Small, Small, S-M-All

SAN FRANCISCO -- For small-cap aficionados, these are the salad days -- replete with croutons, Baco-Bits and those crunchy Asian "noodles."

With a melange like that, you'd think Juliet Ellis, who oversees about $1.5 billion in small-cap funds as senior portfolio manager at

Chase Global Asset Management

, would be ecstatic. Except, she's not -- and it has nothing to do with the fact the

Russell 2000

dipped 0.1%

Wednesday as blue-chips returned to favor.

The small-cap proxy is up 17.8% year-to-date and nearly 38% since Nov. 1. That performance has led me, among others, to try to

examine and

explain what's behind the phenomena of stocks such as

SmartServe Online

(SSOL)

, which have soared in 2000 after months (years, in some cases) of not-so-benign neglect by investors.

Or why

Paging Networks

(PAGE)

, which has about 100 million shares outstanding, was the fourth-most actively traded stock on the

Nasdaq

today, with more than 30 million shares changing hands. (If volume precedes news -- as the old saw goes -- there's something big brewing there.)

Ellis couldn't answer those questions, but is dismayed that "the stocks that are doing the best are those companies that don't have any earnings."

Chase discovered that

S&P SmallCap 600

companies projected to post a profit in 2000 were up just 5.2% year-to-date through March 2. Meanwhile, those expected to lose money were up 66%.

The fact few, if any, Internet and biotech names are expected to be profitable but are most in demand accounts for this logic-defying performance. But that doesn't make it kosher.

"Absolutely, a lot of money" has been made in certain stocks, but "it's a bubble," Ellis said matter-of-factly. "Most bubbles burst; it's a question of when, not if."

Ellis refers to the current small-cap favorites as "long-duration securities," which has nothing to do with bonds (whew), but is a reference to the fact that investors are "discounting 10 years of earnings."

Paradoxically, these stocks are "most sensitive to the direction of interest rates" and most threatened by an aggressive

Fed

.

So why the disconnect, I asked? Why are the stocks most vulnerable to Fed action going up in

Greenspan's

face?

There is a compelling reason small-caps in general are performing well: earnings growth. In the first quarter, earnings growth for the S&P SmallCap 600 is expected to be 19.1% vs. 9.5% for the

S&P 500

, according to

First Call/Thompson Financial

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. That's the first time the little guys have outpaced the big guys in the earnings department since March 1998, Ellis said.

So there's a rationale for what's going on with small-caps in general. As for what's going on within small-caps, it's "almost a frenzy" and "extreme speculation" and not likely to end pleasantly, she said.

But the small-cap manager is not averse to the hot names. Chase has long positions in biotech mighty mites like

Celgene

(CELG) - Get Report

and

Inhale Therapeutics

(INHL)

.

Her advice, though, is to (ta-da!) diversify within the small-cap universe.

"You can capitalize with a portion of assets on highfliers but you don't want to have 100% of assets involved in tech or biotech," she said. "It's great when

they're going up, but it can be pretty painful when the bubble bursts."

Ellis was reluctant to talk specific stocks but offered two in what she called a "very promising" sector, health-care service companies. Long in the doldrums, HMOs are enjoying price and legislative relief that should translate into higher earnings, she said.

The first recommendation is

Province Healthcare

(PRHC)

, an owner and operator of rural hospitals, which Chase is long. The firm's earnings are expected to grow 28% in 2000. The stock closed down 0.9% to 20 5/8 today.

Choice No. 2 is a name likely more familiar to most:

Oxford Health Plans

(OXHP)

, an erstwhile "momentum play" that so famously imploded in 1997.

Ellis acknowledged "it's not going to be easy" luring investors back into Oxford -- and Chase has no position. But management has been totally revamped and the new team has gotten costs down "dramatically," which should generate "a lot of leverage to the bottom line," she noted. Indeed, Oxford's earnings are expected to rise more than 200% this year. The stock closed today up 3.1% to 14 11/16.

"Tech and biotech is still a good place to be, but they're at least fairly valued vs. other areas where value has not been recognized yet," Ellis said.

Diversity in the social strata is certainly commendable. But given that large-cap fund managers were preaching diversification in recent years, to the lament of most who followed their advice (compared with those who stuck to the tech-only approach), I doubt small-cap fans are going to be leaping off the tech and biotech bandwagons anytime soon.

The Stanek Saga, Continued

Monday night, I reported on Michael Stanek's rumored plans to leave

Lehman Brothers

for

Garage.com

.

In the wake of the original piece, a reader faxed me a copy of the itinerary from a Garage.com "boot camp" in Seattle week. The panel, entitled "Life's a Pitch," included Stanek, who was listed as vice president, entrepreneurial development at Garage.com.

"That's where the confusion stemmed from," conceded a Lehman spokesman who reiterated that the software analyst has "not officially left the firm."

Confusion reigns over Stanek at Garage.com as well. Tuesday, a spokeswoman said an announcement regarding the analyst would be forthcoming. Wednesday, she said there was no announcement and declined to comment further.

It seems pretty clear (doesn't it?) that Lehman is trying its darndest to keep Stanek from making the leap from the sell-side to the dot-com side. May we all find ourselves in such demand some day soon.

P.S.: The once (and future?) research analyst has yet to respond to repeated phone messages.

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at

taskmaster@thestreet.com.