US Small-Caps Take Strain in Current Economy

As concerns regarding the pace of economic recovery in the US persist, it has become apparent that small-cap businesses have been hardest hit by investor gloom. Despite fairly upbeat data on retail sales and consumer sentiment, Friday saw the Russell 2000 index of small-capitalization stocks fall by 1.21 percent, being 7.49 points. The total decline for the week was 6.33 percent, going on record as the second consecutive week down. The Standard & Poor’s Small Cap 600 fared no better, dropping 1.31 percent, being 4.35 points, and ending the week down 6.04 percent. This turn of events from when small-caps were challenging blue-chip stocks a while ago, highlights the depth of risk aversion being experienced in current markets, primarily as a result of the Fed’s current outlook on economic recovery.

Friday’s decliners were led by consumer discretionary stocks, with footwear company Skechers USA falling 5.3 percent, or $1.52, to $27.39, while home-furnishings company Ethan Allen Interiors dropped 5.4 percent, or $0.79 to $13.91. In the utilities sector, CH Energy Group dropped 1.2 percent, or $0.52 to $41.30, with South Jersey Industries dropping 0.9 percent, or $0.43, to $46.18.

Swimming against the downward tide, Houston-based power company Dynegy, jumped 63 percent, or $1.75, to $4.53 in response to the report that an agreement had been reached for the purchase of the company by the Blackstone Group, reportedly for around $542 million. In the tech sector, Dow component IBM agreed to buy marketing software supplier Unica, for around $480 million, resulting in Unica’s stock shooting up by 118 percent, or $11.29, to $20.84.

Other hard-hit small-caps include Red Robin Gourmet Burgers that reported disappointing second quarter results, reflecting a 33 percent drop in earnings, resulting in a revision of revenue outlook for the remainder of 2010. Las Vegas-based Bally Technologies dropped 5.3 percent, or $1.66 to $32.84, showing that even the gambling business is taking strain.

Analysts agree that small-cap companies are at a distinct disadvantage in the current economic environment, as they face difficulties raising capital, managing their work-force in a cost-effective manner with the ebb and flow of business, and a host of other aspects that can impact on cash-flow, putting a company in a precarious financial position.