Wednesday, March 17, 1999
Brand-name companies lead rally
Investors choose top growth over 'small-cap' stock
BY JOHN J. BYCZKOWSKI
The Cincinnati Enquirer
The Dow Jones Industrial Average is an exclusive party of just 30 big stocks. The surge that pushed the Dow over the historic 10,000 level has left behind thousands of small and midsized stocks.
“It's been a kind of narrow market,” as investors favor brand-name stocks over the less well known, said Mike Schroer, president and chief investment officer of Renaissance Investment Management of Cincinnati.
Added Jan Holman, vice president of investment services for American Express Financial Advisors in Minneapolis: “It's related to the flight to quality that began in the late fall of 1997, when the Asian market cracked. Investors are looking for recognizable names, very liquid, very large stocks.”
Take 1998, for instance: The Dow was up 18 percent, and even the broadest of market indexes — the Wilshire 5000 — was up 23 percent.
That seems to say that stocks on average were up in 1998. But on the New York Stock Exchange, 1,850 stocks rose while 2,360 fell. On Nasdaq, 1,711 stocks rose, but 2,898 fell.
That trend continues this year. Though the Dow is up more than 8 percent and the S&P 500 Index is up 6 percent since Dec. 31, the number of stocks declining has led advancers on 32 of 48 trading days.
And which stocks aren't rising? One way stocks are compared is by their total value, or market capitalization. Procter & Gamble sells for almost $92 a share, with the the total value of all its shares at $122 billion, making P&G a “big-cap” stock.
By comparison, the market capitalization of Cincinnati's Cintas Corp. is around $7.5 bil lion, putting it in the “mid-cap” stock class. Meridian Diagnostics, at a market cap of $86 million, is considered a “small-cap” stock.
The big-cap stocks have done best recently. In the past five years, the Dow Jones Industrial Average — reflecting the performance of just 30 big-cap stocks — is up about 190 percent.
By contrast, a broader index called the Russell 1000 is up 169 percent, while the Russell 2000 — representing 2,000 of the market's smallest stocks — is up less than 60 percent in the past five years. So far this year, the Russell 2000 is down 5 percent.
Why? The arguments vary. The stock market is ultimately driven by the growth of company profits. Historically, profits grow faster at small companies than at large ones, so the returns on small-cap stocks are higher.
Lately, though, “the really large visible companies are showing good, strong earnings growth,” said Steve Folker, director of equity strategy at Fifth Third Bank. “The last five years, the earnings growth in the large-cap stocks has been as good or better than the small- and mid-caps.”
If the profits are that good, investors have no reason to risk their money with smaller companies that don't have the track records that P&G or Wal-Mart have.
“Investors say, "Why pay more or the same for companies that aren't as seasoned, that don't have leading brands, that aren't as visible, when you can buy some of the very best companies?'” Mr. Folker said.
“Those companies have been pretty successful,” Mr. Schroer said. “Give them a lot of credit.”
In addition, portfolio managers are under pressure to at least match the market's overall performance, and one way to do that is to own the same big-cap stocks that make up the major stock market indexes.
DOW AT 10,000
Fifth Third in no rush for mergers
Oil of Olay's new line says it with flowers
PETA to cease fire on Pepper
Sale helps firms expand
Service Merchandise forced into bankruptcy
European Union in crisis
INDUSTRY NOTES: MEDIA & MARKETING
PEOPLE ON THE MOVE
TRISTATE BUSINESS SUMMARY
TRISTATE MARKET SPOTLIGHT
