Transcripts

Small Caps Are Feeling Some Big Pains

PAUL KANGAS: The downturn in stocks has been felt in nearly every sector, but the pain has been especially acute in small cap with the Russell 2000 falling more than 10 percent in just six weeks. Still, some experts are warning investors not to use current weakness as a buying opportunity.. Erika Miller explains.

ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: Small caps have been in big trouble lately. The sell-off in the stock market has hammered many sectors, but some of the worst damage has been in small stocks. The Russell 2000 index of small cap stocks peaked on May 8 and has fallen about 12 percent since then. By comparison, large cap averages, like the Dow Jones Industrial Average and the S&P 500, have fallen about half as much. The declines in small stocks are part of a broader trend of investors bailing out of riskier assets. Many market strategists are predicting that will continue and they expect large caps to beat small caps this year for the first time in eight years. Experts say the main concerns are rising interest rates and slowing economic growth.

STEVEN DESANCTIS, DIR. OF SMALL CAP RESEARCH, PRUDENTIAL EQUITY GROUP: As we see the economy slowing in the second half of this year and small being more economically sensitive than large cap, you`ve got to think that earnings growth is going to slow faster for small versus large.

MILLER: Another advantage for large caps is greater liquidity, so investors can move in and out of them more quickly during market turmoil. Some experts also prefer large, multinational companies because more of their earnings come from abroad.

CHARLES CRANE, PRINCIPAL, SCOTSMAN CAPITAL MANAGEMENT: Large cap names will benefit from the relatively speedy growth of economic activity outside the U.S. Smaller cap companies tend not to have international exposure whereas the larger, multinational companies do.

MILLER: On top of that, experts say large caps have more attractive valuations, especially on a price to earnings basis.

NIKOLAOS MONOYIOS, PORFOLIO MANAGER, OPPENHEIMER FUNDS: Small cap stocks have become relatively expensive compared to large caps, especially the mega- cap stocks. The 40 or 50 largest companies that make up the top 40 percent of the stock market have become relatively very attractive on a valuation basis.

MILLER: Another reason analysts are pessimistic about small caps is they had a very strong first quarter. Historically, when that happens, the sector tends to lag over the next nine months. Erika Miller, NIGHTLY BUSINESS REPORT, New York.