Corporate activity is continuing to underpin the strong rises made by smaller companies in the past ...
Corporate activity is continuing to underpin the strong rises made by smaller companies in the past 12 months.
Overall in 1999 the FTSE Smaller Cap Index rose by 53.31% compared to a rise in the FTSE 100 of 21.05%. Year to date the smaller cap index is up 7.2% while the FTSE 100 is down 11.99%.
Last year the growth in smaller companies, traditionally restricted to the first quarter, continued into the second quarter. John Alexander, manager of Henderson Smaller Companies investment trust, says: "Broadly speaking we regard the smaller companies index as a losers index with companies falling into it from the FTSE 350 and companies unable to grow out of it. In the first half of last year there were a huge number of take-overs.
"By continually de-rating them the market did not give these companies a mandate to continue and they were replaced by dot.com and e-commerce businesses. This M&A will continue with public companies going private and larger companies taking out smaller companies on low valuations."
Some 65% of Alexander's portfolio is invested in technology stocks - those which he believes will move up the market cap scale and eventually into the FTSE 100.
On the value side he does not favour basic industrial and engineering companies. Instead he holds stocks immune from the forces of the internet, such as Pizza Express which is trading on a P/E multiple of 20 times. He says: "You can't eat a pizza off the internet. The company is leading its market and offering dividend earnings growth of 30%pa over the next five years." Alistair Currie, manager of Edinburgh UK Smaller Companies unit trust, observes that the market always seems to dip on a Monday after Sunday press reports that the technology stocks will crash.
Currie is having to take profits from individual tech stocks as they exceed their maximum holdings limits in his portfolio and is reinvesting into other technology business. He favours stocks manufacturing product for the internet such as Autonomy which sieves out important e-mails for users. He first bought the stock in July 1998 at $3.70 on Easdaq now the price is $120, in August 1999 it was only $8. Although many technology stocks look overvalued now Currie believes in the long term they could look reasonably cheap. He says: "If you take a hypothetical company on a P/E of 100 times if its earnings grow by 50%pa, which could be achievable, its P/E in five-years time would be 13.2 times."
Away from technology companies Currie expects less fashionable companies will provide decent returns during the year. One of his long term holdings is Cammell Laird, the ship repair company, which is on a P/E of 31 times and offers a projected five year dividend growth of 30%pa.
Over the 52 weeks to 28 February its share price peaked at 145p on 24 January but has since fallen back to 103p. Currie says: "The company is well served with dry docks on both the west and east coasts and it should perform well over the longer term. Its share price has fallen back which is due to lack of interest rather than any fundamental faults."
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