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To: Just My Opinion who wrote (3264)	11/3/1998 8:56:00 AM
From: Just My Opinion	Respond to of 3817

OFF TOPIC******** This is an article in case people are interested in the small caps. Is the small cap rally for real? Wall Street smells bargains in these small-to-medium sized firms. Here's Money Daily's analysis. By Andrew Marks Small cap stocks, which are companies with a market capitalization under $1 billion, have staged a powerful recovery in the last three weeks, gaining 22 percent after hitting a three-year low on October 8. Can they keep it up? "I'm feeling very positive on small cap prospects for the first time in a very long time," says Claudia Mott, director of small cap research at Prudential Securities. Her view echoes a growing chorus of analysts and money managers who think that the time is finally right for small caps to start outperforming bigger companies. For one thing, not only are prices for these smaller firms still down sharply for the year, but they look like bargains relative to their larger brethren. Still, small investors need to tread cautiously when considering whether they should add to their holdings in a sector of the stock market that has significantly underperformed the Dow Jones industrial average and the S&P 500 index for the last three years. "I'm bullish on them, but there are still plenty of reasons why small caps could continue to underperform over the next year," admits Key Asset Management's Charlie Crane. Money Daily consulted the experts to examine the case both for and against small caps. Here's what we found: The bullish story: 1) Better earnings growth and low valuations. For more than a year, analysts have been putting forward these two factors as fairly compelling arguments for why small caps should start outperforming big caps. To date, that rationale has not been compelling enough, since the S&P 500 has blown away the small cap index Russell 2000 for three years in a row: 20 percent vs. 15 percent in 1996, 31 percent vs. 20.5 percent in 1997 and 13 percent vs. -13.5 percent in 1998. But the recent numbers for the category are dramatic. Earnings growth for stocks in the S&P small cap 600 index have beaten those in the large cap S&P 500 for six consecutive quarters. Their long-term (three-to-five year) projected growth rate of about 15 percent is 10 percent higher than the average S&P 500 company's. Yet, as Crane points out, small caps are trading at a near-historic 26 percent discount to large cap stocks. 2) Low exposure to a global slowdown. This is another argument that's been around for the past year, but it still holds true. Simply put, small cap companies make far less of their money from overseas compared to big caps, especially the emerging market countries that have been devastated in the last year. With the global economic slowdown expected to continue through 1999, this should makes small caps even more attractive on a relative basis because they typically are less vulnerable, say, to chaos in Russia or a slowdown in Latin America. 3) The torrent of money chasing large cap stocks has slowed. This is the big technical change that has our bullish experts most excited. Big cap stocks have outperformed small caps in recent years for the same reason they've turned in such big returns on an absolute level: liquidity, and lots of it. "There's just been so much money pouring into the large cap names over the last couple of years, especially from foreign investors and mutual funds, that fundamentals didn't matter," said Crane. Now with the stock market correction having slowed the torrent to a trickle, analysts like Mott and Crane think that the market will be driven more by fundamentals than liquidity, and the fundamentals favor small caps (see above). So much for the bullish story. Our less sanguine experts acknowledge the positive arguments, but they counter with two points: Yellow Flags: 1) Stability beats potential in an uncertain market. Some of the considerable investor fear over the possibility of a world-wide economic slowdown, financial shocks, or further market-rocking hedge fund failures has waned in recent weeks, but it's far from certain that those dangers are gone for good. "As long as there are concerns over the economy slowing down and corporate profits sinking, investors will choose predictability and stability of earnings over growth potential," says Lehman Brother's senior equity analyst Arun Kumar. As Money Daily observed in "The Show Me Market," an uncertain environment breeds a flight-to-quality mentality, and that favors big caps. 2) Small caps are much more cyclical than big caps. Where recession is a possibility, investors don't put much faith in long-term earnings growth forecasts. All of our experts agreed that any tremors in a shaky domestic economy in 1999 could be amplified for small caps. All in all, investors should view what looks like a rally in small caps with caution. For one thing, the recent run-up in some of these stocks has discounted some of their value as bargains. Perhaps more important, the next year may bring some rough passages for some of these firms, depending on how the U.S. economy reflects turmoil in global markets. Still, Crane notes that most smaller investors are -- or at least should be - investing for the long term. "And if you can tolerate some short-term volatility," he says, "this is the time to look at the small caps, because the factors in their favor may offer big rewards."