Smaller stocks shine in market's spring rebound

Small fry may be the biggest pleasant surprise in your stock portfolio this spring.

Small- and mid-size stocks have rebounded faster than blue-chip stocks from the market’s lows in mid-March. And in the case of mid-size issues, the rebound has been substantial enough to put a key index of those shares back in the black, year to date -- a trick blue-chip indexes haven’t yet managed.

The Standard & Poor’s index of 400 mid-size stocks jumped 16% from March 10 through Monday, leaving it up 0.7% year to date.

By contrast, the S&P 500 index of big-name issues is up 10.2% from its March low but still is down 4.4% for the year.

The better recent performance of small- and mid-size shares partly reflects a natural snap-back from their sharp declines in the fall and winter market sell-off. As usual when the market goes south, smaller stocks tumbled faster than bigger issues.

Investors also may just be responding to what have been surprisingly good first-quarter earnings reports for many small and mid-size companies.

Steven DeSanctis, small-stock strategist at Merrill Lynch & Co. in New York, says overall earnings of the small-capitalization companies in the universe he tracks dipped 1.8% in the first quarter from a year earlier, counting reports issued through last week.

That’s a far better showing than the 17% drop in earnings of the S&P 500 companies.

Losses racked up by banks and other financial companies have skewed overall results for big and small companies alike. But take out the financials, and profit growth at smaller firms still was stronger -- up nearly 8% in the quarter, DeSanctis says, compared with a 7.1% increase for the S&P 500.

Mid-cap companies’ overall results look even better, up 6.1% in the first-quarter, including financial companies, according to DeSanctis.

One key to decent results for small and mid-size companies, as for larger companies, has been the weak dollar’s beneficial effect on foreign sales. Although investors tend to think of blue-chip firms as the main beneficiaries of the sliding dollar, plenty of smaller companies do business abroad.

DeSanctis found that mid-cap companies that derive more than one-fifth of their sales outside the U.S. posted total earnings growth of 13.5% in the first quarter, compared with 1.6% growth for mid-cap firms with lower foreign sales.