It’s a Small Cap World (for Now) – Russell 2000 Index Up nearly 18 Percent for Year

Graphic courtesy of Russell Investments

 

The stock market finally “took a breather” on Monday of this week, as the Wall Street Journal characterized it. The resilient bull market of 2013 has seen only four sessions in May that had a decline in the Standard & Poor’s 500-stock index and Monday was one of them. This year’s bull market rally has recently been across the board–Asian markets have been up, European markets turned up, and market watchers are anxiously waiting for tomorrow, Wednesday, May 22, when Federal Reserve Chairman Ben Bernanke is scheduled to testify to Congress and the Fed releases the minutes from its last public policy-setting meeting. Will Bernanke offer up any clues about his next steps?

Most importantly for Smallcap World, the Russell 2000 index, which tracks the performance of smallcap U.S. equities, climbed above the 1,000 level for the first time Monday, a metric that MarketWatch considers “psychologically important” for smallcap stocks. As of Monday morning, May 20, the Russell 2000 was up 17.9 percent for the year-to-date, according to FactSet (The Associated Press reported the Russell 2000 up 17.5 percent for the year).

The conventional wisdom is that small caps stock are doing well because they are more U.S. focused than the large caps, which tend to be multi-national. And the U.S. economy is recovering as opposed to other economies around the world. But many large caps are doing well, too,

You don’t have to look far to find small cap stocks at 52-week highs, even “all time highs.” Of course the question always is, how much higher can these stocks go? Buy now or wait for the correction that so many experts have been predicting is right around the corner for months now?

We’ve selected a few stocks we know are at all-time or 52-week highs, and others we’ve covered lately that seem to be on the upswing.

Calabasas, CA-based National Technical Systems * (Nasdaq: NTSC, http://www.nts.com/) is a relatively unknown smallcap stock but also the world’s largest independent engineering services and testing company. It’s biggest markets include aerospace and defense, but also works in the automotive and telecommunications markets, among others. NTSC closed at an all-time high of $13.09, up 94 cents on May 21, with a market cap now of about $150 million. NTSC is lightly traded, only about 7,500 shares a day, although that is trending up. 

Northville, MI-based Gentherm * Incorporated (Nasdaq: THRM, http://www.gentherm.com/) is a global developer and marketer of thermal management technologies for a broad range of heating and cooling and temperature control technologies. Best known for its Climate Control Seat systems that actively heat and cool seats in more than 50 vehicles made by the world’s leading automobile manufacturers, Gentherm (formerly called Amerigon) has branched out into heated and cooled bedding systems, cupholders, storage bins and office chairs. THRM also reached a 52-week high of more than $18 this week, then closed May 20 at $17.78, down 33 cents for the day. Its market cap is now $594 million. As recently as last July THRM was trading at just above $10.

We recently featured Cincinnati-based LSI Industries (Nasdaq: LYTS, http://www.lsi-industries.com/) , a company that offers a different take on an LED lighting company. LYTS creates LED video screens and LED specialty lighting for sports stadiums and arenas, digital billboards and entertainment companies. It closed April 29 at $7.09 with a market cap of $170 million. LYTS closed May 21 at $8, up 1 cent for the day, with a market cap now of $192 million.

Analysts at CRT Capital recently upgraded Atlanta-based Beazer Homes USA (NYSE: BZH, http://www.beazer.com/), a company that builds and sells single-family and multiple-family homes in 16 states in the U.S., to a “Buy” with a $29 price target. BZH also acquires, improves and rents homes. The company operates through commissioned home sales counselors and independent brokers. As recently as last Sept. 14 BZH was trading for $3.77. It closed March 20 at $16.86 with a market cap of $410 million. BZH closed May 21 at $21.75, down 98 cents for the day. Its market cap is now $538 million.

San Jose, CA-based SunPower Corp. (Nasdaq: SPWR, http://www.sunpowercorp.com/), like many solar stocks, have been on the upswing lately. SPWR closed May 8 at $15.36, down 6 cents for the day, with a market cap of $1.8 billion. It closed May 21 at $21, down $1.70 for the day but got up to $23.76 just last week. Its 52-week trading range is now $3.71-$23.76.

