WSJ: Small Caps May Be ‘Too Pricey,’ Headed for Fall

With the Russell 2000 small cap index close to record highs, some market analysts are suggesting it’s about time for the larger cap stocks to start moving up and the smaller stocks to back off, according to the Wall Street Journal. Some veteran analysts suggest these highs are true to form because small caps typically perform better than large caps in the early stages of a recovery. Others don’t necessarily deny that, but argue that the small caps today are nowhere near peaking and have lots of growth still to come as the economy continues to recover.

Either way, WSJ reporter Jonathan Cheng makes some interesting points about the current market for small caps, including:

  • The Russell 2000 index of smallcap stocks is trading at nearly 18 times one-year forward forecast earnings, which is a record according to Bank of America Merrill Lynch. 
  • Since the March 2009 bottom, the Russell 2000 has risen 143 percent, compared to 95 percent for the S&P and 89 percent for the Dow.
  • During this year alone, the Russell 2000 has risen 6.6 percent.
  • Only about 11 percent of Russell 2000 stocks are trading at less than 10 percent future earnings.
  • Investors are expecting small caps to report 19 percent earnings growth for the recently concluded first quarter, compared to 13-15 percent for large caps.
  • Small caps lack of exposure to emerging markets will begin to hinder their rise, according to Steven DeSanctis of Bank of America Merrill Lynch

Other analysts take an opposing view, suggesting that the recovery is still in its early stages and small caps still have plenty of room to grow, according to Cheng’s report.

Here are three of the best performing small cap stocks since the March 2009 market low according to the WSJ:

Detroit-based American Axle & Manufacturing (NYSE:AXL, designs and manufacture driveline and drivetrain systems for the U.S. automotive industry. Their products include axles, chassis modules, driveshafts, transfer cases and steering components, among other items. AXL stock is up 3,828 percent since March 2009 and on April 20 closed at $12.24, still off its 52-week high of $16.03 set last January.

New York City-based Keryx Pharmaceuticals (Nasdaq:KERX, develops and sells products for the treatment of life-threatening diseases including cancer and renal disease. KERX stock is up 4,042 percent since March 2009 and as of April 20 trades at $5.04 but was more than $6.50 in May 2010. A recent Seeking Alpha article suggested KERX is a takeover target because it has two drugs in late stages of development and the larger drug companies like Pfizer and Merck facing looming patent expirations for some of their larger drugs.

Minneapolis-based Select Comfort (Nasdaq: SCSS, manufactures and distributes beds and other sleep-related accessory products. It stock is up 4,844 percent since March 2009 and on April 20 closed at $13.27, nearly hitting its 52-week high of $13.29. If interested, tap into management’s first quarter results conference call at 5 p.m. April 20.

The biggest gainer in the Russell 2000 since March 2009 is Dollar Thrifty Auto (NYSE:DTG) up 9,563 percent. Dollar Thrifty’s market cap of $2 billion is above this blog’s $1.5 billion ceiling.


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