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Pastimes : The Justa & Lars Honors Bob Brinker Investment Club -- Ignore unavailable to you. Want to Upgrade?

To: Justa Werkenstiff who wrote (1900)	10/31/1998 7:03:00 AM
From: Justa Werkenstiff	Read Replies (2) \| Respond to of 15132

Small Cap Article Small- cap stocks have performed well since the major indexes hit their recent lows. Many market pros see signs that small caps are emerging from a three-year slumber, but ample cause for caution remains. I N V E S T O R ' S C O R N E R The small-cap Russell 2000 has rebounded 22% vs. the S&P 500's 14% bounce since both indexes made intraday lows on Oct. 8. Louis Navellier, who manages $1.8 billion, believes the test for junior issues will come in November after the third-quarter earnings season draws to a close. The major investment houses are emphasizing small-cap stocks, but the proof, he says, will be whether institutional cash follows suit next month. The executives of America's junior companies seem to feel it's time to buy. Bob Gabele, director of research at CDA/Investnet, tracks insider trades. Gabele zeroes in on ''significant'' insider buying. He discards artificial buying created by corporate stock-ownership policies and loan programs. ''There's broad buying of the small-cap issues, too broad for corporate programs to make up a meaningful share of the overall activity,'' Gabele said. ''Of the significant-looking transactions, 70% seem to fall into the category of stocks well under $1 billion in market capitalization. In fact, a lot of the insider buying is in market caps of under $500 million.'' Small caps are offering superior earnings growth and lower valuations compared with big caps, but that's been true for years. In terms of price-to-earnings ratios and price-to-earnings- growth ratios, the Russell traded at a deep discount to the S&P toward the end of the '90-98 bull market. The July-August bear widened the gap even more. But the stock market has a habit of doing the unexpected. It seldom rewards betting on simplistic predictions that stocks must do A given B. And P-E ratios are almost useless as timing mechanisms. No few prognosticators have forecast a reprise of small caps in the belief the market must return to its ''norm.'' The market has dashed those forecasts time and again. Earlier this year, some technicians argued that small caps would gain the upper hand only after a bear market could tarnish the large caps' image of invincibility. Then the strengths of small caps - superior earnings growth, low relative valuations and strong ties to a still-healthy U.S. economy - could come to the fore. ''Wall Street amounts to a parade of money going from one place to another,'' Navellier said. ''The real key is liquidity. That's what you need to propel small caps higher. The fundamentals help. But you need persistent institutional buying pressure.'' The market has had its bear. So far, small caps are showing promise. But three weeks is not enough time to proclaim the end of the long large-cap reign. Readers can track the unfolding contest by checking the ''Big-Cap Growth Funds vs. Small-Cap Growth Funds'' chart at the bottom of IBD's ''Industry Groups'' page (today on A23). Navellier is bullish, but he warns investors to look out for ''head fakes'' caused by the third-quarter earnings reports. ''All too often, small caps gap up in earnings season, and they fizzle afterwards,'' Navellier said. ''The question is whether the buying pressure persists. I think it's very encouraging that Fidelity is going back to small-cap land, and Putnam is talking more about mid-cap.'' One small-cap skeptic is Steven Leuthold, chairman of Leuthold/Weeden Research, a Minneapolis- based institutional research firm. In his view, the focus on relative valuations between small- and large-cap issues misses the fact that actual P-E ratios can decline further without breaching historic lows. His research indicates an approaching recession, a development that would pull down stocks across the board. ''The median multiple on 3,000 stocks is about 15.7 times earnings,'' Leuthold said. ''That's considerably below the S&P, which is 26 or 27 times earnings. But back in 1990, the small caps were trading at 10 times earnings and large caps were trading at 15 times earnings. If this is a cyclical bear market, and we go back to the stopping point on a valuation basis of the last two bear markets, stocks could go down quite a bit more on the averages.'' Part of his negative market view rests on declining ''earnings momentum'' of U.S. corporations. Leuthold/Weeden Research compiles an ''Earnings Up/Down ratio'' from IBD's daily listing of total number of companies reporting earnings gains vs. earnings declines (today on A18.) As of the second quarter, the ratio of up/down earnings stood at 1.56, the lowest in six years. ''The third-quarter data isn't all in, but earnings momentum clearly has deteriorated further from there,'' Leuthold said. The news is worse for small-cap issues, which he classes as the bottom 2,000 stocks in market cap in his 3,000-stock sample. The median earnings momentum of small-cap companies slipped behind earnings momentum of the top 100 companies in the second quarter, the first such reversal in four quarters. In Leuthold's view, small caps hold more appeal than large caps in at least one arena: risk. The Russell, which peaked intraday on April 22, is 23% below that top. The S&P, which peaked intraday on July 20, is nearly 8% off its top. If recession does take hold, Leuthold said, ''the discounting in small caps is further along than the discounting of large caps.''

To: Justa Werkenstiff who wrote (1900)	10/31/1998 12:19:00 PM
From: Hank Stamper	Respond to of 15132

"But I hope the bears take their time in making the conversion into becoming reluctant bulls. It gives us more time to get more money in ahead of them. " On Canadian national news last evening, there was a lead for a news feature scheduled for early next week. The lead said 'the markets may be turning around and investors may want to consider getting back into equities.' Also, my office is in a small building that also houses a couple of mutual funds sales persons. They are real nice ladies. Yesterday, they were on the telephone to their customers recommending equity funds because the market has begun to rise again. I keep telling the ladies to listen to Brinker, but they don't. The tide is beginning to turn but there are lots of bears still sleeping I reckon. Yep it's good. I have been taking this whole period to make changes in my portfolio--there were, and still are, many seriously undervalued stocks. OOOO! Ciao, David Todtman