Small caps are unable to cash in on market Their shares drop as investors choose larger companies


August 09, 1998|By Bill Atkinson

THE BEAR is running rampant among small-company stocks.

This was the year experts predicted that small-cap stocks were going to take off. But 1998 has been a bust for investors.

Nearly 50 percent of the stocks on the Standard & Poor's Smallcap 600 Index -- companies with market capitalizations of less than $1 billion -- have plunged into a bear market. They are down more than 30 percent from their highs in the past 12 months, according to a survey by Baltimore-based Legg Mason Wood Walker Inc. The Russell 2,000 index, which tracks the performance of small-cap stocks, has returned a negative 5 percent this year. It is down about 15.6 percent from its April high.

"It is getting ugly," said Paul Greenwood, senior research analyst at Frank Russell Co., a Tacoma, Wash.-based investment management and consulting firm. "Small stocks have been disappointing. It is not a fun place to be."

Sure, bigger companies were nicked in Tuesday's drop, when the Dow Jones industrial average fell nearly 300 points, but small caps have been clobbered for most of the year.

The frustration among the experts is palpable.

"The bear market is everywhere but in the Dow and a lot of the S&P 500" companies, said Claudia E. Mott, director of small-cap research at New York-based Prudential Securities Inc. "The managers that I talk to, their emotions range from frustration to aggravation. We are soon going to be despondent."

What bothers Mott and other experts is that many small companies are making money and growing, but have been ignored.

Corrections Corp. of America, a Nashville-based manager of prisons, has seen its stock plunge about 60 percent in the past 52 weeks to about $17, though its net income for the second quarter was up 82 percent.

Brightpoint Inc., an Indianapolis-based distributor of cellular phone accessories, has slid to about $14 from a high of $24.25 on Oct. 16, despite reporting an 86 percent increase in net income in the second quarter.

Integrated Health Services Inc., an aggressive Owings Mills-based health services company, has been making money and acquisitions, but its stock has fallen about 30 percent in the past 12 months to about $25.

Shares of Regal-Beloit Corp., a Wisconsin-based supplier of power transmissions and motors, have fallen 21 percent to about $23 a share in the past 12 months. It's making money, too.

Why are investors ignoring the small companies?

They've been flocking to the big names like Microsoft Corp., Cisco Systems Inc., Procter & Gamble Co. and Coca-Cola Co., the experts say. These are the companies that have been driving the stock market higher and making novice investors swear that equities are a no-lose bet.

They aren't the only ones spurring the blue-chip advance. Foreign investors have stepped up their purchases sharply, Mott said. And mutual fund managers, desperate to improve their funds' performance, have also been loading up on the big names.

"Investors are enamored with large caps," said Greg McCrickard, who manages the T. Rowe Price Small-Cap Stock Fund, which has $1 billion in assets under management. "We don't know exactly what is going to change group psychology."

McCrickard has taken his lumps with the fund down about 4 percent.

"I am outperforming the Russell 2,000, but it is a pyrrhic victory," he said.

McCrickard sees the downturn as a chance to buy good companies cheap. He would not disclose the stocks he's buying, but said there are deals in the technology and banking sectors.

"You don't have to be too picky," he said. "There is no shortage of raw material."

Richard Cripps, Legg Mason's strategist, likes Nichols Research Corp., which provides technology services to state and federal government agencies. Its shares have dipped to about $24 from a high of $28.75 on July 6. He says Nichols' business is booming.

Mott, who has been tracking small caps for 11 years, says investors should hold small companies in their portfolio. They are typically more risky and volatile than larger stocks, but investors could make more money over the long term.

"You hope to get some exposure to some of the real growth areas of the country," she said.

The Internet, communications, health care and retail are industries that are dynamic and crowded with small, up-and-coming companies. A lesson investors tend to forget is that small companies can grow, Mott says.

"Microsoft was a small-cap company at one point in its life," Mott said.

Pub Date: 8/09/98

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