Fremont, CA-based Procera Networks (Nasdaq: PKT, http://www.proceranetworks.com/) works with mobile and broadband network operators providing intelligent policy enforcement solutions for managing private networks. PKT’s products are sold under the PacketLogic brand name to more than 600 customers in North America, Europe and Asia. PKT’s 52-week trading range is $10.12-$25.99. At mid-day May 2 it was trading at $11.22, with a market cap of $229 million. At market close May 21 PKT was trading at $13.89, down 3 cents for the day, with a market cap of $282 million.

* Denotes client of Allen & Caron Inc., publisher of this blog.

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Some Investors Say Now Is the Time For Small Caps as Markets Continue Strong Rally

Lots of talk on this Friday, Feb. 8, about the S&P and the Nasdaq closing out the sixth straight week of gains. Furthermore, the Nasdaq closed at a 12-year high and the S&P a five-year high based in large part on positive international signs for economic growth.

Wall Street pundits say since the market hit bottom in early November around Election Day, it is nowS&P Image up 20 percent.

And several commentators, like J.C. O’Hara of Phoenix Partners Group, say now is the time to jump into small caps, if you haven’t already done so. He noted that JP Morgan’s top equity strategist today raised his price target for the Russell 2000, an index made up of small cap stocks.

O’Hara told a CNBC audience Friday afternoon that he likes all equities right now, but “the small caps will take you higher.” (http://video.cnbc.com/gallery/?video=3000146737&play=1#).

O’Hara said there is so much “pent-up demand for small cap stocks,” adding “I don’t want to stand in front of this bull train.”

  

From Worst Quarter Since 2008 to Best First Quarter Since 1998

Last Oct. 4 we filed a blog post based on the closing of the worst quarter since 2008. We were talking about the third quarter of 2011 that ended Sept. 30. The Dow Industrial Average dropping another 240 points on the final day to close out at 10,913.

The dismal quarter prompted  a predictable outpouring of dire predictions from bears bemoaning  the state of the economy, the lack of job growth and the unfortunate future that lay ahead. In our post, we tended to take a longer view more in line with veteran analyst Otis T. Bradley (then of ICM Capital Markets, now with Gilford Securities), a relentlessly optimistic bull who has insisted for some time that, while we may have been in the midst of a correction back then, we are in the middle of the “Greatest Bull Market of All Time.”

Things have certainly changed in six months time much as Bradley predicted. Granted, the fourth quarter is typically a good one for stocks, and particularly for the technology sector. But the Dow has now climbed over 13,000 and has been there for some time. Stocks have been buoyant almost since the day we filed that post. Is Wall Street now in the middle of a bull market, as Bradley has long suggested? Market watchers say the first quarter of 2012 is the best first quarter since 1998.

New York Times correspondent Paul J. Lim, who is also a senior editor at Money magazine, offered some evidence on March 24 that it is (http://www.nytimes.com/2012/03/25/your-money/bull-market-may-have-much-further-to-go.html?scp=1&sq=Paul%20lim&st=cse). Among his key points:

  • Small cap stocks typically lead a bull rally, with the larger caps following only after bull markets mature. That is certainly the case. The Russell 2000 index has gained 36 percent during the past six months.
  • Economically sensitive stocks like techs and consumer discretionary stocks have been outpacing the broad market, another sign of early bull markets.

Back when we filed our Oct. 4, 2011 post we highlighted four small cap stocks chosen from the Thomas Weisel Partners Asset Management LLC fund, which invests heavily in small caps in technology and healthcare and the consumer and service sectors. We promised we’d report back, so here they are and have a look at what has happened to them:

Atlanta-based Internap Network Services (Nasdaq: INAP, http://www.internap.com), a provider of Internet services to help with cloud-based applications, closed Oct. 3 at $4.48, down 16 cents on the day with a market cap of $240 million. At mid-day on March 29, INAP was trading at $7.37, down 6 cents so far on the day, with a market cap now at $377 million.

Mountain View, CA-based Map Pharmaceuticals (Nasdaq: MAPP, http://www.mappharma.com), which develops drugs for a variety of ailments including diabetes, asthma and migraines, was apparently a big part of the Weisel fund’s holdings (not sure if that is still true). Back on Oct. 3, MAPP closed at $13.76, down 86 cents on the day, but the stock had been on an upswing. Back in early August it was down as low as $11.17. At mid-day March 29, MAPP was trading at $15.35, down 85 cents so far for the day. It so happens that MAPP reported its fourth quarter, year-end results on March 29, showing a fourth quarter loss and a financial restatement.

