Small-company stocks outperform big boys
By Adam Shell
USA Today
NEW YORK— They lack the muscle and cachet of Wall Street's biggest stocks. Many go by names most investors have never heard of, such as Intermet, Goody's Family Clothing and ShopKo Stores. Some are ignored entirely by Wall Street analysts.
What's more, even when they rally en masse, they tend to fly under investors' radar because they're too puny to drive up major, market-cap-weighted stock indexes such as the Standard & Poor's 500 and the Nasdaq composite.
Most investors gauge the health of the "market" by capitalization-weighted indexes such as the S&P 500 — meaning the bigger the company, the bigger the impact it has on the index going up or down.
The bottom line: Big pops in tiny stocks go undetected.
Welcome to the world of small-company stocks — the laggards of the late 1990s bull market that have quietly emerged as the best-performing stocks.
While the so-called market is struggling this year, the S&P SmallCap 600, an index that measures the performance of small stocks that begin the year with market values of $1.5 billion or less, is up 7.4 percent. The Russell 2000, another small-cap index, is up 2.2 percent. Both indexes hit new highs in mid-April.
Big 2002 winners include: Intermet, maker of auto components, which hit a 52-week high last week and is up 237 percent; Goody's Family Clothing, a retail chain, up 107 percent; and ShopKo Stores, a specialty discount retailer, up 126 percent.
In contrast, the S&P 500, a proxy for the 500 biggest U.S. stocks, has lost 8.6 percent this year and is 31.3 percent below its March 2000 high. The Nasdaq, driven sharply lower by the meltdown of giant tech stocks such as WorldCom, is down 19 percent this year and 68.8 percent below its peak.
The stock market moves in cycles. Sometimes, as in the late '90s, investors flock to giant stocks like Microsoft, General Electric and Cisco Systems.
But as the seasons change, so do the cycles and rhythms of Wall Street. Petite is powerful again. Small stocks — especially so-called value names — have been outperforming big caps since April 1999, Merrill Lynch says.
And if history is any guide, small caps' current hot streak is likely to continue, says Satya Pradhuman, small-cap strategist at Merrill Lynch.
"These cycles of outperformance are multiyear periods, not two-month swings," he says. The average length of a small-cap bull market, his research shows, is about five years.
"Sixty-two months, to be precise," Pradhuman says.
In the prior five cycles dating to the 1930s in which small stocks did better than large, the shortest cycle lasted three years; the longest, almost 10 years. The most recent run began three years ago, about average. But Pradhuman says small stocks might do better than big stocks for two or three more years.
Still, some experts argue that the recent outperformance by small caps might signal a short-term peak.
"That could lead the size-leadership pendulum to swing in the opposite direction toward bigger stocks for the next few months," says Paul Rabbitt of RabbittAnalytics.com. But even Rabbitt thinks smaller companies will fare better than large ones for at least the next year.
