Small-Company Stocks Vulnerable in Slowdown

JON SPRINGER

No publicly traded companies in the food retailing business are looking forward to any more tumult than the stock market has already seen this year, but as fears of a downturn grow, the ride could become especially rough for so-called small caps.

While certain small-company stocks through last week were doing better than they were in the same period a year ago, the ride has been volatile, and some companies have experienced drops that haven't necessarily been tied to their own performance. This, analysts say, may signal the beginnings of a so-called “flight to quality” among investors that could leave small-cap retailers wanting for investors. Larger companies in the meantime could receive additional investor interest as “defensive” plays, observers added.

Much may depend upon how the economy holds up in coming months. The National Association of Business Economists last week said the economy faces a higher risk of recession from credit markets, housing and energy prices, but the majority of economists it surveyed still believe a recession is not the likely outcome. However, the number of economists surveyed who believe the U.S. will slide into recession grew twofold since NABE's September survey, the Washington-based group said.

These fears may manifest themselves in additional small-cap stock volatility.

“If you look at the macro environment, the small-cap retail is under a lot more pressure than the mature, stable companies,” Karen Howland, an analyst with Leh-man Brothers, told SN in a recent interview. In the case of Minneapolis-based distributor Nash Finch, Howland noted the stock had been as high as $40 per share in mid-October and dropped into the $30 range — without any news to explain it.

Howland said she suspected investors in general were becoming choosier as to where they invest, eschewing smaller companies for more predictable, safer vehicles.

“People are looking for safer places to put their money, and smaller-cap retailers tend to be more volatile and slightly riskier,” Howland said. “And retail has been under pressure with gas prices up because of the idea that people will have less to spend at retail stores.”

While larger, more stable stocks typically do better in economic slowdowns, that didn't turn out to be the case for large supermarkets the last time around, according to Andrew Wolf, an analyst for BB&T Capital Markets, Richmond, Va. In an interview with SN last week, Wolf said competitive pricing improvements made by Kroger and Safeway since 2001 should help their stocks perform better in a slowdown, but, he added, that remains to be seen.

“Supermarkets are a little better positioned now than they were the last time around, but a consumer recession or a full-blown recession could be the true test,” Wolf said. “In general, the tendency is for larger, more stable food retailers to do better in a recession, because while their earnings may slow, they won't slow as much as a luxury car dealer. But that didn't happen last the time, because they weren't priced right, and they lost a lot to Wal-Mart.”

Volatile and Vulnerable?

Following is a list of the smallest U.S. publicly traded food retailers and distributors in terms of market capitalization, and their 52-week stock changes, as of early last week. Analysts said such small companies could see less investor interest in the event of a continued economic downturn or recession.