Stock Market Week: Battered minnows get their own index

SMALL COMPANIES have been fighting for their stockmarket life of late. A combination of dire economic conditions, low liquidity and scarce institutional interests have pushed the prices of small stocks to bargain-basement levels.

Over the past six months, the Small Cap index excluding investment trusts has lost around a quarter of its value, at a time when bigger stocks were doing rather well.

This chronic underperformance has left the Small Cap close to its lowest point vis-a-vis the All Share since its launch in 1993. In stockmarket terms, small is certainly not beautiful.

The reasons for the debacle are well known. The Small Cap has a higher percentage of manufacturers and retailers that have been hammered by the deteriorating economic environment.

Smaller companies have also been shunned by fund managers, who have been concentrating an ever-increasing portion of their money on the big boys with pan-European and worldwide ambitions.

From today, the battered minnows will have a brand new index. The FTSE All-Small will bring together some 1,300 stocks currently in the Small Cap and Fledgling lists, even though the two indices will still be calculated separately.

A look at the technical details of the All-Small underlines the plight of the undercard. The combined market value of the thousands of companies making up the index is around pounds 79bn, below the capitalisation of BP-Amoco - a single, albeit huge, oil company.

In a review of the smaller companies sector to be published this week, broker Henderson Crosthwaite asks one of the Square Mile's most muttered questions: "Why are we bothering with small caps?"

The answer, according to Roger Cursley, Henderson's head of smaller company sales, is that buried under a pile of no-hopers, there is some precious value to be unearthed. "There are an awful lot of small companies out there and they have all been tarred with the same brush. They are all under a cloud because of their exposure to the real economy. The trick is to try and focus on the good ones."

Henderson's strategy is two-fold. On one hand it is about finding the real growth stocks, which will soar in value over the next two to three years and become the new millennium's blue chips or medium caps. But on the other hand it is also about picking the ones that have fallen so sharply that their valuation "makes a mockery of the strategic value of the business".

Electronics Boutique belongs to the first group, according to Henderson. The broker predicts that the computer game retailer will see a 50 per cent plus rise in profits over the next two years, with profits set to almost treble as the videogames market remains buoyant. The shares, down 1.75p to 86p on Friday, are now more than 13 per cent below their 98p all-time high.

Austin Reed is on Henderson's list of "too-bombed-out-to-be-true" stocks. The retailer's shares, down 1p to 96.5p on Friday, are now at their five- year-low and have more than halved since May. This rout has left Austin with a market cap of around pounds 30m, which looks rather flimsy given forecasts of pounds 123m sales and pounds 9m profit for 1999.

But for all the small caps' efforts, the big Footsie boys are still dominating this week's results schedule. Half a dozen blue chips are set to reveal their numbers. Bass, which reports on Thursday, is the most prominent. Recent troubles have come from the drinks division, hit by a recent product recall, and in pubs and restaurants. The grub operations have been hammered by the wet summer and were behind a profit warning in September. The shares, which hit a low of 636p after that statement, have recovered of late and are now back to around 870p. The hotels division will be the key profit driver for the group, helped by a good performance from Holiday Inns and by the contribution from InterContinental, acquired in March for pounds 1.77bn. Analysts are shooting for a near 10 per cent slide in full-year profits to between pounds 630m and pounds 650m.

GEC, the defence electronics giant, is also on the block on Thursday. This is the first set of results since a major overhaul of the portfolio. The company has disposed of over pounds 1bn worth of sales and floated its share of Alstom, the Anglo-French joint venture for pounds 1.2bn. It also bought the US defence firm Tracor for pounds 875m and bought out GPT, its joint venture with Siemens, for pounds 700m. The shake-up is expected to have had little effect on interim profits, forecast at around pounds 440m to pounds 450m against pounds 442m. However, the changes will increase pressure on Lord Simpson, the chief executive, to find a deal to reduce GEC's cash mountain, with recent speculation pointing to a deal with the French telecom giant Alcatel.

Carlton's numbers, out tomorrow, will be hit by digital TV start-up costs. The launch of ONdigital, co-owned with fellow ITV company Granada, will wipe out some pounds 20m from 1998 profits of around pounds 310m, down from pounds 326m a year ago. Industry experts expect a strong showing from ITV programs to offset the Asia-induced weakness of its Quantel TV and film products unit.

Royal Bank of Scotland will please in the short-term and worry in the long-run. Thursday's profits will be jolly enough - say a 20 per cent surge on last year to pounds 920m. However, bad debts are set to double to around pounds 300m from pounds 146m. More than pounds 100m will come from Indonesia-related provisions and analysts will want to take a close look at RBO's credit quality.