Behind the Headlines
THIS MONTH: Who's scared of small-caps...Insiders take the money and run...What's next for rates...
(MONEY Magazine) – As Small-Caps Race, Pros Worry
Small stocks have outrun big ones for five straight years, and they nearly tripled the return of large stocks in the first quarter. Can they keep this up?
In their favor: a strong economy that turbocharges their earnings. (Big companies grow slower and more steadily.) And history shows these rallies can endure: Small-caps led for the 10 years ended in 1983.
But it's an ominous sign that because attractively priced stocks are so hard to find, more fund managers have stopped accepting money from new investors. Fourteen shut in the first nine weeks of the year, including two former MONEY 65 funds. And other managers have resorted to buying bigger stocks. "Some of our good small companies have been acquired. Others started out small and grew into midcaps," says Charlie Bobrinskoy of Ariel Capital Management, whose Ariel Fund now buys small and mid-size stocks.
And if the economy slows, small stocks could crash. When investors tire of small-caps, the effect "can be pretty violent," says Sam Stovall, chief investment strategist at Standard & Poor's. Small stocks lagged big ones by 13 points in 1984 and then trailed for six of the next seven years.
What to do? If you've got your pedal to the metal on small stocks, ease up. An 8% to 15% allocation is reasonable. Rebalance, or put new money into large-cap and midcap funds. Drive safely. --JANET PASKIN
Insiders Are Bailing: Should You Be Worried?
Corporate insiders are selling shares in droves. In February they dumped $6.1 billion worth of stock, the highest monthly total in recent memory, says Thomson Financial quantitative analyst Mark LoPresti. The heavy selling continued into March, suggesting that the people running America's businesses are worried about whether stocks can keep going higher. LoPresti thinks that executives see "a lot of geopolitical risk"--as in Iraq and Iran--so they're cashing in now.
Selling is particularly high at big investment banks such as Goldman Sachs and Merrill Lynch, which have been on a tear for the past 18 months. But Najat Seyhun, a finance professor at the University of Michigan, thinks it's much more worrisome for investors when insiders sell as their stocks are falling. His research shows that, on average, insider sales as a stock was rising had no effect on prices. But prices dropped about 4% after an insider sold a stock that had fallen over the previous six months. Jonathan Moreland, research director at InsiderInsights.com, has his eye on troubled automaker Ford Motor (F), where three high-ranking execs sold shares in March. Ford shares are down 20% in the past six months. A spokeswoman notes that most company officials remain heavily invested in the stock. You can check insider sales and purchases at CNNMoney.com by calling up a stock quote. --PAUL R. LA MONICA