SIVY ON STOCKS from money.com
May 25, 2001

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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.

###

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