Profits and Prophets: November

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Small Caps, Big Risk

Good Times for the Patient Investor?

By Art Garcia

If you invest in stocks for the long term, you must own small caps, or so says Paul Elliott writing on “Wall Street’s Worst-Kept Secret” for The Motley Fool’s online edition. According to the Fool, the worst-kept secret is that, “over the long haul, smaller-company stocks outperform, so successful long-term investors own them. Period,” he emphasizes.
    “I have never found a small/microcap stock not worthy of consideration,” adds an equally enthusiastic Kent Williams, head of Vista Asset Management in Orinda, Calif., and consultant for JM Dutton Associates in El Dorado Hills, who has an equity ownership in the Dutton investment-research firm.
    “I think the small-cap market is the most undervalued, relative to large-cap stocks, in many cases,” Williams says of the little fellows. “The best risk-reward ratio for many people is the small-cap area, if it’s well-researched and (investors) have a long-term horizon.”
    Many people have taken early retirement since the dotcom bust or become caught in a downsizing of payroll and many have had to adapt and stay alive by becoming consultants or entrepreneurs. “The entrepreneurial spirit in this country is alive and well,” says Williams, “and is manifesting itself in the micro- and small-cap universe. That’s where product innovation and real risk-taking is occurring.”
    Cash-rich companies are on the prowl for mergers and acquisitions to find new products to push through their manufacturing pipeline, and they’re eyeballing small-cap operations. Leveraged buyout and private-equity players are also in the game, part of which is to acquire small companies and take them private.
Continued...

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