Investing in 2007 - part VI

In the last article, we looked at investing in 2007 with large cap value and blend ETFs. Prior to that, we looked at REITs and the large cap growth sector. We found that REITs to be unattractive at current prices while large cap value and blend to be comparitively more attractive.

In this segment, we will look at small cap ETFs. Again, we will use the vanguard funds as examples where they are available. If not vanguard, a similar study can be done on other funds. It is the author's belief that the investors should look at the overall valuation of a fund/ETF along with expense ratios.

The small cap value ETF VBR has 953 stocks in the ETF. As of 11/30/2006, the ETF had a P/E of 18.9, Price to book ratio of 1.9. The return on equity is 10.7% and the earnings growth rate is 10.4%. The ETF had a yield of 2%. The top stocks in this ETF are as follows:

NU, Northeast Utilities has a P/E of 38
RA, Reckson Associates Realty Corp has a P/E of 28.29
SRP, Sierra Pacific Resources has a P/E of 12.82
CMS, CMS Energy Corp has a P/E of 15.
OGE, OGE Energy Corp has a P/E of 12.
OMX, OfficeMax, Inc has a forward P/E of about 20.
CLI, Mack-Cali Realty Corp. REIT has a P/E of about 36.
CVG, Convergys Corp has a P/E of 23.59
BRE, BRE Properties Inc. Class A REIT has a P/E of 31.55
CMC, Commercial Metals Co has a P/E of 9.94

VB is the small cap blend and has a yield of 1.2% which is much lesser than the SP500 yield of 1.76%. As of 11/30/2006, the small blend stocks as a whole had a P/E of 22.6, with a price to book ratio of 2.4, ROE of 11.7% and earnings growth of 15.7%. The top holdings in this sector are:

NU, Northeast Utilities with a P/E of 38
RRC, Range Resources Corp has a P/E of 20.38
RA, Reckson Associates Realty Corp. REIT has a P/E 12.82
RMD, ResMed Inc has a P/E of 39.67
MTW, The Manitowoc Co., Inc has a P/E of 26.35
FWLT, Foster Wheeler Ltd has a P/E of 58.37
CAL, Continental Airlines, Inc. Class B has a P/E of 13.4
SRP, Sierra Pacific Resources has a P/E of 12.82
PXP, Plains Exploration & Production Co has a P/E of 13.59
CMS, CMS Energy Corp has a P/E of 9.94

VBK is Vanguard's small growth stock. It has an yield of .37%. As of 11/30/2007, this group as a whole had a P/E of 28, price to book ratio of 3.5, ROE of 13% and earnings growth of 23%. The top holdings of this group are:

RRC, Range Resources Corp. has a P/E of 20.38
RMD, ResMed Inc has a P/E of 39.67
MTW, The Manitowoc Co., Inc has a P/E of 26.35
FWLT, Foster Wheeler Ltd has a P/E of 58.37
GPN, Global Payments Inc has a P/E of 28.51
GME, GameStop Corp. Class A has a P/E of 39.17
DNR, Denbury Resources, Inc has a P/E of 18
CCK, Crown Holdings, Inc is expected to be profitable next year
AME, Ametek, Inc has a P/E of 19.35
FTO, Frontier Oil Corp has a P/E of 9.4

Summary:

In the small cap category, the top ten holdings constitute about 4% of the portfolio. So, they arent indicative of the entire sector. In looking at small value, small blend and small growth, the small growth category is looking pricy and there is little margin of safety in this segment. While small blend is looking better than small growth, it is not as attractive as the small value category. The small cap value stocks are a bit cheaper and are fully valued at the moment. Market price drops may provide an opportunity to add more small value to one's portfolio.

Next Article:

In the next article, we will look at mid cap segment. We will also evalutate the midcap segment with respect to the large cap and small cap segments.