This bull market has always found something new to rouse its interest just when it seemed to tire or suffer from an absence of new incentives. And it may be doing it again.
The fading incentive involves the big-name, hugely capitalized companies that have done so well over the past few years, reporting one earnings surprise after another and boosting the popular averages to more records in a month than they used to set in years.The new incentive may involve smaller, oft-overlooked companies - entrepreneurial, swiftly growing, solid small companies with a future. This, remember, is what McDonald's and Microsoft and Dell and Compaq used to be. And not long ago either.
There's nothing terribly wrong with the big companies; many remain healthy as they've ever been and most expect to remain profitable into what they call the foreseeable future. But their rate of earnings gains has begun to slow.
This, of course, was to be expected, because the larger a company gets the harder it is to maintain its annual rate of improvement. While its earnings may continue to grow and even reach new highs, the rate of growth eventually has to slow. "Rate" is the key word.
As the rate of gain slows, so does interest wane. The big-name companies remain excellent repositories for relatively conservative investments, but they lose the gloss, glamour and potential for sudden gains that lure so many of today's aggressive investors.
And so, perhaps, they may turn their attention to the smaller companies. In fact, some already are doing so, but they've tested the small-cap market before, found it wanting, and retreated. This time, or so some claim, they could be in for the longer-term.
The literature of brokerage houses and advisory firms is filling with the possibilities. Not all of them are sold on the idea, though many are, but the majority seems to be at least discussing a small-cap market that they and others have overlooked.
Their main thesis is this: Many quality small companies have much faster profit growth than large companies, yet they have lower price-earnings ratios. Some are takeover targets. Many have secure market niches. Some are destined to be giants.
As a market segment, these stocks have been ignored, mainly because the big-name stocks provided not just great, if diminishing returns, but security and relative freedom from volatility. Small stocks can be volatile, no question, but their growth can be explosive.
Additionally, many small stocks are ignored simply because they are small. So small that their minimal stock float makes purchases by institutions difficult. Such institutions - mutual funds and pension funds mainly - must deal in huge numbers of shares.
They can, however, be an answer for the individual investor willing to do the homework; and homework is required, if only because there is often less information available on smaller stocks, a situation that some brokerage houses are now correcting.