Newspaper article The Christian Science Monitor

Small Caps Pick Up the Pace Stocks of Small Companies Look Ready to Catch Up with the Blue Chips

Newspaper article The Christian Science Monitor

Small Caps Pick Up the Pace Stocks of Small Companies Look Ready to Catch Up with the Blue Chips

Article excerpt

Small-company stocks are back in the Wall Street limelight, often outpacing their large-company rivals, and that focuses attention on mutual funds that buy them.

On Monday, for example, the Russell 2000 small-company index jumped 0.57 percent, even while the Standard & Poor's 500 index of large company stocks fell 0.37 percent.

That ripples into mutual fund results: "Small-cap" funds jumped 1 percent in the past week, compared with a drop of 0.77 percent for growth-and-income funds, oriented toward blue-chip stocks. "There's definitely a shift to small and mid-cap companies under way," says Rao Chalasani, chief strategist at Everen Securities in Chicago. A key reason is the very success earlier this year of their blue-chip brethren. "Valuation levels are just very high" for many blue-chip companies, Mr. Chalasani says. Whether the small caps have staying power is another question. During this bull market, analysts have sometimes given the nod to small caps, only to see them fade from the pace set by the huge firms of the S&P 500 index and the Dow Jones Industrial Average. But that may be changing, as more investors worry about high stock prices among the blue chips. Peggy Farley, managing director of AMAS Securities in New York, adds that the new federal budget deal also helps the small caps by lowering the capital-gains tax on profits. Many investors may now see an advantage to small-company issues that appreciate in value but pay minimal or no dividends. That's because dividends (a hallmark of most blue-chip firms) are taxed at a significantly higher rate than capital gains. The new tax law will definitely boost small-cap stocks, says David Sterman, assistant director of research at Individual Investor magazine. Blue chips look tired, he says. Mr. Sterman likes technology-oriented small-cap funds, including Seligman Communications and Information Fund, up 40 percent this year, (800-221-2450) and Fidelity Select Electronics Fund, up 44.88 percent year-to-date (800-544-8888). …

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