On Wall Street, Big Things Come in Small-Cap Techs

The big story on Wall Street suddenly is smaller stocks.

Even as a sell-off in large tech names and other blue chips weighed on major indexes on Wednesday, the best-known small-stock index hit a new high for the third day in a row.

The Russell 2,000 small-cap index jumped 6.56 points, or 1.3%, to a record 520.02.

The Nasdaq composite index also hit a fresh peak, adding 20.48 points to 4,151.29. But it and the Dow Jones industrial average were hurt by Microsoft’s dive of $8.31 to $107 on investor disappointment that its quarterly earnings didn’t top estimates by a wider margin.

The Dow slid 71.36 points to 11,489.36.

But on Nasdaq, the home of most small stocks, more issues rose than fell on Wednesday--continuing a market shift toward smaller names.

As measured by broad indexes, smaller stocks have outperformed their larger brethren since the market began rallying in late October. The Russell 2,000 has risen 23% since Oct. 28, while the Standard & Poor’s 500 is up a mere 8.5%.

But as with larger stocks, the gains in small caps are largely concentrated in tech stocks. The 268 tech-related companies in the Russell 2,000 are up an average of 65% since late October. That tops the 35% average climb among tech companies in the S&P; 500.

The small-cap tech move has become more pronounced this year. The Russell 2,000 tech contingent is up 6% year to date, versus a 2% drop in the S&P; tech group.

“The tech small-growth area has been hot as a pistol,” said Peter Sidoti, chief executive of Sidoti & Co., a New York-based small-cap research firm.

The names aren’t well known to investors. On Wednesday, for example, the Russell tech group was led by MicroStrategy, a Vienna, Va., software maker, which leaped $23.63 to $265. Another big gainer was Kopin Corp., a maker of semiconductor materials, which rose $16 to $76.

As the valuations of some larger tech issues have become exorbitant, even by their normally pricey standards, investors have been shopping among smaller names, experts say.

For example, when Intel surged 13% last Friday on the heels of a stellar earnings report, investors bid up a number of smaller semiconductor stocks on the theory that those companies may also notch good profits.

“People are buying the hell out of good earnings right now,” said Tom Barry, chief investment officer at George D. Bjurman & Associates in Century City.

The question is whether the small-cap rally can last. The sector overall has made several false starts in the past few years only to have investor allegiance return to larger issues. And even small-cap bulls agree the rally must broaden beyond techs, which they say are due for some sort of cooling period.

Still, the small-cap rally is causing some money managers to shift funds out of larger issues, said L. Keith Mullins, Salomon Smith Barney’s small-stock strategist in New York.

“There’s an enormous amount of money that simply ignored small caps for a long time and that now feels pressure to participate in the group,” he said.

And even with their recent gains, the price-to-earnings ratios of many smaller stocks pale in comparison to big stocks’ P/Es, Mullins said.

But analysts also concede that the same can’t be said of many small-cap tech issues--which may now be as pricey, or more so, than bigger tech names.

Indeed, a key question is whether many small-cap buyers are searching for solid companies--or just playing the “momentum” game and chasing smaller issues that suddenly turn hot.

Sidoti, however, said he has noticed a nascent move toward value-oriented smaller stocks in the last six weeks. Volumes have picked up in many of the value stocks he tracks, and buying activity has stepped up.

“You’re seeing more interest, but you’re not seeing [investors] pulling the trigger just yet” and buying forcefully, Sidoti said.

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Market Roundup, C10

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Small Wonders

Wall Street’s leaders in recent months have been smaller stocks--and in particular, small tech issues. Weekly closes and latest for the Russell 2,000 index tech sub-index:

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Wednesday: 340.60

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