** Small Caps ** I2: Here is another article on Small Caps. There is one issue that has not been mentioned by any article or television report on small caps. No one has attempted to measure the performance of small caps after an incredible sales campaign for this sector. You cannot read anything or listen to CNBC without the small cap valuation and outperformance being sold, sold, sold!!! It becomes self fulfilling after awhile. The herd hears this stuff and before you know it, the Beardstown Ladies are reseaching penny stocks!!!
Article from IBD:
Mutual fund investors who believe small-cap funds are staging a comeback face two important questions: Will the comeback last, and if it does, which are the best small-cap funds to buy?
After so many false starts in small-cap rallies recently, the first question is difficult to answer.
Small-cap stocks, as measured by their recent strong showing in the IBD Mutual Fund Index and the Russell 2000 index, have participated in the September and October rally in the stock market. (See the Big-Cap Growth Funds Vs. Small-Cap Growth Funds chart on Page A23.)
This type of rally, coming on the heels of the third-quarter slowdown in S&P 500 earnings, could be viewed as the foundation of a long-lasting small-cap turnaround.
Other factors, such as the absurdly low valuations of some small-cap value stocks, also make a sustained small-rally seem possible. Many of these stocks are priced too low to be ignored by the market for long. The fact that small caps have had better earnings than large caps for six straight quarters also points to a rebound.
The managers of small-cap funds have found even more reasons why the small-cap rally should stick this time.
Paul Kandel, co-manager of DREYFUS EMERGING LEADERS, believes small caps should do well because ''tax loss selling is over for now, which means more liquidity will come into the market.''
Hilary Woods, who co-manages the $116 million fund with Kandel, said there are three more reasons why small caps should do well.
''The IPO market has been stagnant since last summer, which means investors looking for a place to put their money may consider small caps,'' she said. ''Also, 78% of the share repurchases in the third quarter were done by small-cap companies, and, according to inflow figures, investors are putting money into small-cap mutual funds for the first time since June.''
Share repurchases by companies boost earnings-per-share figures.
Gary Lewis, manager of VAN KAMPEN AGGRESSIVE GROWTH, a $250 million small-cap fund, believes small caps are poised for growth, but that it will take a catalytic event to get them moving.
''In 1990,'' Lewis said, ''we had the same type of situation that we have now. Small caps were a better value than large caps, but investors weren't buying them because they were worried about recession and the worldwide economy.
''Then the Gulf War came along and restored confidence,'' he added. ''It touched off a small-cap rally that lasted from '90 to '93. We need some event to bring investors back into the market. More Fed rate cuts might do it.''
But these same strengths have been in place before, and the anticipated small-cap rally did not happen. So the question remains, will the small-cap rally stick this time?
''I can only give you a 'should' and 'will' answer,'' said Kurt Brouwer, a money manager with $500 million under management. ''The small-cap rally should last this time, but there is no way to know if it will last.''
If the rally does last, how should investors select a small-cap fund?
''The best method,'' Brouwer said, ''is to find the funds with the best performance records (see The Long View above). You also want a manager with a good deal of experience. Small caps have a tendency to rally and then get crushed quickly. You need a manager who has been around for a long time and knows how to react.''
In the past, small caps have indeed rallied on good earnings news, only to fall back to earth within a few weeks.
The critical factor, says fund manager Louis Navellier, will be ''whether institutional investors continue to buy small caps'' after the third-quarter earnings season is over.
Some small-cap funds that have been closed to new investors are reopening to take advantage of the irresistibly low valuations. AIM AGGRESSIVE GROWTH is reopening Monday after being off-limits to new investors since June '97.
The fund's total return of 599% for the 10 years ended Sept. 30 is the third best of 70 small-cap funds tracked by Lipper Analytical Services.
AIM Aggressive Growth, like other small-cap funds that stayed true to their investment style, fell on hard times during the big-cap led rally. The fund carries an IBD grade of E as its total return of 13% in the three years ended Oct. 31 was beaten by more than 70% of all funds.
The $2.7 billion fund was down 8% for the year going into Friday, but has rocketed 33% since its Oct. 8 low.
''There is an abundance of small-cap stocks that are priced at historic lows while maintaining strong earnings growth,'' AIM Aggressive Growth manager Bob Kippes said.
If the small-cap rally lasts, value stocks should lead the way, according to a recent study by Kobren Insight Management. ''In today's difficult market, value investing will again reward investors,'' the study said.
Ed Goldfarb, director of research at Kobren Insight Management, says investors should view small-cap funds as long term investments. ''The short-term view may not be clear yet,'' he said, ''but the long term perspective is very attractive.'' |
