Small is beautiful once again. After more than a decade as the investment world's ugly duckling, small growth-company stocks are up better than 20 percent in value in early 1991.
Small companies have featured better earnings than many of their larger rivals, a trend expected to continue. The leveraged buyouts that boosted the stocks of many big corporations have also ended. In addition, with the junk bond market dead, only these rather daring equities offer the sort of risk-to-reward potential which typified that once-popular market.
"Small companies should do better in recession than large firms, for their prospects are based directly on their products and growth," said Alan Radlo, portfolio manager of the $725 million-asset Fidelity OTC Fund, specializing in over-the-counter stocks. His fund, up 14 percent this year, declined 4.75 percent last year in what was actually a good performance compared with a 17.8 percent overall decline in small-company stocks.
"Stocks of the Dow Jones industrial average and Standard & Poor's 500 will be playing catch-up with the secondary stocks this year, a trend which will accelerate when the next quarter's earnings come out," predicted Louis Navellier, editor of the MPT Review investment letter, whose model investment portfolio emphasizing small-company stocks was up 14 percent last year.
Navellier's portfolios are ranked first by the Hulbert Financial Digest for the three- and five-year periods, up 105 percent and 244 percent respectively.
"If we're actually in a new bull market, you'll want to be in small-capitalization stocks in its early stages, for they historically have led the way," said Robert Natale, editor of Standard & Poor's Emerging and Special Situations investment advisory. It's worth noting, however, that these stocks are more volatile than their larger counterparts.
Current recommendations emphasize health and technology. The medical area should do well primarily due to cost-containment steps.
Radlo likes New England Critical Care in home therapy; SciMed Life System, maker of medical equipment in balloon angioplasty products; United Healthcare in HMOs; Applied Bioscience in toxology study; National Health Labs in testing of blood and tissue; and Medical Care International in outpatient centers.
Meanwhile, Navellier recommends HealthCare COMPARE, a firm which basically makes sure HMOs don't overcharge. Natale prefers Home Nutritional Services, which provides outpatient service, and SciMed. In technology, Natale favorites are Applied Materials, leading supplier of semiconductor equipment, and Lam Research in semiconductor equipment. Xilinx is a promising semiconductor equipment firm, as is Exar, he said.
The computer networking area offers Cognex Corp. in vision recognition systems, Radlo said.
Financial services firms offer opportunities. Stocks of banks that benefit from a high level of ongoing fees include Fifth Third Bancorp, the Northern Trust and State Street Bank of Boston, said Radlo. Natale likes Eaton Vance and T. Rowe Price, two companies that sell mutual funds.
Among food companies, Navellier likes Smithfield Foods in ham and Michael Foods in pasteurized eggs. Membership warehouse firms such as Costco Wholesale and Price Co. are moving ahead by offering discount prices, Natale said.