This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Untainted and Untapped Small-Caps

Lost in the great accounting panic of 2002 is the plain fact that the shares of small, cheap, blue-collar companies are beating the pinstriped pants off their bigger, more expensive brethren.

Indices produced by the financial consultants at Russell Co. tell the story best:

  • Through Feb. 4, the Russell 1000 Growth Index -- representing the most expensive half of 1,000 U.S. stocks, with an average market capitalization marketcapitalization of $13 billion -- lost 5.04%.

  • The Russell Midcap Growth Index -- representing the most expensive half of 800 stocks, with an average market cap of $4 billion -- lost 6.72%.

  • The Russell 2000 Value Index -- representing the least expensive half of 2000 stocks, with an average market cap of $520 million -- lost just 0.59%.

  • While value small-caps clearly haven't hit the ball out of Enron Field yet, they are at least on the same path they followed in 2001, when they also started stronger than their flashier, larger peers. When the year was done, the Russell 2000 Value Index outperformed the Russell 1000 Growth Index, 14.03% to minus-20.40%.

    This exercise reveals the value of paying less attention to broad market indices, which largely track math-challenged big-cap stocks, than to individual stocks themselves. Take the analysis one step further to examine valuation metrics on individual stocks, and you'll have grass-roots proof of Russell index results: Of those small-cap stocks that have posted gains, twice as many have price-to-sales ratios pricetosales less than 3.0 as have ratios greater than 3.0.

    The small-cap value thesis becomes even more vivid in a screen of the year's top-performing stocks. Of the 25 top performers this year through Feb. 2 with prices greater than $2, only three have price-to-sales ratios greater than 3.0. Indeed, the median price-to-sales ratio of those 25 winners was a paltry 0.62, while the median ratio of the winners' price-to-sales multiple to their industry average was even punier, at 0.28.

    It seems that these cheap, tiny companies have largely been orphaned by the Wall Street investment community, as only 10 sport brokerage analyst ratings. It wouldn't surprise me to see a handful continue to roar back into favor over the coming months as fund managers move down in market capitalization to seek growing companies that are untainted by the accounting maladies afflicting larger firms. After all, if you can't afford the $5 million salary of a McKinsey or Andersen-trained chief financial officer, you probably aren't using rocket-science financial engineering tricks to falsely boost your bottom line.

    Here's a list of the top 10 stocks of the year so far that have prices greater than $2, little debt and price ratios much lower than their industry and the market.


    Small Caps: Fast, Cheap Starters
    Company Name Market Cap % Chg 2002 Price/Sales Ratio
    Koala (KARE) $20.3 million 228.9 0.34
    Rowe (ROW) 47.4 million 200.8 0.14
    Overland Data (OVRL) 176.8 million 103.8 1.11
    SimpleTech (STEC) 218.0 million 93.2 1.33
    SmartDisk (SMDK) 39.2 million 92.2 0.55
    EZCorp (EZPW) 38.2 million 79.0 0.21
    Cutter & Buck (CBUK) 69.5 million 75.0 0.42
    Autobytel (ABTL) 90.1 million 68.2 1.27
    RDO Equipment (RDO) 53.9 million 64.0 0.09
    MarineMax (HZO) 182.7 million 59.2 0.35
    Note: Minimum price $2, minimum 12-month revenue $50 million

    Bush Disappoints Broadband Pushers

    Like a comic-book superhero flourishing a star-spangled cape and a menacing wink, President Bush warned at length in his State of the Union speech on Jan. 29 of an "axis of evil" that threatens our nation with weapons of mass destruction. But the Defender of Kandahar failed to find even a moment to speak of the danger that lurks in the shadows of a nation beset with slow, lousy, expensive Internet service.

    The omission irked a great many technologists who had lobbied the White House for months in an effort to get State of the Union support for the high-speed Internet service known as "broadband." Distressed but defiant, they blamed the antideregulation pall cast by the Enron debacle, and vowed to press the fight in the months ahead.

