Small stocks lagging behind expectations Uneven economy hinders Nasdaq

July 10, 1993|By Ian Johnson | Ian Johnson,New York Bureau

NEW YORK -- After finally hitting their stride late last year, small-company stocks were supposed to blow past the rest of the pack this year. But a little past the halfway mark, they have slackened off.

Depending on which measure is used, small stocks have either slightly outperformed or been no better than bigger stocks. The combination of a weak economy and impending health care reform have drained the stocks of their staying power, causing them to lurch around for much of the year.

"It seems like this is the third or fourth time where we've been wondering where the economy is going," said Henry Otto, the small-stock portfolio manager for Brandywine Asset Management Inc. in Wilmington, Del. "This hasn't helped them much at all."

The Nasdaq composite index is up 5.1 percent since the start of the year, after closing yesterday at 705.81. But most of that gain came in January, before details of the Clinton administration's economic plans were known.

Since then, the market has been basically flat, although it has managed a small rally over the past three days.

Because the Nasdaq index is made up of some big stocks, many analysts prefer the Russell 2000, which tracks companies averaging just $220 million in market capitalization.

This index has performed better, rising 7 percent to close yesterday at 234.96, but also saw most of its gains come in January.

Indexes of bigger stocks have not fared better -- the S&P 500, for example, is up a scant 3 percent, and the Dow Jones industrial average is up 6.4 percent -- but small stocks are supposed to outperform big stocks during a bull market.

That's the compensation that investors get for putting up with their subpar performance during bear markets.

One reason for the small stocks' relatively poor performance is that investors had already bid up their price late last year in anticipation ofa strong stimulus program from President Clinton. According to most analysts, small companies would be the ones nimble enough to take advantage of such money.

But when the new administration was unable to come up with the money and then began to propose new regulations, which usually hurt smaller companies more than bigger ones, the stocks lost momentum.

Greg McCrickard, who heads T. Rowe Price's OTC Fund, said the indexes' poor performance stems largely from underperforming technology and health care stocks, which each make up 15 percent of the Russell 2000 index.

Health care stocks nosedived in February, when the Clinton administration began floating ideas for health care reform that some analysts said would hurt small health care companies.

Excluding those stocks brightens the small-stock picture considerably, Mr. McCrickard said, noting that several companies in his fund, such as Roper Industries Inc. and Zenith Laboratories Inc., have increased by more than 100 percent in value overthe past year.

Mr. McCrickard said his fund is up 6.6 percent for the first six months of the year.

While the weak economy hurts small stocks, the current low-growth economy hurts bigger companies even more, said Claudia Mott, a technical analyst specializing in small stocks with Prudential Securities Inc.

With no general pickup to help them out, many industrial giants will continue to stumble along, making small-company stocks more inviting to investors, she said.

"If the economy were to go gangbusters, that might help some bigger companies get into gear, so the current low-growth environment isn't bad for small stocks," Ms. Mott said.

Even investors who have been hammered by the small stocks' weak rally shouldn't lose hope, Ms. Mott said.

Small stocks typically move in six-year cycles, so with the current bull run only having started in 1990, it should be good for another two to three years, she said.

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