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Small cap renaissance
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September 4, 1997: 3:14 p.m. ET
The stocks have set sail, recently outperforming large-company stocks
From Correspondent Carmine Gallo
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NEW YORK (CNNfn) - Many investors have made a lot of money in the past couple of years investing in big-company stocks such as Microsoft, Coke, and IBM. But now, small company stocks are beginning to have their day in the sun.
In August, while the Dow lost just over 7 percent, the Russell 2000 Index of smaller stocks rose more than 2 percent. The small cap momentum presses ahead into September, with the Russell hitting a series of record highs. On Wednesday, the Russell was up 0.74 to 428.79.
Despite the run-up, analysts say many small stocks are still bargains.
"You can tell that the small-cap sector is still cheap relative to large caps. Some of it is because they haven't done as well this year, but also when you look at how they're priced relative to the earnings growth people expect them to produce, they're still very attractive," said Claudia Mott, analyst for Prudential Securities.
Mott suggests investors use mutual funds as a way of riding the small-cap resurgence.
According to the mutual fund research firm Morningstar, there are nearly 600 small-cap funds for investors to consider. Among those given strong grades based on their long-term record:
- Baron Asset Fund, up 22 percent this year. It favors service-company stocks rather than product-based firms, and it shuns technology;
- Nicholas Limited Edition Fund is up 23 percent this year to date. It's highest concentration is in companies that provide health-care services and make health-care products.
Also on the list are two value funds:
- Barr Rosenberg U.S. Small Capitalization Fund, up 27 percent this year;
- Dreyfus Small Company Value Fund, is up 29 percent this year.
"The advantage of a mutual fund for small-cap investing is they can do the research an individual might not be able to do and get into a company before the broader market picks up on it," said Peter DiTeresa, a stock fund analyst for Morningstar.
Investing in smaller stocks can require stamina and commitment. Small-cap growth funds are especially prone to dramatic ups and downs. From February through April they plummeted a harsh 15 percent.
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