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SIVY ON STOCKS from money.com
May 25, 2001 *****************[ A D V E R T I S E M E N T ]**************** Jump-start a child's College Fund with MONEY's $5000 QUICK CASH Sweepstakes! It's easy - just click the link below for your chance to enter to win $5000 Cash! Plus while you're at money.com, jumpstart your investments with a FREE Trial issue of MONEY! Click Here: http://www.money.com/scholarship ************************************************************** Small is beautiful Stocks with market caps of less than $7 billion are cheaper than the market's giants -- and are likely to outperform them. By Michael Sivy For most of the past seven years, stocks with the largest market capitalizations outperformed mid- and small-cap stocks. As a result, the big guys grew more overvalued relative to smaller companies. In the wake of the tech wreck that valuation gap is narrowing, but there's still a long way to go. And that means opportunity. Shares of the 300 largest companies -- those with market caps of roughly $7 billion or more -- trade at an average P/E of around 23. Smaller companies have average P/Es in the 16 to 19 range. P/Es vary with companies' earnings growth rates, of course, but right now smaller stocks offer growth at a cheaper price. As investors realize what good deals are available, share prices of those companies are likely to benefit from rising price/earnings multiples. Here are three companies that look well worth further investigation: T. Rowe Price [TROW] is a stock I've always liked. The share price has gone nowhere since 1998 -- the stock traded in the high $30s back then and is currently at $36.70. The reason, not surprisingly, is the economic downturn -- mutual fund companies take such setbacks especially hard. But T. Rowe Price seems to be past the worst -- the share price is up 25 percent since the April lows. I view this stock as a lot more than just a cyclical play, however. Mutual funds companies earn profits based on the dollar-value of the assets they manage. And those assets grow in two ways. First, investors can add new cash to funds. Except for a couple of months earlier this year, inflows into stock funds have remained uninterrupted for most of the past decade. That trend will continue as Americans become increasingly responsible for providing for their own retirement. A fund company's assets under management also grow, however, simply because the market rises over time, increasing the total value of the stocks in the funds they run. So if the S&P 500 returns 12 percent a year, T. Rowe's profits should climb a bit faster. The shares currently trade at 24 times this year's estimated earnings. St. Joe [JOE] is a special situation -- a real estate holding company that controls a big chunk of the Florida panhandle. Much of the company's 1 million-plus acres -- or nearly 3 percent of the state -- is beachfront or near-waterfront (within 10 miles of the Gulf Coast). St. Joe is a competent developer of resorts and planned communities, but in truth the stock is a play on the opening up of the Florida panhandle. Acreage there is cheaper than along other parts of the Gulf Coast because of lousy transportation and infrastructure. More highways and an enlarged airport are in the works, however, and as they're completed land values could rise substantially. At $25.70, the shares look a bit dear on a price-to-earnings basis, but St. Joe is really valued on its assets. Whole Foods Market [WFMI] operates a chain of more than 120 natural foods supermarkets, making it the category leader. A quarter of the stores are in California, and profit margins have been hurt there by power shortages. Nonetheless, earnings were up more than 10 percent in the most recent quarter. And the company has indicated that earnings could grow at a 15 percent-plus annual rate in the second half. Analysts believe Whole Foods could more than double its number of stores over the next seven years, simply by expanding to other parts of the U.S. The chain's compound earnings growth is projected at up to 20 percent for the next five years. At $56.30, the stock, which will soon split 2-for-1, trades at 26 times this year's estimated earnings. ### Post your comments on Michael's column at: http://www.money.com/depts/investing/sivy/index.html To subscribe or unsubscribe to Sivy on Stocks, go to: http://www.money.com/email/ ----------------------------------------------------------- CONTACT THE BIGGEST COMPANIES IN THE WORLD! Over 5,000 contact names in the OFFICIAL FORTUNE Databases. 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