Never mind the Nasdaq 100--have you checked out the "Nasdaq 12" this year?
The Nasdaq 100, loaded with major technology stocks, is down 27.3% year to date. But the Nasdaq 12--the dozen stocks dumped from the index in December when it was reshuffled--have gained an average of 25.3%.
Nasdaq re-balances the index annually, and on Dec. 18 it dropped 12 stocks to make room for 12 bigger ones. The Nasdaq 100 is the basis for the tracking stock known by its ticker symbol QQQ. It's the most widely held exchange-traded stock fund, with $27 billion in assets.
Though 2001 has been tough on the tech sector, the tech issues booted from the Nasdaq 100 in December have fared well, led by Internet security specialist Network Associates Inc. (ticker symbol: NETA) and enterprise software maker Legato Systems Inc. (LGTO), up 164.1% and 86.6%, respectively, this year.
The average return of the Nasdaq 12 is skewed by those two huge gainers, but 10 of the castoffs are in the black this year, and even the other two have fallen less than the reshuffled Nasdaq 100.
Why have the discards done so well? One reason may be a shift in investors' preference from big stocks to smaller stocks.
The Nasdaq 100 index includes the largest nonfinancial Nasdaq stocks as measured by market capitalization (stock price multiplied by number of shares outstanding). The annual re-balancing eliminates the smallest companies by market cap.
Yet smaller stocks have been the market's leaders since the middle of last year. Indeed, some analysts argue that small- and mid-cap stocks have been in a "stealth" bull market overshadowed by continued losses in bigger stocks.
"There just seems to be an appetite for small caps," said Max Isaacman, author of "The Nasdaq Investor" (McGraw-Hill, 2001).
In part, that may reflect the 2001 corporate profit picture, which looks best for smaller companies, said Arnold Kaufman, editor of S&P Outlook, an investment newsletter published by Standard & Poor's Corp.
S&P small-cap 600 index members are expected to post earnings growth averaging 16% this year, Kaufman said, while S&P mid-cap 400 company earnings are projected to rise 9.5% over 2000.
By contrast, earnings for the big-cap S&P 500 firms are expected to drop 8% this year.
For the Nasdaq 100, earnings overall are expected to plunge 50% in 2001, according to Thomson Financial, as major tech firms have seen their prospects collapse.
Although smaller companies' earnings look better overall, Kaufman noted that S&P's small- and mid-cap stock indexes still trade at moderately lower price-to-earnings ratios than the S&P 500. In a jittery market, fundamentals such as P/Es take on added importance.
Still, even many of the Nasdaq 12 have suffered declining profit in 2001 along with their bigger-cap brethren. Yet all 12 of the stocks have outperformed the index--for whatever reason.
The rise of hacker attacks and virus-infected e-mails has boosted security software stocks such as Network Associates, whose products include the McAfee line.
Although several analysts call Network Associates a "strong buy," Morningstar's Rob Plaza suggested investors cash in their winnings if they own it or look for bigger bargains if they don't. After this year's run-up, the share price leaves no room for disappointment, he argued.
Legato Systems, which makes network storage management products, got a lift after reporting a rise in first-quarter sales.
The non-tech issues in the Nasdaq 12 may have benefited from investors' search this year for exactly that type of stock--anything outside of computer technology.
Apollo Group Inc. (APOL), for instance, runs education programs for working adults. Sigma-Aldrich Corp. (SIAL) provides biochemicals for medical research. And PacifiCare Health Systems Inc. (PHSY) is a leader in the HMO field, though it has struggled in the last year.
As for the performance of the stocks added to the Nasdaq 100 in December: At this pace, perhaps a few of them might be rejected at the next index re-balancing. They're down an average of 33.6% in 2001.
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Revenge of the Rejects
All 12 stocks booted out of the Nasdaq 100 when the technology-heavy index was re-balanced in December have fared better in 2001 than the reconstituted index.
Ticker Fri. YTD % Company symbol close change Network Associates NETA $11.06 +164.1% Legato Systems LGTO 13.88 +86.6 American Power Conversion APCC 14.29 +15.5 Synopsys SNPS 54.80 +15.5 Apollo Group APOL 37.35 +13.9 Sigma-Aldrich SIAL 43.86 +11.6 Adaptec ADPT 8.77 +9.7 PacifiCare Health Systems PHSY 16.38 +9.2 Quintiles Transnational QTRN 22.16 +5.8 Dollar Tree Stores DLTR 25.14 +2.6 Herman Miller MLHR 24.90 -13.4 Northwest Airlines NWAC 24.84 -17.5 12-stock average +25.3 Nasdaq 100 index -27.3
Source: Bloomberg News