CrossWave Communications (fka CWCI)

[blueskywaves]

Small / Mid Cap Overview
03-Jul-03 09:47 ET

[BRIEFING.COM -- Robert J. Reid] Briefing.com has been highlighting small cap ideas on In Play nearly daily for the past six months. In this column, we will provide a more in-depth analysis of ideas. We are changing our strategy on the sector as a whole. The breakout strategy has worked well, but appears to have mostly run its course. While we are not abandoning those names, we recommend investors consider some value small caps.

Solid Second Quarter

Q2 was a heck of a quarter for the small cap space. The Russell 2000 and the S&P 600 Small Cap Index were up +23.0% and +19.6%, respectively. This compares to +14.9% for the S&P 500 and +12.4% for the Dow.

In the first half of 2003, Briefing.com highlighted some breakout / strong story opportunities in the In Play section.

For example, MetroLogic was profiled in January as a play on increased demand for airline security services.

Example (Jan 21): New High Profile -- Metrologic Inst (MTLG) 9.41 +1.86: Issue moves to a new 52-wk high. While volume today is 8.6x avg turnover, the 24% advance is occurring on just 33,000 shares traded. MTLG is a manufacturer of laser and holographic bar code scanners used by grocery stores, package handlers, and libraries. Co also offers airport baggage scanning systems. MTLG's 'scanning tunnel' system is used by airports to direct bags to the appropriate aircraft loading ramp by interpreting bar codes attached to luggage at the the time of check-in. Baggage that has not been properly entered into the system or identified as being searched is rejected and sent to a separate claim line to be investigated... MTLG is expected to grow EPS by 78.5% in 2003 to $0.50 (p/e 18.8). Stock higher today after MTLG raised Q4 outlook to +$0.25 from $0.10. Mkt-cap $52 mln.

MTLG is up 287% since then. Other winners include: ASKJ +194% (Jan 29); CNQR +145% (Jan 10); EELN +111% (Apr 3).

Stratasys is an example of a stock that appeared to be under accumulation based on its strong volume. Valuation helped to confirm that this was probably the case.

On March 21, we wrote: Stratasys, Inc. (SSYS 12.50) -- New High Profile (SSYS) 12.50 +0.75: Stratasys (SSYS) hit a new 52-week high today on almost 5x avg volume. Co makes prototyping devices that allow engineers and designers to create models and prototypes from computer-aided design (CAD) workstations; customers include GM, Intel, Boeing, Lego, Honda, Lockheed Martin, and Ford. Analysts expect 2003 EPS to grow 48% to $0.83 (P/E 15x) and 2004 EPS to grow 18% to $0.98 (P/E 13x). Mkt cap $66 mln, float 4.5 mln, avg daily volume 70k shares.... The stock is now above $35.

Our Current Strategy

We are now concerned that streteched valuations and over-extended technicals leaves previously compelling names such as MTLG and SSYS vulnerable to major price corrections.

The breakout strategy appears to be on its last leg. Lately, we have been focusing more on small cap value names for our readers. With the run-up, we are a bit more cautious on the small cap space and recommend investors may want to cash in some winning chips.

We are not abandoning our bullish views on the breakouts. We just like them at lower levels and would wait for a pullback to support levels. We prefer a p/e in the 18-20x range, rather than the current 25-35x level that many of these names now trade.

Recent price action has shown that small cap managers are beginning to rotate into value names in more mundane spaces. The sexy names appear to have had their run, leaving investors to look at metrics such as discount to book value as a catalyst to put money to work.

Value may not be a sexy area, but we believe that's where the emphasis should be. Some of the value names have made decent moves, but as long as their valuation is reasonable, they are worth a look.

Please email any comments or suggestions to [e-mail].

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