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Take-Two Takes Off; Diamond Food Stages a Rally

Wall Street Journal, 9.3.09

Donna Kardos Yesalavich

NEW YORK -- Small-cap stocks fell slightly Wednesday, led by a drop in financials that more than offset a jump in consumer staples, as investors reacted defensively to a disappointing precursor to monthly jobs data.

An employment report from Automated Data Processing showed the private sector shed jobs in August at a faster rate than economists had been expecting, hurting investors' willingness to buy small-cap stocks -- considered the equities market's riskier investment -- ahead of the government's monthly employment report due Friday. It came at a time when investors already have grown increasingly nervous a pullback could be in the offing, given the size of stocks' rally this summer.

But the ADP report showed small and medium-size businesses cut more than twice as many jobs as large businesses, which Jeffrey Kleintop, chief market strategist at LPL Financial, considers a silver lining.

For small-cap companies, "that's actually good news for profit growth going forward," Mr. Kleintop said. "It shows smaller companies have been even tougher when it comes to cutting costs than their larger-cap peers, so they're going to have better profit margins. That's going to mean a lot for earnings growth."

Wednesday, the Russell 2000 index of small-capitalization stocks slid 2.23 points, or 0.4%, to 555.83. That marks the index's fifth straight day of declines, its longest losing streak since early July. However, it is still up 11% for the year. The Standard & Poor's Small Cap 600 index fell 1.66, or 0.6%, to 294.08.

The financial sector of the S&P 600 index tumbled 1.7%. Among its decliners was Central Pacific Financial, which dropped 20 cents, or 8.1%, to $2.27 on the New York Stock Exchange. Susquehanna Bancshares, meanwhile, fell 33 cents, or 5.9%, to 5.26.

Consumer staples stocks made up the S&P 600 index's best-performing sector Wednesday, with a 0.9% gain. Nuts distributor Diamond Foods rallied 2.06, or 7.5%, to 29.59, while nutritional-products maker Mannatech climbed 22 cents, or 6.1% to 3.81.

In the consumer discretionary sector, NYSE-listed Zale fell 51 cents, or 8.6%, to 5.39, as the Irving, Texas, jewelry retailer rescheduled the release of its fiscal-year results to next Wednesday, saying it was working on the accounting treatment for about $13 million in pretax charges. The results had been expected Wednesday.

Blockbuster (NYSE) jumped 29 cents, or 32%, to 1.20 after saying it reduced the face value of letters of credit with former parent Viacom by two-thirds to $25 million, the latest step in the Dallas video-rental chain's efforts to boost liquidity.

MDS surged 1.76, or 30%, to 7.62 after large-cap Danaher said it agreed to buy the Canadian health-care conglomerate's analytical-technologies business and a 50% stake in a joint venture for $650 million. NYSE-listed MDS, which is acting on a long-awaited plan to break itself apart, also announced a $400 million to $450 million share buyback program and plans to sell its early-stage pharmaceutical services unit.

Applied Signal Technology fell 2.78, or 11%, to 23.44 as the latest quarterly earnings from the maker of intelligence and reconnaissance products fell short of Wall Street's expectations. The Sunnyvale, Calif., company also said it acquired privately held Pyxis Engineering for $16.3 million in cash and a stock-based earn-out potential of $3.8 million.

Also in the technology sector, Netgear jumped 1.95, or 12%, to 18.91 on expectations the San Jose, Calif., networking-equipment designer will benefit from improving consumer demand. Barclays raised its investment rating on the stock to "overweight" from "equalweight."

Take-Two Interactive Software rose 79 cents, or 7.8%, to 10.95 after the videogame maker reported it swung to a fiscal third-quarter loss thanks to broad retail weakness and the lack of a new "Grand Theft Auto" release to rev up sales. The New York company also offered a cautious earnings and revenue outlook for the rest of the fiscal year.

VeriFone shares jumped 2.85, or 26%, to 13.98 on the NYSE. The San Jose, Calif., maker of credit-card processing machines reported it swung to a fiscal third-quarter profit that was better than Wall Street expected.

Write to Donna Kardos Yesalavich at donna.yesalavich@dowjones.com