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With large-cap stocks, as measured by the major averages, relatively flat at midday,

let's get small

. (Yes, that's a


to Steve Martin.)

As "everybody" knows, small-cap stocks have been the place to be for some time now. In the past year the S&P 600 SmallCap Index is up nearly 15%, while the Russell 2000 has risen 9.2% vs. gains of 5.3% for the

Dow Jones Industrial Average

and declines of 1.1% for the

S&P 500

and 5.6% for the

Nasdaq Composite


The recent new high for the S&P 600 notwithstanding, small caps' outperformance has cooled of late. Since the start of the year, the Dow is essentially even with the S&P 600 and is outperforming the Russell 2000, although both small-cap indices are well ahead of the S&P 500 and Comp.

"After five months of outpacing their large-cap counterparts, secondary stocks took the back seat in February, posting losses greater than those of large-caps," observed Satya Pradhuman, director of small-cap research at Merrill Lynch, in a recent report.

Still, since the end of the third quarter, small-caps gained 16.5% vs. 7% for "mega-caps," he wrote, noting that as volatility fell, the market broadened, contributing to small-cap strength. Similarly, the central bank's aggressive easing led to narrowing credit spreads, which lowered the relative cost of capital, further aiding small caps vs. large.

I couldn't reach Pradhuman for comment on whether the recent widening of credit spreads, in conjunction with anticipation that the

TheStreet Recommends

Federal Reserve

will soon begin tightening monetary policy, means the end of small-cap dominance is at hand.

Carrying the Small-Cap Flag

But Juliet Ellis, who manages $1.8 billion in small-caps for J.P. Morgan Fleming, says "we could still be in the early stages" of small-cap outperformance. Expanding on a view expressed

here in mid-December, she noted that past cycles of small-cap relative strength have lasted an average of six years.

Additionally, there is a strong precedent for small-caps to outperform coming out of recession, she said.

Getting granular, Ellis' current favorite small-cap sectors and overweight recommendations are consumer-related and industrial names.

Focusing on consumer stocks is "a little controversial," because retailing stocks have fared so well, the fund manager acknowledged. Also, there's a widespread belief that consumer spending will be slack coming out of recession after remaining so robust during the recent slowdown.

But the strong-consumer story "has legs," Ellis said, noting that the wealth effect from appreciating real estate is "underestimated" and that this is where the bulk of consumers' assets reside. Additionally, tax cuts and falling energy prices have padded consumers' wallets, while average hourly wages held up well during the rise in unemployment, which she believes has peaked.

"I'm not in the camp that worries about the consumer retrenching because there is no pent-up demand," save for in the auto sector, Ellis said, although J.P. Morgan Fleming maintains long positions in auto-parts makers

Borg Warner Automotive

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(GNTX) - Get Gentex Corporation Report


She's also not terribly concerned about the recent upturn in oil and gas prices -- although she does favor some energy names because of it -- noting that energy prices are still down considerably on a year-over-year basis. Similarly, she's not worried by yesterday's disappointing retail sales data, believing "we've got some stocks whose same-store sales will be better than the average" going forward.

Specifically, Ellis recommends specialty retailers





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Other consumer-related plays include broadcasters

Emmis Communications

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Radio One


and Spanish language media company


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, as well as leisure companies such as

Multimedia Games



The case for industrials is "pretty simple," according to Ellis: The manufacturing recession was "very real" but "we're seeing orders turn up" due to the "huge monetary stimulus" at a time when inventories are "very lean," notwithstanding today's surprising 0.2% rise in business inventories.

Additionally, small-cap (i.e., domestic-focused) manufacturers aren't as exposed to the dollar's strength as large-caps, she said, although the greenback was weakening again today.

Ellis' industrial (add cyclical tech) recommendations include


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Heartland Express

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Rudolph Technologies

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Brooks Automation

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Finally, Ellis is growing optimistic about energy names such as

Pride International



Swift Energy

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"I'm not recommending a huge overweight in energy, I just think everyone hates it; oil is firming, and now is not the time to be underweight," she said.

J.P. Morgan Fleming has long positions in all of the aforementioned stocks.

Among others, Ellis manages the

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J.P. Morgan Small-Cap Select Equity fund, which is up 3.6% year to date after falling 4.4% in 2001, although it's still up nearly 5% on a three-year annualized basis. She also manages the

(VSCOX) - Get JPMorgan Small Cap Blend A Report

J.P. Morgan Dynamic Small-Cap fund, which is flat year to date after falling 14.3% last year, but still up nearly 11% on a three-year annualized basis.

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

Aaron L. Task.