Newspaper article St Louis Post-Dispatch (MO)

As the Bull Gets Older, Small-Caps Look Better

Newspaper article St Louis Post-Dispatch (MO)

As the Bull Gets Older, Small-Caps Look Better

Article excerpt

Many fund investors have given up looking for bargains in today's stock market. After all, the stock market's major indexes have climbed by around 80 percent since 1995, setting a series of records.

But some analysts say there are plenty of bargains for investors who look in the right places. They cite small-company stocks and the funds that hold them as a perfect example.

In fact, the gains in the stock market indexes have been led by a small number of today's biggest, most popular firms. Stocks such as Intel (up 130.7 percent since 1995); IBM (up 96.4 percent); and Microsoft (up 88.3 percent) have accounted for the lion's share of the gains in the Dow Jones industrial average and the S&P 500. Not surprisingly, funds that invest in large companies have gained an average of 25.8 percent since 1995, compared with a 20.7 percent annualized gain for the typical small-company growth fund. But Chuck Carlson, editor of Dow Theory Forecasts, an investment newsletter in Hammond, Ind., figures small-company funds soon may start outperforming large-company funds. Among his reasons are that large companies' profits will slow this year. Large companies, Carlson points out, have had much faster profit growth in recent quarters. That's due in large part to gains from overseas profits, and restructurings that have slashed the operating costs of many big firms. But the strong U.S. dollar will reduce the value of profits that are counted in relatively weak overseas currencies. And many firms have done all they can to squeeze extra profits from their restructuring efforts. The result is that the average profit gain for large companies will be only 15 percent in 1997, according to a consensus of analysts' estimates. That compares with a 35 percent estimated gain for the smaller companies that make up the Russell 200 Index. Small stocks generally lead big stocks during the late stages of bull markets. The current bull market is looking long in the tooth. History suggests that we could see a small-cap stock rally before it ends. Small stocks add diversification benefits. …

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