For years now, investors have been combing the landscape of public companies, wondering which will be the next Cisco Systems Inc. (CSCO
) But maybe they should be asking who will be the next Chico's FAS Inc. (CHCS
) True, the top-ranked star of the Standard & Poor's SmallCap 600 is a flyspeck next to the S&P 500-stock index' giants, but there's nothing small about its performance. The Fort Myers (Fla.) women's-apparel retailer more than quadrupled its stock price in the same 12-month period that Cisco was sliced in half. Clearly, shoppers love Chico's. In the fiscal year ended Feb. 3, revenues grew 67.4%, to $259.4 million, while net income soared 83.2%, to $28.4 million. A flash in the pan? Perhaps, but on Mar. 7, there was more good news. In February, when retail sales fell 0.2% in the U.S., Chico's revenues jumped 78.1%, and same-store sales went up nearly 28%.
We think investors will find great values among our stars, the best performers in the S&P SmallCap 600. They got to the top of the list by offering consumers attractive products or services or by offering businesses services that enhance productivity. Being in the energy business during a period of rising prices can get a company to the top as well. To come up with this list, we ranked all the stocks in the index by their one- and three-year stock market returns (as of Feb. 16), and added the two rankings.
The SmallCap 600, the newest of S&P's broad market measures, is made up of 600 U.S. stocks chosen for market capitalization, liquidity, and industry. The total value of the stocks in the index is $341.7 billion, less than the market value of the largest company in the S&P 500-stock index, General Electric Co. (GE
) It's an index that experiences huge turnover as well. In 2000, there were 143 company changes, and turnover has increased every year since its Oct., 1994, launch. Why? Mergers, acquisitions, or graduation of stocks out of the ``little leagues'' and into the S&P MidCap 400 minors.
The past year hasn't exactly been gangbusters for the SmallCap 600. The index was essentially flat. That was a whole lot better, though, than the 16.7% loss suffered by the Russell 2000, an older and better-known index of the small-cap market.
In some respects, the flat figure doesn't reveal the true story, since the past year of the SmallCap 600 is actually a tale of two indexes. Like the S&P 500 and the S&P MidCap 400, the SmallCap 600 is divided into value and growth indexes. The S&P SmallCap 600/Barra Value Index contains stocks with lower-than-average price-earnings and price-to-book value ratios; the S&P SmallCap 600/Barra Growth Index has stocks with higher-than-average ratios. Over the past year, the value index returned 26%; the growth index, -22.7%.
The list of the top 50 is a mix of both. Energy stocks are the quintessential value plays, and they certainly came to the fore as oil prices rocketed. Cross Timbers Oil (XTO
), Patina Oil & Gas (POG
), and Remington Oil & Gas (ROIL
) are all in the business of buying, drilling, and recovering oil from older fields. With oil at $28 a barrel, these properties may not justify the investment by Big Oil, but our nimble SmallCap oil stars exploited them to great profit. Cross Timbers' net income rose from $46.7 million in 1999, to $117 million in 2000. SmallCap oils are looking for an even better year in 2001.
Financial stocks are showing up on the list, too. Houston-based Southwest Bancorp. of Texas Inc. (SWBT
), parent of Southwest Bank of Texas, which lends to small businesses and homeowners, saw its net income rise from $32 million in 1999, to $43.5 million in 2000. Its stock returned 149.3% last year. One worrisome sign: The Federal Reserve Bank of Dallas, watchdog for the region, recently noted slowing demand for loans, particularly at big banks, though it did not detect a slowdown in the region's economy. Earnings per share were up about 20% for each of the past three years, and analysts are looking for a little less than that in 2001.
A different sort of financial play is BARRA Inc. (BARZ
) Besides creating and maintaining the growth and value indexes with S&P, BARRA develops software that lets big portfolio managers, mutual-fund groups, and asset managers balance and manage the risk in portfolios of stocks, bonds, and currencies within individual funds and across vast families of funds. ''BARRA dominates high-end risk management,'' says First Union Securities Inc. analyst Asa W. Graves, who rates it a ''buy.'' The firm, founded in 1975 by some professors at the University of California at Berkeley, has grown briskly: For the nine months ended Dec. 31, 2000, revenues rose 22%, to $173.2 million, and earnings per share were $1.57, vs. 76 cents the year before. But BARRA's stock is not for the faint-hearted: Over the past year, the stock has fluctuated between 18 and 61. It's now trading at 44.
There's a financial angle to HNC Software Inc. (HNCS
), which makes fraud-detection software. The technology, first used by the Defense Dept., has been adapted by credit-card companies to help them fight fraud as well as to better manage customer relations. Medical insurers and telecoms have also put it to work. HNC's customers include 9 out of the 10 top credit-card issuers, insurer Cigna, and telecoms AT&T Wireless (AWE
) and Sprint (FON
). Revenues surged from $179 million in 1998 to $255 in 2000, and the share price nearly quintupled.
Several other highly ranked small companies are successfully tapping consumers' tastes. Cheesecake Factory Inc. (CAKE
), a fast-growing restaurant chain that highlights--surprise--cheesecake on a very large menu, is pleasing palates and raking it in at the cash register. Revenues rose 26%, to $438.3 million, for 2000, and net income leaped 48%, to $32.1 million. Timberland Co. (TBL
) is appealing to a different kind of taste--fashion. The apparel maker has profited from the shift to a more rugged look and has extended its familiar brand even more with clothing and gear. Last year, sales topped $1 billion, and earnings were $2.91 per share, up 70%. The stock nearly tripled.
WMS Industries (WMS
) doesn't sell to consumers, but it sure benefits from their nickels, dimes, and quarters. The Waukegan (Ill.)-based company, which builds slot machines, is cashing in on the growth of legalized gambling. WMS rang up earnings-per-share from continuing operations in the second quarter of fiscal 2001, ending June 30, of 34 cents, up 47% from the year earlier. But don't take our word for its attractiveness: Sumner M. Redstone, chairman and CEO of Viacom Inc. (VIA.B
), owns 25.6% of WMS common stock through his investment vehicle, National Amusements Inc.
If you're investing in small-cap stocks, you need to be well-diversified or have a strong stomach for risk. Consider Aeroflex Inc. (ARXX
) It makes thin-film circuit and interconnecting products that are essential to the U.S. government and defense companies and to manufacturers of fiber-optic gear. Just days after we compiled our ranking, the stock fell 33% in reaction to a profit warning by Nortel Networks Corp. (NT
) about falling revenues in the once-hot fiber-optic industry. The stock still could be a buy, though, since the Defense Dept. will continue to need Aeroflex' state-of-the-art electronics. The company has $134.6 million in working capital and very little debt, which should let it ride out a slump. The stock trades around 10, well below its 52-week high of 38.
In panning the SmallCap index, investors may find gold--maybe even the next Cisco. Not the huge Cisco that dropped precipitously over the past year but the one that went up 12,000% over the past decade--present slump included. |
Copyright 2001 , by The McGraw-Hill Companies Inc. All rights reserved.
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