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German `Small Caps' Excel Amid Slumping Economy: Taking Stock
Dec. 28 (Bloomberg) -- Smaller German companies, such as Rational AG and Techem AG, may rise more than the DAX Index for a third year in 2005 amid optimism that a slump in the country's economy will have less effect on their business.

The SDAX Performance Index, whose members have a median market value of 355 million euros ($480 million), has advanced 20 percent. That's more than three times the gain for the DAX, a benchmark for Germany's largest companies.

Some investors in Europe's largest economy are turning toward ``small caps'' to increase returns as higher oil prices and rising unemployment crimp earnings for companies such as Deutsche Lufthansa AG, Europe's third-largest airline, and Volkswagen AG, the region's biggest carmaker.

``When the economy is hard to predict, you can find small caps in niche markets that aren't dependent on economic swings,'' said Alexander Mozer, who helps manage about $4.8 billion in equities at Deka Investment GmbH in Frankfurt. He declined to specify his holdings.

The SDAX has outpaced the DAX since the latter benchmark dropped to a seven-year low in March 2003 amid concern that the war in Iraq would impede economic growth. The small-cap index has gained 86 percent in that time, surpassing the 63 percent advance for the DAX.

Small-cap stocks have also climbed elsewhere in Europe. The Morgan Stanley Capital International Inc. Europe Small Cap Index has added 27 percent this year, led by Ashtead Group Plc, a U.K. construction and industrial equipment-rental company. The index beat the 9.3 percent gain in MSCI Europe, a regional benchmark.

`Less Affected'

Members of the 50-stock SDAX have a total market value of 17 billion euros, equivalent to the combined value of the four smallest companies in the 30-member DAX. The measure includes ``mid caps,'' or companies halfway between the largest and smallest by market value.

``Small and mid caps have potential for growth because they are less affected by events that move large caps, such as oil prices,'' said Karl Fickel, a partner at Frankfurt-based Lupus Alpha Asset Management GmbH. Lupus manages 3.6 billion euros ($4.8 billion), including shares of Rational.

Crude oil has surged 36 percent in New York trading this year and climbed as high as $55.67 a barrel, the highest price since contracts were introduced there in 1983.

Germany's November unemployment rate reached 10.8 percent, its highest in six years, as business confidence dropped and companies including BASF AG and Deutsche Bank AG cut jobs.

Two institutes lowered 2005 projections for the economy on Dec. 21. The Ifo institute forecast 1.2 percent expansion and the HWWA predicted 0.9 percent, down from 1.5 percent growth both estimated in October for next year. The institutes have forecast 1.7 percent expansion for 2004.

Medion's Drop

Rational, a maker of stoves that counts Kentucky Fried Chicken among its customers, has climbed 49 percent this year. Rational expects annual sales growth of 10 percent, helped by new automated stoves, the company said in September. This year, it will probably beat a May forecast for an 11 percent profit increase, Chief Executive Guenter Blaschke said last month.

Techem, Germany's only publicly traded company that measures energy and water use in homes, has jumped 71 percent. The company said last month that fiscal 2005 earnings before interest and taxes may rise about 14 percent to 88 million euros as the company adds customers in regions such as Eastern Europe.

Not all German small-cap companies are thriving. Shares of Medion AG, a distributor of computers, has lost 49 percent. The drop is almost twice as big as the 27 percent slide for Infineon Technologies AG, the worst performer on the DAX this year.

Medion, which relied on Germany for two-thirds of its sales last year, in July scrapped a full-year profit and sales growth forecast as consumers scaled back spending.

Neuer Markt Collapse

``I'm not that bullish about German small caps,'' said Ralf Walter, who manages $202 million in German and European small-and mid-cap stocks at Cominvest Asset Management GmbH, a unit of Commerzbank AG, in Frankfurt. Many stocks ``look expensive.''

The SDAX is valued at 71 times its members' earnings. The price-to-earnings ratio is four times the DAX's multiple of 17.

Losses in small-cap stocks more than two years ago led to the collapse of Germany's Neuer Markt for technology companies. The Neuer Markt's index tumbled about 90 percent from its peak in March 2000 as bankruptcies and shareholder suits shattered investor confidence.

About a quarter of the companies whose shares were listed on the Neuer Markt at the start of 2002 have sought protection from creditors or were acquired, Bloomberg data shows.

Dr. Hoenle AG, a maker of ultraviolet light technology used to paint cell phones and car parts, is an exception. The stock has almost quadrupled since March 2003. Earnings may rise more than 40 percent in fiscal 2005, the company said in October.

`Thinner Air'

``You can still find some nice companies, though the air is getting thinner for some,'' said Henrik Lier, an analyst with WestLB AG, Germany's third-largest state-owned bank.

WestLB in November reiterated a recommendation that investors buy shares of smaller German companies such as Balda AG, the world's second-largest maker of mobile-phone cases, and K+S AG, the No. 3 producer of potash for fertilizers.

Volker Riehm, a fund manager at Activest Investment in Munich, said his team is buying small-cap stocks that include Leoni AG, a German maker of wiring systems used in Porsche AG and Lamborghini SpA cars; Krones AG, the world's largest maker of packaging and bottling machines; and AWD Holding AG, a financial- services broker.

Next year ``could be a tough year for large caps, so individual small caps will look attractive,'' said Riehm, whose team manages $4.7 billion.



To contact the reporter on this story:
Sheenagh Archey in Frankfurt at sarchey@bloomberg.net.

To contact the editor responsible for this story:
Chris Collins at collinsc@bloomberg.net.