But small caps, ignored since '94, are now more attractively pricedWhile the Dow Jones industrial average and other large-company indexes are flirting with a bear market, stocks of smaller companies are mired deeply in one.
The large-company indexes, which peaked in mid-July, are close to flat for the year. But small-company indexes like the Russell 2000 are off about 20 percent - and down about one-third from their highs of last April.When investors become skittish, they tend to gravitate toward the largest, best-known and presumably safest names. As editor Susan Belden of No-Load Fund Analyst newsletter puts it: "When the market gets into trouble, small caps tend to get into bigger trouble."
But small stocks have trailed large stocks every year since 1994.
Over those four years, analyst Claudia Mott of Prudential Securities says, small-company stocks have been suffering from "flow of funds" disease. Money is pouring into only a select number of larger names, leaving small companies behind.
Foreign investors and many mutual fund managers tend to buy large stocks, partly because they are afraid of getting stuck in smaller stocks, which are harder to sell quickly.
As a result of all this neglect, rarely have small-company stocks been more attractively priced. The Russell 2000 index recently sold at 16 times estimated earnings for 1999, while the S&P sold at 20 times, reports First Call.
Yet, according to a consensus of analysts, Russell 2000 earnings are expected to jump 32 percent in 1999, while S&P profits climb just 16 percent.
So smaller companies seem to promise more growth at a substantially lower price.
But Arun Kumar, a strategist at Lehman Brothers, cautions that small stocks "can stay cheap for a long time."
Ultimately, it may take a full-bore bear market before the small names begin to justify their reputation for delivering big returns. Since 1926, small stocks, on average, have returned more than large stocks.
Mott recommends owning at least one fund that buys undervalued small stocks and one that buys rapidly growing small com-pa-nies.
Among small-company growth funds, newsletter editor Belden favors Berger Small Company Growth (800-551-5849) and Robertson Stephens Microcap Growth (800-766-3863). On the bargain-hunting side, she likes CRM Small Cap Value (800-844-8258).
If you're already an investor in a small-company fund, think twice before dumping it. It's pointless to compare a small-cap fund with the S&P 500. Instead, check its performance against the Russell 2000. Internet users can get updates at (www.russell.com).