Stock Market Week: Small caps take the biggest hammering

SPARE A thought for small cap shares as the stock market bloodbath stains every portfolio in the land.

Last week Footsie plunged to its worst level since November, yet the poor old small caps are rubbing along at their lowest since the early months of 1995.

Smaller companies often start the year well; this year was no exception, with the small cap index stretching to a 2,782.2 peak in the spring.

Since then the collapse has been breathtaking. Last week the index ended at 1,914.2.

FTSE International, the organisation which governs the various stock market share indices, put a minimum valuation of pounds 65m when it last decided the composition of the smallcap index.

It deliberates on the indices' make up each December. Next time round it will, no doubt, be forced to lower the cut-off point a long way below pounds 65m, perhaps even to pounds 40m, if it wants to retain a realistic indicator of the smaller company sector.

The dramatic meltdown in smaller company valuations comes on top of what has been a long period of under-performance against Footsie and the mid caps. For a short time in 1996 small cap shares looked the rest of the market in the eye.

Even when the six-year-old index was riding at a record level this year, the small timers were largely playing second fiddle to their Footsie peers.

The difficulty in dealing in the shares of the smaller brethren is often cited as the main reason for their poor showing on the market's under- card. Institutional and international investors exacerbate the liquidity problems by largely ignoring any share below the mid cap index; indeed some restrict their attention solely to the blue chip Footsie constituents.

With the liquidity problems, and in the current economic environment, the stockbroker Teather & Greenwood says the relatively harsh recent mark-down is to be expected.

Yet the small cap collapse could have far-reaching implications. The under-card is a vital part of the market, where the private investor is still a powerful force and private client stockbrokers manage to hold their own.

And, of course, a healthy market is vital as a cash-raising source for British commerce and industry, not only for the giants but the small fry as well.

If the market under-card is seriously damaged it could have a devastating impact on vast swathes of the business community.

As the steady flow of takeover bids, usually for cash, demonstrate, there is still sound value among the small groups. Why are, for example, buccaneering venture capitalists prepared to pay more than the market price in hard cash for the likes of Regal Hotels and brewer Ushers of Trowbridge?

There has already been one round of overseas cash bids for engineers and the like. Another is likely.

Some experts are pointing to the staggering dividend yields on some small companies in unfashionable sectors as examples of oversold shares.

Leeds, the textile group which has promised to hold its dividend, is yielding nearly 22 per cent at 40p. The market is either mad, does not believe the company will maintain its payment or expects the dividend will disappear next year.

Sirdar, involved in floor coverings and spinning and seemingly trading well, yields nearly 12 per cent at 58.5p. It is one company where directors' options, exercisable next year, are out of the money unless there is a sharp recovery.

Incidental intelligence suggests most small investors, perhaps with the exception of unit trust holders, are keeping their heads down and letting the storm roll over them. But some of the traders, particularly those in the T-25 game, have taken a pasting.

Certainly there is continuing evidence of director buying. It seems that many boardrooms just cannot believe such an unrelenting share depression is justified. Director buying in the past has been an encouraging signal.

This week's paltry reporting schedule is a small companies affair.

Thornton, the chocolate group, is expected to record a 12 per cent advance to pounds 12.5m over the year, although a higher tax charge will hold back the earnings per share figure.

Joan D'Olier of the investment house BT Alex.Brown, expects the accompanying trading statement to indicate a slowdown in current like-for-like sales.

Like other members of the small cap index, Thorntons shares have melted in the heat of the setback. In the spring the price was nudging 300p; last week it was 177.5p.

The engineer McKechnie, a midcap constituent, is likely to produce year's figures around the pounds 61.5m mark, which would represent a commendable 11 per cent advance for a group operating in such a tough environment.

The shares, at 248p, bump along at a 12-month low against a 568.5p high. They cannot buck the market trend, although the sale of its Australian operations, which could be announced with the figures, would be well received and provide a prop for the shares.

William Sinclair, a leisure equipment group, is expected to report little- changed year's results of around pounds 6.2m and Johnston, the building materials group, should manage interim figures of pounds 2.5m against pounds 1.2m.