Smaller Stocks Hang on to Gains

06/09/2010 11:11 am EST

Focus: STOCKS

Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

Ian Wyatt, chief investment strategist of SmallCapInvestor.com PRO, says smaller stocks are barely ahead for the year while the large indexes are under water.

[For the year,] the [Standard & Poor’s 500 index] is now down 4.6% in 2010, the [Dow Jones Industrial Average] has lost 4.7%, and the tech-heavy Nasdaq [Composite index] has posted a fractional loss of .4%.

Smaller companies have actually fared better so far this year. The Russell 2000 is holding on to a [1.2% loss], while the iShares Russell Microcap Index ETF (NYSE: IWC) is up 0.9% in 2010.

So, while May certainly wasn’t a euphoric month for investors of all types, those with exposure to small- and micro-cap stocks may have had some positions offset losses in larger asset classes.

I wouldn’t say that I’m bearish on the market, but I’m certainly cautious. I recommend continuing to average into stocks, as well as initiating new compelling positions. Weak stocks should be sold without pause if they are breaking down.

I expect to add positions in June, so that should be a clear indication that I see compelling valuations for many small cap stocks at current levels.

In our small-cap portfolio Hypercom (NYSE: HYC) continues to roll out new payment solutions, including the L5000 line which was unveiled earlier this month. This particular line will help retailers with more than one checkout lane (which is almost all of them these days) be mobile and still accept payments. Other functions such as product location and wedding registry processing are possible as well.

Analyst Gil Luria [of Wedbush] said the company’s euro exposure could cut earnings by [four cents] in 2010 and by [eight cents] in 2011. Prior to the potential cuts, the consensus analyst estimate calls for [earnings per share] growth of 113% this year and 40% in 2011.

Backing out Mr. Luria’s worst case scenario from the consensus estimate would mean [earnings of 28 cents a share] in 2010 and [37 cents] in 2011. The forward P/E for the stock would then be around 12x. Even in this scenario this company is attractively valued.

That said, I’m not going to let our gain disappear, so I’m placing a stop loss on shares of Hypercom at $4.03. The stock has pulled back around 12% from the high of $5.15 that it hit on June 3rd. It’s now trading around $4.50, an area of short-term support. (It jumped to over $5.00 in after-hours trading Tuesday—Editor.)

I expect we’ll see other analysts come out and update their recommendations on Hypercom in the next few weeks, and I don’t think the stock will make a quick descent to the $4.00 level.

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