Small Caps Snooze
Friday, June 5, 1998
by Greg Markus
TEMPE, Arizona (June 5, 1998) -- U.S. stocks finished the week on a strong note following the government's release of economic data indicating the domestic economy remains strong despite financial turmoil in Asia. The national unemployment rate remained at a 28-year low of 4.3% in May, while hourly earnings rose four cents to an average of $12.73.
Not all stocks participated equally in Friday's surge, however. Shares of the very largest companies fared best. The Dow Jones Industrial Average soared 167 points, or 1.88%, to close once again above the 9000 mark. The S&P 500 did nearly as well, gaining 1.74%. Moving to the S&P index of 400 mid-cap stocks, however, the gain was a less spectacular if still quite respectable 0.76%.
And what about small capitalization stocks? The S&P Smallcap index rose a modest 0.29%.
That's pretty much the way it's been all year. And the Boring Portfolio, which is invested almost entirely in small- and midcap equities, has performed -- or rather underperformed -- accordingly. On Friday, for example, the Borefolio closed unchanged, as fractional gains in five of its investments -- including big-cap Cisco Systems (Nasdaq: CSCO) were offset by a $3/8 decline in Borders Group (NYSE: BGP) and a $1/8 drop in our REIT, FelCor Suite Hotels (NYSE: FCH).
In light of the persistent differentials among the performances of large-, middle-, and small-cap stocks, the obvious question is: Why does the Borefolio persist in focusing on the little guys? Do we have a thing for underdogs? Do we enjoy beating our heads against the wall?
The answer is: None of the above. For better or worse -- and we believe that in the long run it's decidedly for the better -- the Boring Portfolio buys only what we see to be good value -- that is, stocks of high quality companies that happen to be selling at or below a fair price based on the companies' projected earnings and cashflow.
Fine, you may say. Value is good. But what does a focus on value have to do with plunking one's pesos primarily in small- and medium-sized companies? The answer, as a feature story in the June 15 issue of Business Week attests, is that that's where the value is.
Says Brian F. Rauscher, U.S. equity strategist at Morgan Stanley Dean Witter & Co. (love those mergers), in Business Week, "The earnings for small companies are coming through, and investors will eventually recognize that. The valuation of small caps is extremely compelling."
Equally compelling, we believe -- and equally ignored this year -- is the value in real estate investment trusts. Our REIT, FelCor, is trading at barely 9-times this year's projected funds from operations. And FelCor's dividend has swelled to 6.3%. Yet for a variety of largely technical reasons -- outlined in yet another article in the latest issue of Business Week -- REITs have gotten no respect this year.
This will pass. If value happens not to be the flavor in vogue right now, it eventually will be. Sooner or later, stock prices adjust to a level that reflects fair value, K-Tels (Nasdaq: KTEL) and Entremeds (Nasdaq: ENMD) to the contrary notwithstanding.
And every one of our Boring investments offers excellent value, in our opinion.
Stock Change Bid ANDW + 1/16 21.06 CGO + 1/16 33.63 BGP - 3/8 32.00 CSL + 3/16 48.13 CSCO + 9/16 77.38 FCH - 1/8 33.44 PNR + 5/16 42.31 TBY --- 9.81
Day Month Year History BORING +0.00% -0.18% 1.03% 27.12% S&P: +1.74% 2.11% 14.78% 79.19% NASDAQ: +0.73% 0.23% 13.54% 71.28% Rec'd # Security In At Now Change 2/28/96 400 Borders Gr 11.26 32.00 184.29% 6/26/96 150 Cisco Syst 35.93 77.38 115.33% 8/13/96 200 Carlisle C 26.32 48.13 82.81% 3/5/97 150 Atlas Air 23.06 33.63 45.83% 5/20/98 400 TCBY Enter 10.05 9.81 -2.31% 4/14/98 100 Pentair 43.74 42.31 -3.27% 11/6/97 200 FelCor Sui 37.59 33.44 -11.05% 1/21/98 200 Andrew Cor 26.09 21.06 -19.27% Rec'd # Security In At Value Change 2/28/96 400 Borders Gr 4502.49 12800.00 $8297.51 6/26/96 150 Cisco Syst 5389.99 11606.25 $6216.26 8/13/96 200 Carlisle C 5264.99 9625.00 $4360.01 3/5/97 150 Atlas Air 3458.74 5043.75 $1585.01 5/20/98 400 TCBY Enter 4018.00 3925.00 -$93.00 4/14/98 100 Pentair 4374.25 4231.25 -$143.00 11/6/97 200 FelCor Sui 7518.00 6687.50 -$830.50 1/21/98 200 Andrew Cor 5218.00 4212.50 -$1005.50 CASH $5429.76 TOTAL $63561.01