Each year for nearly the last nine, small-capitalization market gurus have been predicting that finally large-cap growth stocks will lose steam and small-cap stocks will become the new market leaders. And for nearly every year, those prognosticators have been proven wrong.
It looks like 1999 will be yet another disappointment for small-cap aficionados, as a robust economy with little inflation fuels the fast-rising earnings of large-caps, making them hard to beat-especially in recent months.
The market averages tell the story. The Russell 2000 index, which tracks small-cap stocks, is down 1.15% as of September 24. The Dow Jones industrial average’s 11.96% return so far this year beats it cleanly, as does the Standard & Poor’s 500 index’s 3.92% gain.
“There’s been a complete thrashing of the overall market, if you will, particularly of small-caps,” says Dawn Alston Paige, a portfolio manager with Loomis Sayles & Co. in Bloomfield
Whether or not it’s time for small-caps to rise “all depends on their earnings outlook relative to large-cap stocks,” says Alston Paige, who runs the Loomis Sayles Midcap Value fund (800-633-3330). And she expects the earnings of large-cap stocks to keep growing.
But all is not gloomy for small caps-that is, if investors are willing to take a long-term view, says Alston Paige. Now is the time to buy small-cap stocks with solid franchises, unique businesses and good long-term growth prospects, she says.
Meanwhile, William Thomason, president of Thomason Capital Management L.L.C. in San Francisco, says another way to play small caps is to buy stocks that will benefit from the top sectors in this bull market.
For example, Thomason, who runs the SRI Equity Fund (800-343-5345), notes the semiconductor capital equipment industry is on the comeback trail and has benefited from the renewed boom in technology stocks. One small-cap name he thinks can be lifted by this trend is Helix Technology (Nasdaq: HELX). Helix, based in Mansfield, Massachusetts, manufactures cryogenic vacuum pumps for semiconductor equipment, and one of its biggest clients is Applied Materials (Nasdaq: AMAT). Helix’s stock has enjoyed healthy price gains, recently closing at $31.75, up 148% year-to-date.
Alston Paige favors small caps that have a unique niche, such as NOVA Corp. (NYSE: NIS), an Atlanta-based processor of credit-card transactions. The company is planning to set up interactive billing for its clients’ Websites. Once this business is up and running, it should boost the stock price and could make NOVA an attractive takeover candidate, particularly for larger transaction processors like First Data Corp. (NYSE: FDC), she adds. NOVA is not for the timid. It closed at $25.75, down 25.8% so far this year. But that’s the kind of long-term turnaround story some professional investors are betting on.