Aron Ralston surely must be the symbol of our times. He's the ultimate survivor, a self-sufficient, super-rational adventurer prepared to adapt to any outrageous turn of fortune.

You've probably heard of this remarkable mountaineer by now. He's the Aspen, Colo., hiker who amputated his own right arm with a pocket knife after it was trapped by an 800-pound boulder during a solo canyoneering expedition in a remote Utah desert.

Pinned for five days and out of both water and ideas on how to lever himself out of the mess, the onetime Intel engineer fashioned a tourniquet with one hand, sawed through the limb without anesthetic, then rappelled down a cliff and hiked seven miles out of the ravine through a river before finding help. A few months before, he'd barely survived an avalanche while backcountry skiing.

Profiles in Courage

What could be more emblematic of the path taken by public companies in the past few years -- and particularly the smaller ones with fewer resources?

They've been harassed by a recession, a terror attack, a three-year bear market, two wars, angry regulators, crusading politicians and bitter shareholders. If they've come this far with their exchange listings intact and no executives under indictment, they must be tough as nails.

They've cut nonproductive assets, found ways to grow without adding more financial leverage, cleaned up their balance sheets, hired more reputable financial officers, improved their boards of directors, repaired relationships with lenders and changed their business plans.

At this point, they might not be worthy of an investment by a trust fund for orphans. But they may be worth a second look by speculators with an appreciation for the indomitable capitalist spirit -- so long as those willing to risk it keep one eye on the exit, in case these companies have only hidden their faults better than peers.

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."


Ralston Raiders
These stocks have been through a lot and survived
Company May 2 Price % Change Last 12 Months % Change YTD Short Ratio Price/Sales Ratio
Epcos (EPC:NYSE) $15.77 -58.7% 52.2% 30 0.79
Manugistics (MANU:Nasdaq) 3.22 -77 34.2 18 0.79
Amerco (UHAL:Nasdaq) 8.22 -52.8 86 14 0.08
WCI Communities (WCI:NYSE) 13.40 -56.3 31.4 11 0.49
Elan (ELN:NYSE) 3.85 -67.6 56.5 10 0.92
Children's Place (PLCE:Nasdaq) 15.23 -56.8 43.1 10 0.6
Factory 2-U Stores (FTUS:Nasdaq) 5.28 -62.9 54.8 10 0.16
Metris Cos. (MXT:NYSE) 3.42 -73.2 38.5 9 0.14
Paxson Communications (PAX:NYSE) 3.46 -65.4 68 9 0.84
Atlas Air Worldwide (CGO:NYSE) 2.10 -83.6 39.1 8 0.1
Amkor Technology (AMKR:Nasdaq) 8.61 -50.1 80.9 7 0.87
Continental Airlines (CAL:NYSE) 11.80 -50.6 62.8 6 0.09
Lucent Technologies (LU:NYSE) 1.85 -58 46.8 6 0.75
Mirant (MIR:NYSE) 3.15 -72.2 68.4 6 0.08
Allmerica Financial (AFC:NYSE) 16.24 -67.6 60.8 5 0.26
Source: MSN, Value Line

The first of our Ralston Raiders is a decent example: Epcos ( EPC) is the world's second-largest manufacturer of passive electronic components -- those funny-looking things such as capacitors, and surface acoustic wave devices that stud the circuit boards of your computer, cell phone, television, digital camera, rail-car brake system or automotive air bag. They may not be as exciting as the CPU or graphics chip, but they process signals, control the supply of energy and generally make the thing work.

Germany-based Epcos is essentially a joint venture of the Munich industrial conglomerate Siemens and the Japanese conglomerate Matsushita. The stock traded in the upper $100s during the heyday of the tech-stock bubble. Then it fell as far as $5.70 during the bloodbath last fall.

It's been steadily rising all year, but still trades at a paltry price-to-sales multiple of 0.79. A multiple of 1.0 or even 1.5 would not be expensive for a market leader with such a diversified client base. Barring global depression, it's fair to expect the stock to double to trade back to the $30 range over the next two years, as it muscles up to give short-sellers a bloody nose.

Shrugging It Off

Or how about Atlas Air Worldwide Holdings ( CGO), which rose another 21% on Monday alone to $2.65? This stock traded as high as $46 in 2000, and as high as $12 just last year as the air cargo company suffered from onerous debt load and global recession.

Last December, it suffered the indignity of being kicked out of the S&P SmallCap 600, which, as you know, is often a good sign that frustrated longs are selling out. At that point, it had fallen to $1.25. The shares would get cut in half one more time, sinking to 65 cents a month ago when it announced that it was having trouble restructuring leases on several of its aircraft and would suspend all payments to lessors in the meantime.

And now? On April 1, the company announced it had reached an agreement with GE Capital Aviation Services to restructure its obligation and would start making lease payments again. Presumably that means harsh payment terms, but that's the equivalent of cutting off your arm to save your life.

The stock is up 300% since then -- mostly in a slow and steady move, until Monday. And yet it's still dirt cheap, even by the standards of the low-margin air cargo business, with a price-to-sales ratio around 0.15 and a price-to-book value of under 0.25. It has traded in better times at a price-to-sales multiple of better than 1.0, so it has a lot of muddy water to slog through before anyone can complain it is overvalued.

Long-Odds Lucent

And then, of course, there is Lucent Technologies ( LU), which has been in the intensive care unit almost as long as the bear has been growling. It has regularly made the list of the five companies most likely to declare bankruptcy.

Yet it keeps chugging along, laying off workers and executives, restructuring debt, throwing away divisions and dumping real estate, all the while developing new products for the next phase of the digital age. The stock may never even reach $10 again.

Yet, with a price-to-sales multiple of 0.75, bankruptcy staved off this long and both SEC investigations and shareholder litigations now in the rearview mirror, Lucent is probably an even bet to get back to the $5 range. But there's a catch, of course: Investors must decide to lift Lucent's sales multiple back closer to the 2 perch it held before the bubble began in the late 1990s. Lest you forget, it was at $5 as recently as last May.

Each of these names has its own survivor story, and perhaps more lasting trauma will emerge in coming months to dampen our appreciation. But at least consider celebrating the spirit of Aron Ralston by finding a place in your portfolio for companies that seem to be walking out of the desert alive.
Jon D. Markman is senior investment strategist and portfolio manager at Pinnacle Investment Advisors. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at supermodels@jonmark.com. At the time of publication, his fund was neither long nor short any stock mentioned in this column, but positions can change at any time.