Small-cap stocks in for a bull run?

OUTPERFORM RECOMMENDATION: Average earnings of small-capitalised companies came in ahead of market estimates, says research house
A revival of small-cap companies may be in the offing, after one of the country's top research houses urged investors to buy stocks of such companies traded on Bursa Malaysia.

CIMB Research had upgraded the small-cap sector to "outperform" from its previous "neutral" recommendation.

It said average small-cap company earnings came in ahead of market estimates as they had Yusof said the Muhibbah-built ship has a market value of between US$25 million and US$30 million (RM79 million and RM95 million).

"We expect to take delivery of another diesel electric PSV from Labuan Shipyard and Engineering Sdn Bhd in November," Jamal said,
adding that the value is similar to the current vessel.

Meanwhile, Muhibbah managing director Mac Ngan Boon said the company will continue to maintain its focus on oil and gas activities.

lower input costs last year, which translated to better earnings in the first quarter.

In view of this, the research house had revised earnings forecasts upwards and investors are expecting to make fast gains from the small-caps.

Dealers and investors normally associate small cap companies with high risks.

The rewards from small-cap stocks are however equally high, as they normally have a higher beta against the benchmark FBM KLCI.

"Small caps have significantly outperformed the FBM KLCI in the past month. As such, we remain positive as investors have only just started to show keen interest in this sector in the last
month after staying on the sidelines for more than a year," CIMB Research said.

Small-cap stocks, after briefly hogging the limelight some three years ago, have been largely ignored by research houses.

Still, investors in search of a bargain have been zeroing in on the small caps, as they are a cheaper alternative to large-cap companies.

"Investors now have higher risk appetites, so the investment portfolio switched from high valuation stocks to small caps," said Affin Investment Bank's head of retail research Nazri
Khan.

He added that the ample market liquidity had also contributed to the buying, and that small caps are poised for a bull run.

CIMB Research also noted that the first quarter results of small-cap companies were better than the third quarter in 2012, when their results were lower than expected.

It said that the latest first quarter results showed that 23 per cent of these companies' performance was above expectations, while 23 per cent were below.

Meanwhile, Interpacific Securities head of research Pong Teng Siew warned against banking heavily on small caps.

His advice has some basis, as three years ago, the small caps had a market capitalisation of about RM1.5 billion, but now collectively have a market capitalisation of RM67 billion.

Pong said while small caps' current quarter results could still be better than the past year, he is doubtful they could be better than the first quarter.