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Small-Cap Peripherals' Perils: Under the Radar

Stocks in this article: MRCY RIMG SSYS

BOSTON ( TheStreet) -- The computer software and hardware industries have rebounded as large companies including Oracle (ORCL), Cisco (CSCO) and IBM (IBM) outperformed stock-market indices, posted impressive earnings and won investors' confidence.

The same can't be said for many small-cap computer-peripheral companies. Bit players' offerings are too specialized and fail to be vital to business systems to make their future look anything other than uncertain.

The line between the haves and have-nots has grown wider in the economic slump. Smaller companies like Mercury Computer Systems (MRCY), Rimage (RIMG) and Stratasys (SSYS) have posted outsized gains over the past year, leading to high volatility and values that are out of whack with the stock market. Even growth investors should be shaking their heads at Mercury and Rimage since estimated growth rates are nothing to get excited about. Stratasys, on the other hand, has favorable growth prospects, but with a return on equity of only 3.25%, the company still has a long way to go before it can match the bigger names in tech.

Specialty products such as disc recorders and signal-processing equipment aren't as ubiquitous as servers and software packages. Because of that, it's far easier for customers to put off upgrading outdated, though functional, specialty equipment.

The best combination for early-stage-rebound bets is expensive, but necessary, components that may have been unattainable during the recession but are key to a company's operations. Smaller components are a better play for later in the economic recovery when the stock market is back on solid ground and companies can once again spend on improving non-vital systems.

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