For a premie hat, I think I would do less repeats by at least two. I'm using a little bit bigger guage (thicker yarn...) on my current one, but it's ending up plenty big for an adult head with one less repeat and the yarn isn't THAT much thicker...
I love this hat, I made myself one that is way too big but I pretty much put it on the first time it gets chilly in fall and don't take it off (except to carefully wash sometimes) until it warms up in spring. And yes, it is VERY stretchy.
You might also try using a smaller guage, so that you can keep more of the cables that give it that really delicate look while sizing it down... I love the baby version linked above but the cables start to look a little chunky and squashed in such a small version.
recent FOs: Shedir cap, Bricks of Atlantis, Pirates Hat, Citrine Socklets, Teddy bears, 1 entrelac sock
OTN: scraps blanket, Shedir for Teenie, Ice Serpent Hat
NIL: Qiviuk tam re-visited; weatherproof gloves; sweaters
My knitting blog: http://emilai333.wordpress.com/