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TheStreet Open House

15 Gritty Survivors Worth a Gamble





Hundreds of small companies have already won a first look by early birds, as the Russell 2000 Index has risen 12% this quarter, compared to a 6% rise by the Dow Jones Industrials in the same period. As for the year, the returns of micro-cap stocks are stunning: Two out of three are up in 2003 -- and 1,100 out of the roughly 3,500 stocks with prices greater than $1 and capitalizations less than $300 million are already up more than 15%. Not bad for a bear market.

Price Moves the Shares

The move seems to be more about low price than about small-capitalization, according to the results of experiments I've conducted in the past week on the 1,675 stocks in the Value Line Arithmetic Index.

This index contains all of the stocks in the Value Line survey, so they are to some extent vetted for quality; it's all of the S&P 500 stocks plus 1,175 others that include micro-caps such as bone-builder Osteotech (OSTE). I ranked them by price from low to high every day for the past week and observed a virtually monotonic increase in price by percentile.

On Monday, for instance, the lowest-priced 16 were up 6.1%, the next 16 were up 5.1%, the next 16 were up 3.3%, the next 16 were up 2.2%, and so on. Emblematic stocks for each group included Handspring (HAND), Atmel (ATML), Foster Wheeler (FWC) and Midwest Express Holdings (MEH).

In a similar experiment, Camelback Research Alliance analyst Jeffrey Mindlin looked at the returns for all NYSE and Nasdaq stocks priced at $1 or higher in the past month and percentile-ranked each by price. He found that the average daily return for the cheapest stocks was 0.75% per day vs. 0.34% for the most expensive stocks -- with a linear distribution between.

This indiscriminate move is probably driven in part by fund managers who are buying the small-cap indexes through electronically traded funds such as the iShares SmallCap 600 (IJR); they buy all stocks in the S&P 600 regardless of individual merits. Yet it's not hard to find low-priced companies like these that illustrate the Ralston Effect more systematically -- that is, stocks that have scrambled back to life after near-death experiences.

Just look for stocks that are down 50% in the past 12 months and have price-to-sales ratios under 1.5, but are up 50% this year in the face of heavy pressure from nonbelieving short-sellers. These stocks are saying: "What else can you throw me that I haven't seen before? We've been through fire, and we may be filthy with soot and our clothes a little ratty, but we're survivors, so get out of my way and let's get back to business."



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