SMALL-CAP OPTIMISTS KEEP THE FAITH: ‘THIS TIME IT’S DIFFERENT,’ THEY SWEAR–THEY’RE BOUND TO BE RIGHT, SOONER OR LATER

Get ready — yet again — for the small company stock comeback.

That’s the advice of Anthony Dwyer, chief market strategist at Ladenburg Thalmann & Co. Inc., an analyst firm in New York.

Mr. Dwyer says the Nasdaq, the exchange for over-the-counter stocks — most of which are small companies — will reach a record 2000 by the end of the third quarter, although he believes it will then drop a bit. That would represent a 14.5% gain, since the Nasdaq now stands around 1750. Still, for the full year, small company stocks would have finally outperformed their large company brethren after having lagged them for nearly four years.

any day now

So he says. Many analysts predicted small-company stocks would outpace larger ones in 1997, and now have egg on their faces. But, exclaims Mr. Dwyer, “This time it’s different!”

To be fair, small company stocks outperformed large company stocks between April and October of last year, but then the small caps caught the Asian contagion. And so far this year, both the Dow Jones Industrial Average and Standard & Poor’s 500 stock index are again trouncing small caps, as measured by the Russell 2000 index. The Dow and S&P are up 8.56% and 8.41% respectively, while the Russell is up 5.81%.

And forget what you’ve heard about overvaluation in the stock market, Mr. Dwyer says. According to his Feb. 9 research report, more than 50% of S&P groups were trading at or near their five-year low valuations relative to the S&P 500.

One undervalued favorite is Consolidated Freightways Corp. a Rosemont, Ill., trucking company that ships across the U.S. and to Canada and Mexico, which is trading at about 15?, 12 times trailing earnings. He also likes voice recognition companies such as Melita International Corp. of Norcross, Ga., which supplies voice recognition services to company call centers. Voice recognition technology is the wave of the future, he insists.

“The whole Star Trek thing — ‘computer, turn out the lights,’ ” he says, imitating Captain Kirk
.. “We’re getting closer to that.”

Not surprisingly, small-cap fund manager Aash M. Shah of Federated Investors’ Small-Cap Strategies Fund, agrees. Large-and small-cap stock valuations tend to move in cycles, and small caps are very much due for an upturn, he says.

The S&P 500 is trading at a 15% premium over companies’ three- and five-year growth rates, while the S&P 600, which measures small-cap stocks, is trading at a 10% premium.

it’s only logical

He likes Probusiness Services Inc., a payroll processing company in Pleasanton, Calif., which has negative earnings to date, but a 15% growth in revenues.

Another favorite is Action Performance Cos., which designs and distributes collectible replicas of of cars driven by famous race drivers.

Mr. Shah contends it’s 50% more expensive to buy a unit of earnings in a large company stock than a small-cap stock that promises explosive earnings growth.

“The next logical leg in the cycle,” he says, “is that small caps will outperform large caps.”