Small caps lead the pack
The Russell 2000 (NYSE: IWM) led the pack with the major U.S. indices posting solid gains as investors disregarded mixed earnings news and a decline in housing. The small-cap index added 13.79 points, or 2%, to 702.39. The Dow Jones Industrial Average (INDU) climbed 176.72 points, or 1.45%, to 12,383.89.
On a year-to-date basis, the Russell 2000 has let go 8.31%, while the Dow has let go 6.64% and the S&P 500 has shed 7.79%.
Small-cap stocks began the week with a strong showing despite beginning the session in negative territory following mixed earnings news from major corporate players.
McDonald’s Corp. (NYSE: MCD) reported that sales at restaurants open at least 13 months were unchanged in December, disappointing analysts expecting a rise.
“While severe winter weather throughout the month and softer consumer spending resulted in December U.S. comparable sales being flat, we remain confident in our U.S. business,” said CEO Jim Skinner in a statement.
The result brought out the bears, as consumer spending comprises about 70% of gross domestic product and a decline will surely be bad news for the economy. Previously, retailers had also reported weak December sales, raising the fear that American consumers are pulling back.
However, the fast food chain operator also announced that its net income for the three months ended Dec. 31 increased to $1.27 billion, or $1.06 per share, compared with $1.24 billion, or $1 per share, a year earlier.
Adding to the economic concerns was power tool maker The Black & Decker Corp. (NYSE: BDK), which forecasted before the start of trading that its first-quarter profit will come in below analysts’ projections.
The Russell 2000 opened in negative territory and hit its lowest level during the session at about 10 a.m. ET, when the U.S. Census Bureau reported after the start of trading that new home sales in December fell 4.7% to an annual rate of 604,000. The rate in November was a downwardly revised 634,000.
Economists were expecting to see a considerably smaller decline.
The December rate is the lowest in almost 13 years and 40.7% below the rate during the same month of 2006.
An estimated 774,000 new homes were sold in 2007, the worst yearly sales result since the measure was inaugurated in 1963. In 2006, 1.05 million homes were sold.
The numbers tell us that there is no end in sight for the slumping U.S. housing sector.
But stocks quickly recovered and the small-cap index moved into the green, adding to its gains as the session advanced. Investors turned bullish in anticipation of the U.S. Federal Reserve’s two-day meeting, which kicks off on Tuesday.
According to futures, the majority of market players are expecting the Fed to lower the federal funds rate, the rate at which commercial banks make overnight loans to each other, 0.50% to 3.50%.
Here are the day’s biggest percentage gainers and losers, along with top volume leaders, among companies with a market cap between $100 million and $750 million:
• American Dairy, Inc. (ADY), up 29% to $10.91 on news it has added new personnel to its senior management team.
• Landry’s Restaurants, Inc. (LNY), up 23% to $20.45 on news that CEO Tilman Fertitta has offered to buy out the company for $379.4 million in cash.
• Beazer Homes USA, Inc. (BZH), up 22% to $8.81.
• Graham Corp. (GHM), down 18% to $34.85 despite news that its fiscal 2008 revenue will come in near the top end of its projection for between $80 million and $85 million.
• Rediff.com India Ltd. (REDF), down 18% to $8.80 on news of a decline in third-quarter earnings.
• Ceragon Networks Ltd. (CRNT), down 17% to $8.58 on news of fourth-quarter earnings in line with analyst estimates.
• Hovnanian Enterprises, Inc. (HOV) 4,896,500 shares traded.
• SunOpta Inc. (STKL) 4,231,800 shares traded on news an analyst reduced the stock’s target price.
• Beazer Homes USA, Inc. (BZH) 3,875,700 shares traded.
The day saw 13 small-cap stocks set 52-week lows, while nine small caps established a 52-week high.
