Small-company stocks have rebounded smartly in recent weeks, but some analysts are urging caution. Since the market low on March 10, the...
Small-company stocks have rebounded smartly in recent weeks, but some analysts are urging caution.
Since the market low on March 10, the Russell 2000 index of small-cap stocks has gained 12.4 percent through Friday’s close, more than the 8.1 percent rise for the broader S&P 500.
“Small caps ought to trade cheaper,” says Credit Suisse strategist Jonathan Morton, who thinks they’re “abnormally expensive” relative to large stocks.
Until last year, small companies outpaced large stocks for much of the past decade, fueled by the economy’s strong growth since the 2001 recession.
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But current tight credit conditions hurt smaller companies more than large, Morton says, because small companies tend to have credit ratings below investment grade.
Weakening profit margins are also a concern, says Citi Investment Research strategist Lori Calvasina.
For the first time since the spring of 2003, more companies are seeing falling profit margins, 28 percent, than rising profit margins, 18 percent, according to the most recent National Association for Business Economics survey.
Soaring raw-material costs are a key reason.