Saturday, May 04, 2002

Small-cap companies bask in market boom

By Lisa Singhania
The Associated Press

        NEW YORK — Cobalt Corp. Boyd Gaming. Brookline Bancorp. Many investors have never heard of these companies, but for those who own them, 2002 has been a very lucrative year. The trio has been among the best performers year-to-date in a part of the market that is booming: small caps.

        The Russell 2000 index, which tracks stocks of smaller companies, is up 4.9 percent for the year, compared with losses in the barometers that track the stocks of bigger companies: the Nasdaq composite index is off 17.3 percent, while the Dow Jones industrials have lost 0.2 percent and the Standard & Poor's 500 index is down 6.5 percent.

        The numbers reflect a decades-old pattern on the market, in which small and big stocks rise and fall in opposing cycles. Analysts say that if history is any indication, small stocks will likely outperform their bigger counterparts for at least another few years.

        “This is a rotation that's been under way for about three years now, and the average length of most of these cycles is about five years,” said Satya D. Prad human, chief small-cap strategist at Merrill Lynch.

        Small-cap companies are those with market capitalization, or market value, between $250 million and $1 billion. The Russell 2000 includes businesses that the index considers to be in the bottom two-thirds of the 3,000 largest U.S. compa nies. The average market cap is $530 million.

        The category struggled in the last half of the 1990s, as the bull market for the Dow, S&P and Nasdaq was intensifying. But by 2000, a small-cap turnaround had begun and the stocks moved higher just as big caps were pulling back.

        In the last three years, the Russell 2000 has risen 18.2 percent, compared with declines of 9.2 percent in Dow, 36.4 percent in Nasdaq and 20.8 percent in S&P.

        The shift occurred because big-cap stocks became too expensive relative to earnings. At some point, when investors decide small stocks are too pricey, the pendulum will swing back.

        In the aftermath of the Enron and Global Crossings debacles, many investors are shying away from bigger companies with complex structures. Because of their size, smaller companies tend to have more straightforward financial statements.


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