter of small caps still trade at or below the current median multiple for M&As. With that information in mind, small caps should not be undervalued -- simply because they make great takeover targets. Plus, thanks to the greatest bull market in the history of the world, large companies can use their inflated stock to buy small companies, rather than cash. Well, that's it for me today. I think I'll go try and become a preferred customer somewhere.