Stocks Rally to Record Highs in Early January with Small Caps Leading the Way

Stocks soared to a great start in 2013, posting the best weekly gain in two years, with small caps leading the way. But the rally was really just an extension of a small cap surge that  started back in mid-November, according to the Wall Street Journal (http://online.wsj.com/article/SB10001424127887323374504578217923720381476.html?KEYWORDS=matt+jarzemsky). The story headline notes that the Russell 2000 index of small cap stocks was up 14 percent since mid-November, when small caps hit bottom, compared to an 8.1 percent increase for the S&P 500.

Photo courtesy of joshkilen.com

Photo courtesy of joshkilen.com

The rally was connected to improvements in home construction and related industries and analysts’ forecasts that small caps will report stronger earnings growth in the fourth quarter than mid-size and larger companies, according to the WSJ. There are also expectations that merger activity will be beneficial to small caps in the coming months.

Finally, the bullish mood in this market tends to benefit small caps, according to analysts quoted in the story. Small caps are more volatile, so when investors are feeling bullish they are willing to make bets on the stocks that have more “juice,” the report noted.

The first week of 2013 also featured a lot of small cap stock picking. The WSJ small cap story mentioned two to watch, Big 5 Sporting Goods and OfficeMax.

Naperville, IL-based OfficeMax Inc. (NYSE: OMX, http://www.officemax.com/) operates 978 retail stores selling office supplies in the U.S. and Mexico, three large distribution centers in the U.S. and one in Mexico. OMX also operates what it calls its Contract segment that sells directly to corporate and government offices. Formerly called the Boise Cascade Corporation, OfficeMax was founded in 1913. The WSJ noted that OMX stock has climbed 27 percent in the past three months. It’s 52-week trading range is $4.10-$10.62 and its current market cap is $869 million. OMX closed Jan. 4 at $10.02, up 42 cents for the day.

El Segundo, CA-based Big 5 Sporting Goods (Nasdaq: BGFV, http://www.big5sportinggoods.com/), which was also featured in a recent Barron’s article, has seen its stock price soar by 31 percent in the same three-month period.  Big 5 operates 409 retail sporting goods stores in the western U.S. and was founded in 1955. According to Barron’s, Big 5 is enjoying a successful turnaround since hitting bottom during the recession. The turnaround strategy included moving to higher-priced, “name brand goods” which resulted in the third quarter of 2012 enjoying the best same-store sales growth since 2006, according to the Barron’s story. A Piper Jaffray analyst says if Big 5 can regain the margins it lost during the recession years, bigger things are ahead. BGFV’s 52-week range is $6.12-$14.30 and its market cap is $283 million. It closed January 4 at $13.28, up 15 cents for the day.

The Barron’s story, which focused on small cap winners for 2012 that the publication had featured during the year, suggested two other small caps to watch: Farmer Brothers and Reading International.

Torrance, CA-based Farmer Brothers (Nasdaq: FARM, http://www.farmerbroscousa.com/) is a producer and distributor of coffee and related products as well as teas, soup bases, sauces, pancake mixes and preserves. Barron’s calls it the small cap column’s “biggest winner to date” based on the fact its stock has nearly doubled since July. The company has turned around this year, expanded its margins and signed up McDonald’s as a client, according to Barron’s. Its 52-week trading range is $6.73-$15.37 and its market cap is $217 million. It closed Jan. 4 at $13.98, down 66 cents on the day.

Los Angeles-based Reading International (Nasdaq: RDI, http://www.readingrdi.com/) develops and operates real estate and entertainment (cinemas, theaters including Union Square theater in New York) assets in the U.S., Australia and New Zealand. Barron’s called the stock a good pick for “patient investors.” RDI’s 52-week trading range is $4.11-$6.62 and its market cap is $140 million. It closed Jan. 4 at $6.07, down 1 cent for the day.

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