Transcripts

The Rise of the Small Cap

PAUL KANGAS: "Higher" is exactly where small cap stocks having been going so far in 2007. For a few years now, the small cap area of the stock market has been facing a wave of dire predictions from Wall Street. Still, the group continues to prove that small can be beautiful for investors. Suzanne Pratt has the story.

SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: It's one rally on Wall Street that just won't quit. In the past seven years, small cap stocks have outperformed their large cap peers. Since March of 2000, the Russell 2000 Index, which measures small caps, is up 37 percent. In that same time frame, the Dow is up 24 percent and the S&P 500 has gained just 4 percent. Even though many market pros predict small cap dominance will come to an end this year, so far the Russell is outperforming the S&P 500. Oppenheimer fund manager Mark Zavanelli explains why small cap stocks continue to do well.

MARK ZAVANELLI, SMALL CAP PORTFOLIO MANAGER, OPPENHEIMER FUNDS: Part of it is a momentum story. We continue to see more money coming into the small cap market, effectively chasing the returns that have already been gained in small caps.

PRATT: Still, many experts continue to voice caution about small caps in 2007. They say it's tough to find value in the small cap arena. Others say it's not that small caps will do so poorly this year, it's just that the environment is better for large caps

ZAVANELLI: Larger stocks have underperformed, have had quite anemic returns during this generally good period for the market and we believe they'll catch up over the next year.

PRATT: Most point to predictions for a slowing U.S. economy. Large companies, like General Electric, can better weather the thinner margins that come in a slowdown. Large multinationals with overseas operations are also expected to do well this year because of the weaker U.S. dollar. While Prudential small cap analyst Steven Desanctis expects small caps will under perform large caps, he still predicts positive returns for the sector.

STEVEN DESANCTIS, DIR. SMALL CAP RESEARCH, PRUDENTIAL INVESTMENT GROUP: I think they are going to give you performance that ranges between 5 and 10 percent this year, primarily because valuations are going to catch up to them. At 18.5 times earnings, they do look quite a bit expensive relative to large-caps.

PRATT: One other reason small cap stocks have done so well this decade is that earnings growth has been fantastic. That too is expected to slow with most small cap companies likely to post profit growth only in the high single digits. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.