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Technology Stocks : THQ,Inc. (THQI) -- Ignore unavailable to you. Want to Upgrade?

To: Don Westermeyer who wrote (10085)	3/2/1999 7:48:00 AM
From: Jim Oravetz	Read Replies (1) \| Respond to of 14266

Small-Cap True Believers Look For First Signs of a Comeback By ROBERT MCGOUGH Staff Reporter of THE WALL STREET JOURNAL Heard it on the Street As big technology stocks such as Compaq Computer, Intel and Dell Computer stumble over lowered growth prospects, some small-cap fans are feeling an almost painful glimmer of hope: Will Wall Street finally embrace small-cap stocks again? "Get real," they quickly tell themselves. Hope doesn't come easy anymore to fans of small-company stocks. Year after year, these stocks have lagged behind the almighty blue chips, despite all sorts of measures that show the stocks are cheap. Last year, the difference between the Standard & Poor's 500's 28.6% return and the Russell 2000 small-cap index's negative 2.6% return was the biggest on record. Adding insult to injury, the explosion of investor interest in Internet companies is almost bypassing the universe of small-cap stocks. "In this era, companies are small-cap for 10 or 15 minutes before they become mid-cap or large-cap," says Ed Keon, director of quantitative research at Prudential Securities. Normally, it takes years for small companies' stock-market value to graduate from small-cap status, a line frequently drawn at $1 billion in market value. But now, companies often cross that line in their first day of trading as a public company, Mr. Keon says. Promising IPOs "stop in for a cup of coffee, then off they go to the bigger-cap world." Jay Tracey, manager of the $1.2 billion Oppenheimer Discovery Fund, says he doesn't "want to sound bearish," but he just doesn't see the catalyst for lifting small-cap stocks out of the doldrums just yet. To be sure, by all sorts of measures, small-cap stocks are cheaper than big-cap stocks. One seasoned measure is the relative price-earnings ratio of the Standard & Poor's 500 and the stocks held by T. Rowe Price New Horizons Fund, the granddaddy of small-cap stock funds. Normally, small-company stocks sell for a higher price-earnings ratio than large-company stocks. But at the end of 1998, for only the third time in the 38 years of the New Horizons fund, the average P/E of the fund was 92% of the P/E of the S&P 500, based on 12-month estimated earnings. That's the lowest level in the fund's history, suggesting small stocks are very cheap -- at least compared with big stocks. But are small stocks cheap on an absolute basis -- compared with things investors care about, like earnings and interest rates? The picture here is less clear. Different analysts cite different indexes and different statistics to say small caps are cheaper, or more expensive, than they have been historically. But the worst news is that the earnings trend doesn't look good for small-company stocks. According to data from the Leuthold Group on 3,000 public companies, operating earnings at the smaller 2,000 companies in the survey climbed 9.6% in the 12 months through the end of 1998. Operating earnings at the 100 largest companies jumped 15.4%. Even if the big-cap juggernaut runs into trouble, small-cap stocks could get whacked, says Preston Athey, manager of T. Rowe Price Small Cap Value Fund. "It's hard to see small caps doing well if the whole market's going down," he says. "Everyone's concerned about liquidity." True believers remain. Warren Isabelle of Ironwood Capital says he's been able to find very small companies selling for less than their net working capital-current assets minus current liabilities. Usually, these stocks are among the smallest of the small. But most managers now agree with Claudia Mott, director of small-cap research at Prudential Securities: When it comes to small caps, "there's no compelling reason to own them unless you have to." Mutual-fund investors have been yanking cash out of small-cap funds, leading fund managers to sell stocks -- and putting further downward pressure on prices. Managers are "building their triage lists, what to sell if they're getting hit with redemptions," she says. It's not surprising that some fund managers of "small-cap" funds are buying larger and larger companies. +++++++++++++++ I don't think that earnings are going to be a problem for THQ. Go Long THQ! Jim