Investing in an Opportunist's Market

In a column written some 18 months ago titled "Surf's Still Up for Small-Cap Stocks," I said, "There's been a lot of discussion lately about the outperformance of small-caps relative to large-caps. Many pundits are saying that the game is up, that small-caps are set up for a fall. Are they right? Is the outperformance of smaller companies nearing an end?"

That paragraph merits a reprise because the sentiment being bandied about today is exactly the same. Pundits were surprised by the outperformance of smaller companies in 2003. Certainly, at least, the magnitude of the outperformance has been a shocker: The Dow Jones Small-Cap Index was up about twice as much as the Dow Jones Large-Cap Index last year.

So the question of large-caps vs. small-caps is just as salient today as it was 18 months ago. Is the game up for small-caps?

Back then, I was unequivocal in my position that smaller companies offered dramatically better opportunities. As a valuation-focused investor, I told RealMoney subscribers that "the most compelling valuations, by far, are in smaller companies." I said that "the surf's still up in small-caps. Ignore the pundits and ride the wave."

My position has changed. I've morphed from owning no large-cap stocks to now owning three of the 30 stocks in the Dow Jones Industrial Average. (Each is mentioned in my newsletter, TheStreet.com's Value Investor.) For an active money manager who allocates capital to concentrated portfolios, going from owning no Dow stocks to owning three is a major change.

Why the change? For me, it's not the result of a purposeful, top-down analysis of the market. In fact, I don't analyze the market in the aggregate at all. I do the same thing I've always done: I pick up one set of numbers at a time for one company at a time. I cycle through certain data points on the same 800 or so stocks (with a few minor modifications to the review list), looking for pockets of undervaluation.

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At time of publication, Alsin and/or Alsin Capital Management was long Monaco and Ethan Allen, although holdings can change at any time.

Arne Alsin is the founder and principal of Alsin Capital Management, an Oregon-based investment advisor and portfolio manager of The Turnaround Fund, a no-load mutual fund. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Alsin appreciates your feedback and invites you to send it to [e-mail]. Click here to receive Arne's latest favorite stock picks from his newsletter, TheStreet.com Value Investor.