    Trey Thomas, a Boston hedge-fund group chairman and captain of the battle, said he learned that the industry would gain administration support only once they stop attempting to "myopically" push their own technological solution. All technologies -- DSL, cable and wireless -- must have a seat at the table, he insisted.

    Thomas said it also became clear that White House support is not enough. Congress must admit that the once-promising Telecommunications Act of 1996 was a time-wasting fiasco, and repeal it. The bill's list of problems is longer than a fiber-optic line stretching around the earth, but the bottom line is that it ultimately ended up being an act of anticapitalism that required regional telephone monopolies to surrender their broadband infrastructure to competitors at a discount. Something they refused to do. Go figure.

    The law helped neither consumers nor businesses. From 1996 to 2002, the Telecom Act encouraged the number of competitive local-exchange carriers, or CLECs, to multiply, until at the peak there were about 600 of them. Most were never viable enterprises, depending for their livelihood on easy access to capital through offering of shares to the public or bond issuance -- and for their future on the notion that Baby Bells would build infrastructure and rent it to them cheap.

    Stonewalled at every turn, the CLECs withered and died. The massive bankruptcies in the past two weeks of Global Crossing (GBLXQ) and McLeodUSA (MCLDQ) were the latest two examples.

    I hope that Thomas and his pals don't give up on pressing their case to the White House and Congress. The Silicon Valley-based organization TechNet, made up of many leading industry executives, at least has vowed to keep pushing for a public-sector-supported plan to connect 100 million homes and businesses to a next-generation Internet that would be 50 to 100 times faster than today's broadband.

    This sort of capacity already exists in an initiative called Internet2, which connects research universities and laboratories at 100-megabit speeds. Benefits would not only be science-fiction applications, such as telemedicine and streaming video that rival the quality of high-definition television, but also the heads-down science required to make such speeds ubiquitous as well as a big boost to the economy as thousands more routers, software bits and fiber-optic lines would be manufactured, sold and lit.

    In this scenario, companies such as Cisco (CSCO) and Lucent (LU) would fulfill the promises they made to investors long ago.

    At the time of publication, Jon Markman owned shares in none of the equities mentioned in this column.

    Select the service that is right for you!

    COMPARE ALL SERVICES
    Action Alerts PLUS
    Try it NOW

    Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

    Product Features:
    • $2.5+ million portfolio
    • Large-cap and dividend focus
    • Intraday trade alerts from Cramer
    • Weekly roundups
    TheStreet Quant Ratings
    Try it NOW
    Only $49.95/yr

    Access the tool that DOMINATES the Russell 2000 and the S&P 500.

    Product Features:
    • Buy, hold, or sell recommendations for over 4,300 stocks
    • Unlimited research reports on your favorite stocks
    • A custom stock screener
    • Upgrade/downgrade alerts
    Stocks Under $10
    Try it NOW

    David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

    Product Features:
    • Model portfolio
    • Stocks trading below $10
    • Intraday trade alerts
    • Weekly roundups
    Dividend Stock Advisor
    Try it NOW

    Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

    Product Features:
    • Diversified model portfolio of dividend stocks
    • Alerts when market news affect the portfolio
    • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
    Real Money Pro
    Try it NOW

    All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

    Product Features:
    • Real Money + Doug Kass Plus 15 more Wall Street Pros
    • Intraday commentary & news
    • Ultra-actionable trading ideas
    Options Profits
    Try it NOW

    Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

    Product Features:
    • 100+ monthly options trading ideas
    • Actionable options commentary & news
    • Real-time trading community
    • Options TV
    To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
    Submit an article to us!
    DOW 16,943.81 +28.74 0.17%
    S&P 500 1,967.57 +2.89 0.15%
    NASDAQ 4,415.49 +19.2860 0.44%

    Brokerage Partners

    Rates from Bankrate.com

    • Mortgage
    • Credit Cards
    • Auto
    Advertising Partners

    Free Newsletters from TheStreet

    My Subscriptions:

    After the Bell

    Before the Bell

    Booyah! Newsletter

    Midday Bell

    TheStreet Top 10 Stories

    Winners & Losers

    Register for Newsletters
    Top Rated Stocks Top Rated Funds Top Rated ETFs