Didn't smaller companies get the memo about the economic slowdown?
Wall Street's earnings growth expectations for this year remain far rosier for small and mid-size companies than for blue-chip firms, data show. Those expectations appear to be helping small and mid-size stocks hold up much better than big stocks.
The average company in the Standard & Poor's small-cap 600 index and in the S&P mid-cap 400 index is expected to post earnings growth of 21% this year, according to analysts' earnings estimates as tracked by First Call/Thomson Financial.
By contrast, earnings of the average blue-chip company in the S&P 500 are expected to rise just 5% this year, First Call data show.
Investors seem to be taking the numbers to heart: So far this year, the S&P 600 index is up 1.3% and the S&P 400 is off 1.2%, while the S&P 500 has sunk 4%.
But even fans of small and mid-size stocks say the aggregate earnings gains estimated for those companies may be overly optimistic, thanks to some of the peculiarities of those sectors.
Steven DeSanctis, an analyst who follows smaller stocks at Prudential Securities in New York, said though many companies in that universe so far are faring better than big companies amid a weaker economy, he doubts the average smaller firm will manage to post 21% earnings growth this year.
Because smaller companies usually are followed by fewer analysts, the "consensus" estimate figures that become a company's de facto growth target can be skewed by one or two bullish projections, DeSanctis said.
In addition, energy companies tend to hold a bigger weighting in smaller-company indexes than they do in the S&P 500, he noted. Energy companies' earnings have been robust recently, of course--that's the upside of an energy crisis.
DeSanctis also said he has found that smaller-stock analysts often are simply more optimistic than analysts who follow blue chips.
Still, with the troubles faced by many multinational giants over the last few years--from Coca-Cola to Lucent Technologies to Xerox--more investors may be appreciating smaller companies in easier-to-understand businesses, analysts say.
Many of those stocks were ignored from 1995 through 1999, as blue chips soared. That changed last year, when the S&P 600 index rose 11% and the S&P 400 gained 17.5%, while the S&P 500 fell 9.1%.
Even if 2001 earnings estimates for smaller companies overall are too optimistic, experts point out that the recent strength in smaller firms' earnings goes well beyond the energy sector.
