Micro-Cap Rally Shows Renewed Risk-Taking
Speculation is making a comeback of sorts on Wall Street.
In the stock market’s now month-old rally, shares of many “micro-cap” companies--the smallest of small stocks--have led the way.
Some of the shares have experienced such furious price and volume spikes that they recall the “momentum”-fueled buying frenzy that was centered in the technology sector in early 2000.
Many of the small stocks that have risen the most since early April are merely bouncing back a bit from deep losses of the last year. That group includes many Internet-related issues. But other small stocks that have rocketed in recent weeks appear to be attracting classic momentum players--traders who watch for stocks that are catching a significant updraft, and pile in.
Some Wall Street pros think the micro-cap stock rally is a bullish display of renewed risk-taking by investors that could pave the way for a broader and longer-lasting market recovery.
Indeed, smaller stocks in general often have led at the start of new bull markets, analysts note. So the recent surge could be another sign that the yearlong bear market has ended.
But many other analysts say gains in micro-cap shares simply show that, no matter what’s happening in the market overall, there will always be pockets of momentum buying.
“Momentum players are always going to try to find something they can play with,” said Harvey Baraban, a professor at Golden Gate University who runs a for-profit series of trading seminars.
Momentum investing’s image was badly tarnished with the tech-stock crash of 2000, and many of those players lost huge sums. Yet the gains in some smaller shares during the last month suggest momentum investors remain a force in the market.
“Even during the ‘70s--in fact, particularly during the ‘70s--when the market went through waves of bear markets, there were nevertheless strong momentum periods,” said Gary Anderson, a principal at TradersBootCamp.com, a Web site teaching trading techniques to individual investors.
“It was almost as if the momentum players created their own bull markets because the [real] market didn’t give it to them,” he said.
Fans of the micro-cap arena--generally, companies whose market capitalizations (stock price times shares outstanding) are under $250 million--say many of the companies have strong earnings prospects.
Caci International, a small Arlington, Va.-based information technology firm, said first-quarter operating earnings surged 30%. Its shares have jumped 50% in the last three months, including an 8% leap on Wednesday after Caci said it won a $17.6-million government contract.
Tom Barry, manager of the Bjurman Micro Cap Growth fund in Los Angeles, said average earnings of the 115 stocks he owns doubled in the last year.
Also, with interest rates falling, the cost of credit is declining. Many smaller firms rely heavily on bank lending for financing.
Barry’s fund, up 7% year to date, is drawing new investors: Assets have risen to $244 million from $127 million in March. Barry expects to close the fund to new investors soon.
But the latest rally also is lifting highly speculative issues with no earnings. SkillSoft, a Nashua, N.H.-based provider of Internet-training courses for businesses, whose shares are up 120% in three months, posted a loss of $22 million last year.
Some momentum investors have latched onto micro-cap stocks because, in some ways, they’re viewed as lower-risk bets, experts say.
Many investors who bought larger tech stocks last year, and held on, now have huge losses on paper. As the stocks rebound those investors often rush to sell, to recoup their losses. That can cause rallies to abort, stranding momentum players.
Some relatively unknown micro-cap stocks, by contrast, are already at new price highs with the recent rally, and thus don’t face the risk of an “overhead supply” of shares.
Also, because micro-cap firms are all but ignored by Wall Street analysts, investors don’t have to worry about a surprise downgrade torpedoing a stock price, Baraban said.
Still, some experts warn that heady gains in micro-cap stocks could be fleeting. When momentum investors turn their attention elsewhere, as they inevitably do, shares of thinly traded micro-cap companies could quickly fall back.
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Small Stocks, Big Gains
The stock market’s rebound of the last month has been led by such “micro-cap” shares as Caci International and SkillSoft. Some analysts say the action reflects the return of “momentum” investors who seek to quickly pile into fast-moving stocks.
Caci International
Caci shares (CACI), weekly closes and latest on Nasdaq
Wednesday: $36.00, up $2.64
SkillSoft
SkillSoft shares (SKIL), weekly closes and latest on Nasdaq
Wednesday: $31.30, unchanged
Source: Bloomberg News
