Thinking ‘small’
NEW YORK – In a bruising stock market, placing a bet on a small company rather than a behemoth might seem like a foolish move. But that’s the point for investors looking to scoop up a bargain others might have overlooked.
Analysts have been watching the recent path of small-capitalization stocks, which can be among the first to recover when a market rebound is at hand. Last month, investors largely held onto small-caps even as they dumped other types of stocks, hinting that some could be expecting the market to turn higher.
But it’s still too soon to say small-caps are ready to lead Wall Street higher – they’re known for their volatility even in good times.
Still, some investors appear to be setting aside some caution and looking for deals. In September, which was a dreadful month across Wall Street, with the implosion of big financial companies and traders running from stocks, investors withdrew $100 million from small-cap funds. That compares with the $8.1 billion investors yanked from large-capitalization funds, according to fund tracker Lipper Inc.
“I think that’s a signal that the risk appetite of investors is improving,” said Christopher Colarik, small-cap portfolio manager at Glenmede Investment Management in Philadelphia. “I believe that this is some people who have built up cash that are starting to be opportunistic with investing that cash.”
From September 2007 through August this year, before they started feeling more comfortable, investors removed $16.3 billion from small-cap funds. Funds focused on larger companies were harder hit, bleeding $66.2 billion. Investors shifted $26.2 billion into so-called multicap funds, which aren’t wedded to investing companies of a certain size.
“Small-caps had really been shunned for the past year or so,” said Lipper analyst Tom Roseen. “I do believe some people are out there trying to do some bottom shopping right now.”
Colarik is encouraged by the possible shift in sentiment.
“Earlier in the year, the small-cap asset class was underperforming substantially,” he said. Now, with signs emerging that tight lending conditions could be easing, some investors are hoping the stock market might be starting to regain its footing.
“If it were to be forming a bottom and we could look at a crystal ball, I don’t see anything that would likely change the belief that small cap would outperform on a rebound,” Colarik said.
Still, that doesn’t mean any advance will necessarily occur in tandem with the rest of the market. Take a recent week on Wall Street in which stocks showed a partial rebound from a massive sell-off: The benchmark Russell 2000 index of smaller companies gained 0.76 percent while the Dow Jones industrial average and the Standard & Poor’s 500 index, which track bigger companies, each rose more than 4.5 percent.