Article of interest from a few days ago. Note the following statement from the article:
''This probably is one of the best times in the past 20 years to be buying lesser-known, smaller-cap names, particularly aggressive growth smaller-cap names, which have been hit the hardest,'' Oberweis said.
Investors in Small Stocks See No Recovery in Sight
New York, Aug. 27 (Bloomberg) -- As small stocks sink further into a bear market, even their fans say a return to full health is several months off.
''I don't see a recovery before the end of the year,'' said Thomas Madden, chief investment officer at Federated Investors Inc. in Pittsburgh, which oversees $95 billion. He advocates small-capitalization stocks as a long-term investment.
The Russell 2000, which consists of companies with an average market value of about $400 million, is down 26 percent from its April record. A 20 percent drop is the commonly accepted definition of a bear market, which historically can precede long periods of decline or little gain.
In the Russell's previous three bear markets, at least 11 months passed before a complete rebound. It took 11 months to top previous highs after a 34 percent drop from October 1989 to October 1990. Two years were needed to get over a 39 percent slide in August-October 1987. The index required 17 months to recover from a 26 percent slide from June 1983 to July 1984.
Small stocks, which have lagged large stocks since 1993, are now in the forefront of the overall market's decline. The Russell 2000 has fallen more than three times as much as the S&P 500, in percentage terms, since April. This year's deterioration has resulted in a moribund market for IPOs and steep losses for small companies that disappoint investors.
Seeking Safety
The uncertainty in the overall market has caused investors to flock ''toward the historically most liquid stocks, which are the large-cap companies,'' said Jim Oberweis Jr., a portfolio manager at Oberweis Asset Management in North Aurora, Illinois, with about $200 million under management. Also, the popularity of indexed mutual funds, especially those that track the S&P 500, ''has dragged money away from small caps,'' hurting their performance relative to big company stocks.
Individual investors believe large-capitalization stocks are safer than small ones, and as a result, ''the incremental cash is going into big, safe, and well-known companies,'' said Arsen Mrakovcic, the portfolio manager for J.W. Seligman's Frontier Fund, which has about $1 billion under management.
Many portfolio managers ''played a game of chase,'' selling small company and buying large company stocks in an effort to mimic the better performance of the S&P 500, and this, too, contributed to small stocks' poorer results, he said.
While small company stocks didn't match the performance of large company stocks in the last few years, they still managed gains that handily beat historical averages for stock-market investing. The Russell rose 26 percent in 1995, 15 percent in 1996, and 21 percent in 1997. In the 1980s and early 1990s, small stocks typically outperformed the S&P 500, beating the larger- company index about two-thirds of the time.
Opportunity Seen
Small stock portfolio managers see opportunity in the current downturn.
''This probably is one of the best times in the past 20 years to be buying lesser-known, smaller-cap names, particularly aggressive growth smaller-cap names, which have been hit the hardest,'' Oberweis said.
Fast-growing companies are undervalued, he said. Historically, these companies traded at a substantial premium to the overall market in terms of their price-to-earnings ratios, although they aren't doing so now.
Large capitalization stocks are riskier than many investors realize, Mrakovcic said.
''Large cap stocks as a group are overpriced in this environment,'' Mrakovcic said. ''People are paying a great premium for (the) perception of safety, which in the next few quarters may not bear out to be true.''
Casualties
Even small stocks in growing industries such as telecommunications have performed poorly in recent months.
Take ICG Communications Inc., a local exchange carrier, which is down 52 percent from its March 19 record high. WinStar Communications Inc., which sells local, long-distance and Internet access to businesses is down 46 percent from its June 10 record.
One casualty of the steep decline in small stocks is the initial public offering. ''For all intents and purposes, the IPO market is dead,'' Mrakovcic said. ''I haven't seen a prospectus (for an IPO) in a couple of weeks, which is very unusual.''
Investment bankers prefer to present IPOs ''when the typical small-cap investor is much more optimistic.'' Now, buyers have too much leverage to demand lower prices.
''Good companies coming to market now would be an ideal investment, but they're smart enough to figure out they don't want to be coming out,'' Mrakovcic said.
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