Investing In Growth Companies;

Like the weather, the fortunes of fast-growth stocks can change overnight. Witness the rebound of this year's INC. 100 portfolio.

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In what might have seemed a desperate sop to a sorry situation (with its 27% loss, the 1981-82 INC. market average was the scruffiest of a sad lot), INC. concluded its stock-performance roundup last year with the assumption that "what went down can also go up." Added INC., more out of wistfulness than confidence: "The volatility of stocks like those represented on the INC. list can turn frowns into smiles in a matter of weeks."

Well, since stocks in general continued to drop through most of the summer of 1982, it wasn't exactly a matter of weeks. But in August a bona fide bull market began. And sure enough, INC.'s tentative reflection has since proved not only sound, but downright prescient. Thanks to the ability of smaller companies to move relatively quickly in the stock market -- a factor of volatility that technical analysts call "beta" -- an investor placing $100 into each of the INC. 100 companies at its average price in March 1982 (or, in the case of seven companies, the average price within the month of their going public) would have had a profit of 72% by March 1, 1983, not bad, considering that much of the list was under water for nearly half a year. (Although such investments could theoretically have been made, it is actually an exercise in futility, since the INC. 100 candidates are not determined until a year later. But, however utopian, the 72% profit is come by honestly: INC. establishes each stock's cost midway between the high and low for 1982 on the assumption that it represents an attainable buying level; the price shown for March 1983, is the actual closing price, accounting for splits and stock dividends where necessary.)

As the accompanying table and bar graph display, equal investment in the INC. 100 outstripped four widely known rivals by significant margins. It doubled the gain of Standard & Poor's 400, and nearly doubled that of the 30 Dow Jones Industrials. It performed 80% better than the American Exchange Market Value Index and outdid the NASDAQ Industrial average by a third, leaving little doubt that -- from August to March, anyway -- equities of fast-growth, mostly thinly capitalized, small companies were the swiftest tickets to market profit (87 of the INC. 100 corporations are traded in the over-the-counter market; only 7 are on the New York Stock Exchange, and the remaining 6 are on the American Stock Exchange.)

And what a difference a year makes. While in 1982's report only 22 INC. stocks had managed gains and the largest was the $70.16 tacked on by Ferrofluidics, this time no fewer than 73 went up. The biggest winner -- a quintupler -- was newcomer Scientific Leasing, a corporation with only 1.5 million shares outstanding that rents high-tech equipment to healthcare and other facilities. All told, 44 stocks exceeded last year's leader, giving solid credence to another incisive INC. reflection from 1982: "In the long run, fundamentals matter, and, if the sales growth records turned in by these companies mean anything, the future should be brighter than the immediate past."

O ye of little faith! Apple Computer, last year's leading grower in terms of sales, improved its stock market record from the 30% loss in 1982 to a 185% gain in '83 And all Apple did was keep growing. A number of other fast-growing but fast-losing 1982 stocks made equally dramatic reversals in 1983. Among them: Computer Associates International, down 6% in 1982, but up 268% this year; Micom Systems, down 38% in '82, up 218% in '83; ASK Computer Systems, a loser of 8%, and a gainer of 130%. Even Matrix, barely making last year's list as the 100th on the INC. 100, gained 116% after dropping47%.

But alas, INC.'s homily on growth and patience didn't hold in every case. This year's biggest loser -- Pengo Industries, an oil-well service company -- was among last year's poorer performers as well, dropping 75% and 58%, respectively, despite revenue growth of more than 500% over the past five years. The problem is that, sharing sorrows suffered by the oil sector over the last several years, Pengo dropped $8.36 per share down the well in 1982; in five years it has shed 92% of its stock price. So, clearly, expanding revenues are no guarantee of stock market reward, particularly if costs expand at the same -- or a faster -- rate. Indeed, among INC.'s 26 losing stocks, no fewer than 12 are oil or oil-related companies. Had a savvy investor eschewed the 17 oils in the comparatively oil-heavy INC. 100 list (the 30 Dow Industrials have only 3), an equal investment in each of those remaining would have netted 90% for the 12 months.

But, as dismal as they have been, even the oils cannot continue their slide forever: Remember INC.'s now-documented credo that what can go down can also go back up. And already, technical-chart patterns show that the oil group is stabilizing and is demonstrating increased upside potential. Thus it is not beyond the realm of possibility that, given the same growth rate it has been enjoying -- plus a humbled OPEC -- this group could (we're not saying "will") lead next year's INC. 100 gainers.

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