Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: THURSDAY, February 14, 1991 TAG: 9102140214
SECTION: BUSINESS PAGE: C4 EDITION: METRO
SOURCE: The New York Times
DATELINE: NEW YORK LENGTH: Medium
Over the past five weeks, the NASDAQ industrial index has gained 21.4 percent, the second-best performance in the 30-year history of the index. The Dow Jones industrial average, by contrast, is up a comparatively modest 10.3 percent over the same stretch.
The sharp gain has made life difficult for money managers such as Jack Laporte, who runs T. Rowe Price's New Horizons Fund, a fund devoted to small-capitalization stocks.
"It's not easy to step in and buy stocks today that were 20 or 30 percent cheaper a few weeks ago," Laporte said.
But the money is pouring into his fund from eager investors, and Laporte said he is investing it despite reluctance from some analysts who have never seen a prolonged boom in such stocks.
"All our analysts are saying, `Sell, sell, sell - everything looks so expensive,' " he said. But relative to big stocks, there may still be a lot further to go, he added.
The only time the NASDAQ industrial average had a better five-week showing was in the period ending Nov. 5, 1982, when it rose 21.9 percent. As it happened, that was also the time when the last recession was coming to an end, although there was widespread doubt about it at the time. During that period, the Dow rose 15.9 percent.
By some standards, small stocks are clearly a better relative investment now than they were then. Then, the leap came late in a multiyear period of outperformance for small stocks, which peaked in the summer of 1983, with the NASDAQ industrial index reaching 408.42. On Oct. 11 of last year, that index was at a low for the year of 344.11, 15.7 percent below its 1983 level.
Since then, the index, which gives heavy weight to industries such as health and technology, has leaped 40.4 percent, to 483.23. The Dow, by contrast, is up 19.7 percent over the same period.
Moves like that can make even the most determined small-stock bull fear that prices have gotten ahead of themselves, and Laporte conceded: "What I've seen develop over the last week is the inevitable downgrading in quality and bottom fishing, where investors are looking at the stocks that did not move in the initial phases and probably do not have the fundamentals to justify a move."
He declined to name any such stocks, but it is not hard to spot rallies among stocks that had been given up for dead. Businessland Inc., a computer retailer that Standard & Poor's Corp. warned last month might face a liquidity crisis if computer makers stopped providing extra-generous credit terms, last week reported growing losses and falling revenues.
But Businessland said it was making progress toward returning to profitability, although it did not say when that might occur. Still, that was enough to make its share price more than double in the week, rising $1.50, to $2.625, in New York Stock Exchange trading. The stock is still well below the $11.875 it brought last spring.
Whatever the fate of companies like Businessland, it is possible to maintain that small stocks are still relatively cheap. A widely followed indicator of that market is the price-earnings ratio of the New Horizons Fund, which is about 16, Laporte said, based on estimates of profits over the next 12 months. At the end of September, the ratio was only 12.
Back in September, the T. Rowe Price calculations indicated that the price-earnings ratio for the fund was below that of the S&P 500. Now, the ratio is about 1.1 times, or half what it was in the summer of 1983. "I don't think 1.1 times is all that expensive," Laporte said.
When the stock market began to turn up late last year, many stocks did not follow at first. But one measure of the breadth of the most recent rally is that more Big Board stocks have gone up than down in each of the last 14 trading sessions. That is the longest such string, noted Laszlo Birinyi, a market analyst who runs Birinyi Associates, since a string of 19 in January 1985.
It was about the same time that small stocks enjoyed their last run comparable to the current one. In the five weeks ended Feb. 8, 1985, the NASDAQ industrial average leaped 20.5 percent, while the Dow gained only 8.9 percent.
Those moves came after concerns over the economy had depressed prices, although the 1984 slowdown did not bring on a recession.
In the aftermath of the 1985 leap for small stocks, the stock market marked time for several months and then saw big stocks soar while little ones edged up. By the end of the year, the Dow was up another 20.4 percent, while the NASDAQ industrials gained just 5.7 percent.
But the fact that small-stock rallies have faltered in the past may not necessarily indicate that this one also will recede. Pointing to the relative price-earnings ratio figures, Laporte said he hoped this rally would continue. "If this is the long-awaited turn, forecast by myself and others," he said, "these prices are not going to look so bad."
by CNB