Small-cap stocks defined as the bottom 10% of the market by capitalisation value are set for another year of positive gains says ABN Amro.
The sector is unlikely to outperform the large-cap sector, but “should match” its “modest gains” set to follow earnings growth through this year, ABN says. ”We believe the evidence of current sector weightings, a bottom-up December 2005 price/earnings ratio of 12.5x and earnings growth of 13% all justify current valuations.”
According to the Hoare Govett Smaller Companies (HGSC) index used by ABN in its analysis, the sector returned 40.4% and 20.3% respectively in 2003 and 2004, although it is unlikely to repeat these figures.
Last year some 19 companies in the HGSC + AIM stocks index went bust, including furniture retailer Courts, car parts maker Mayflower and football club Leeds United – meaning approximately 1% of the joint index’s constituents went bust in the 12-month period.
Online fashion retailer ASOS went from 5.5p to a high of 89.5p in mid-November to become the best-performing stock in the HGSC index last year – representing an annual return of about 1,000%.
Some 1,052 companies make up the HGSC index currently.
ABN’s house view is currently ‘overweight’ on three small-caps in three sectors: real estate, construction and building materials, and engineering and machinery.
The bank is ‘underweight’ in general retailers and ‘neutral’ on support services.
ABN’s figures suggest there are no great differences between the small and large-cap sectors in either yield or dividend growth valuations.
Where large-caps trade at an average forward yield of 3.2%, small-caps in the HGSC index are on a forward yield of 2.8%, with dividend growth for 2005 predicted at 8% and 10% respectively.
Key special situation and recovery stocks on ABN’s watch list of small-cap stocks include: First Technology, Aggreko, Anite, Charter, Chloride Group, CSR, Easynet, Mothercare, Neutec Pharma, Ricardo, Quintain Estates and St Ives.IFAonline
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