Features

NEW YORK — It is an investment category containing some of the most promising stocks in the entire market, some of them possible giants of the future, but which has been almost ignored for several years. 

The small-cap category has received little more than a nod from investors during this time, when low-price momentum stocks – those capable of doubling in a week or less – overshadowed its more modest performance. 

But small-caps, traditionally those with total market values of under $300 million, might be back. Many of these relative midgets did well last year, and they’ve been outperforming large-company stocks this year. 

And, says Gerald Perritt, a former professor who did as much as any individual to bring public attention to their superior cyclical returns two decades ago, “the long-awaited overperformance leg of the cycle may be upon us.” 

Small-caps are streak hitters, but when they go on a streak it can last several years, during which their returns may greatly outpace the performance of big companies that are publicized by analysts. 

Working from the basic research in 1978 of Rolph Banz, a professor at the University of Chicago, Perritt explained in articles and books how and why traditional small caps outperformed larger stocks over long periods of time. 

In the years 1975-1982, for example, “large-cap growth stocks provided an average annual return of 12 percent. But small-cap growth stocks in the same period provided a 28.3 percent return. Then they slumped to 9.1 percent in the period 1983-2000, compared with large-cap returns of 16.4. 

Perritt – whose own small caps are really small, some with valuations of less than $100 million – was waiting for a catalyst, which he now suspects was the collapse of so-called dot-com companies. He feels that seeking safer returns, investors are likely to revisit the overlooked small caps. Institutions too. 

Because they invest in such large amounts, it is often difficult for institutional investors to deal with small caps. The volume of available shares is often insufficient, and regulations prohibit owning too much of a company. Their impact on prices also creates volatility. Perritt’s Mutual Fund Letter” as well as running “Perritt Micro Cap Opportunities,” a mutual fund, sees two ways. One, by choosing a small-cap fund. Two, by buying single companies. 

The latter choice, however, imposes big responsibilities as well as offering potential rewards. Since there is minimum guidance from professionals, it means doing your own homework and testing the market. 

John Cunniff is a business analyst  

for The Associated Press