Wilmington, NC-based TranS1 Inc. (Nasdaq: TSON, http://www.trans1.com) develops minimally invasive instruments and transplants for degenerative disc diseases and is another stock in which the Weisel fund had a large position. TSON closed Oct. 3 at $2.73, down 27 cents. At mid-day March 29, TSON was trading at $3.24, down 3 cents on the day.

Mountain View, CA-based Hansen Medical (Nasdaq: HNSN, http://www.hansenmedical.com) develops robotics for controlling catheters and medical devices and was yet another big part of the Weisel fund. HNSN, which was above $5 in late July, closed Oct. 3 at $3.05, down 25 cents that day. At mid-day March 29, HNSN was trading at $2.97, down 2 cents so far on the day.

Strong Earnings, Fed Interest Rate Report Keep Small Caps Soaring

So much for predictions. A little more than a week after the Wall Street Journal suggested small caps may have topped out, the same reporter hailed a new high for small caps based on the soaring Russell 2000 index. Prompted by a slew of good earnings reports and  the Federal Reserve’s suggestion that no interest rate hikes are on the immediate horizon, the Russell index of small cap stocks on April 27 set a new record of 858.31, breaking a high set back in 2007, according to the WSJ.

With large caps, the Nasdaq, the Standard & Poor’s stock index, gold and silver soaring as well, portfolio managers were quoted in the WSJ as predicting that the Fed’s comments gave confidence to investors “to take stocks to levels we haven’t seen in three years.”

They noted that some of the stocks that make up the Russell index “have seen their share price multiply by 50 times or more,” particularly the stocks that were hit hardest by the recession and are now potential takeover targets. High-flying examples include Tulsa-based Dollar Thrifty Automotive Group (NYSE:DTG), which has jumped 96-fold since March 2009 and Ft. Worth-based Pier One Imports (NYSE:PIR), which has increased 81 times.

Also continuing to rise during the week were the three stocks that SmallCapWorld cited in our last post as having possibly topped out: American Axle & Manufacturing (NYSE:AXL) moved from $12.24 to $12.80; Select Comfort Corp (Nasdaq: SCSS) went from $13.27 to $15.87 and Keryx Pharmaceuticals (Nasdaq:KERX) moved from $5.04 to $5.29.

How long can all this last? One portfolio manager suggested it should last long past the June wrap up of QE2, perhaps for the entire year. Just for curiosity sake, we took a look at a few of the stocks that were this blog’s best performers for 2010 to see how they are faring in the bull market of 2011.

Scotts Valley, CA-based VirnetX Holding Corp. (Amex: VHC, http://www.virnetx.com/), a developer of software and technology for securing real time security solutions over the Internet, closed out 2010 at about $15. It closed Friday, April 29 at a whopping $25.35.

Bellevue, WA, Radiant Logistics (OTCBB:  RLGT, http://www.radiant-logistics.com/), a global transportation and supply chain management company, was about $1.18 at the start of 2011. It closed April 29 at $1.45.

Wilmington, OH-based Air Transport Services Group (Nasdaq: ATSG, http://www.atsginc.com/), a provider of aircraft, airline operations and other related services primarily to the shipping and transportation industries, was $7.84 at the start of the year. It closed April 29 at $8.18.

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, http://www.aam.com/) 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, http://www.keryx.com/) 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, http://www.selectcomfort.com/) 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.

Old Wall Street Adage Suggests Market May Be Reaching A Peak

“If large caps beat small caps in January, that trend will continue throughout the year.” That’s an old Wall Street adage. The question remains whether it will be on the money this year.

According to the Financial Times, the Russell 2000 index, which is made up of small- and mid-cap stocks, fell .3 percent in January compared to a rise of 2.7 percent for the Dow Jones Industrial Average and a 2.3 percent rise in the Standard & Poor’s 500.  This is a sign investor optimism is declining, according to the Times story (http://www.ft.com/cms/s/0/a0e32be2-2e26-11e0-8733-00144feabdc0.html#axzz1DK6KY7ps). 

Also cited in the Times article is a Bank of America Merrill Lynch report noting that fourth quarter earnings from smaller companies in January trailed fourth quarter earnings from larger companies for the first time since 2008. If this small cap underperformance keeps going, as the adage indicated it may, many investors believe it’s an indication that the recovery phase of the U.S. economy is ebbing and riskier times are ahead.

In general, superior earnings from larger cap stocks tend to depress investment in shares of smaller caps. That’s because investors believe that the market is maturing or topping off, prompting a move toward safer, large cap stocks, according to the FT.