Small Is, Finally, Beautiful

Small company stocks enjoy their best year ever and gain new interest from investors.

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Underappreciated for years, small-company stocks finally exploded intoinvestment favor in 1991. Will their newfound preeminence last?

While the country's largest public corporations -- General Motors, IBM, Westinghouse, Woolworth, and the like -- are coming apart at the seams, its smallest have been putting on quite a show of strength. Small-capitalization corporations -- those whose market value is a few hundred-million dollars or less -- enjoyed their best stock-performance year ever.

In 1991 the blue-chip 30 Dow Jones Industrials gained 20%. But the Dow wasn't where the action was. The real movement was in the automated over-the-counter market, NASDAQ, where at the close of the year the average market value of a listing was $126 million, or approximately one two-hundredth of GM's. The NASDAQ Industrial Average soared a monumental 65%. Similarly, the Hambrecht & Quist Growth Index, composed of about 100 companies with market values of less than $200 million, surged an even longer 94%. Trading on NASDAQ soared to 41.3 billion shares (a record), and dollar volume to $694 billion (ditto).

Small-cap stocks' climbing to record heights suggests a fundamental shift in investors' appreciation of our economy's future. Previously chary of the risk inherent in small-cap corporations -- and of in-and-out liquidity problems due to their relatively low number of outstanding shares -- many an institutional trading desk hired a small-cap money manager in 1991.

Why? Not because they suddenly discovered that growth-oriented management was more alert. Or that small companies could adapt to change faster, grab market share faster, create new products faster, bring them to market faster, start selling them faster, cut fat, trim overhead, go lean and mean -- those abilities they already knew about.

What investors realized was that, almost without exception, small-cap operations were bringing the bacon back home. Such companies thrive best where the rest of the globe hasn't yet dared venture. In 1991 small-cap hot spots included regional health care and delivery, biotechnology, software, computer mail order, specialty retail, and telecommunications -- nary a VCR, TV, slab of steel, or side of beef to be found. Save for the silicon-chip business every now and again, no industrial sector populated by small public companies was so desperately inept that the government had to drag a bevy of underinspired and overcompensated executives across the Pacific to bitch about it.

So let Japan have its MITIs and hierarchies. Big money's eager endorsement of small, non-dividend-paying companies in 1991 recognizes that pure capital gain is itself a rewarding concept. Forget the Nifty Fifty. Forget total return. Growth companies that plow income back into operations constitute a far more sensible investment than behemoths that have no better plan for capital than to raise CEO salaries.

Indeed, our entrepreneurial hockey-stick growth curves are the envy of the Japanese, who for half a dozen years have been trying to light the spark of innovative enterprise under their own worrisomely flattening economy.

They've had little success. So little, in fact, that plenty of U.S. small-company executives have been invited to teach them how to sow seeds properly. We may not be selling them any cars or fridges, but our growth-strategy know-how sure is in demand.

And no wonder. Businesspeople here run clever, raised-on-their-own-nickel companies such as -- to name a few mentioned previously in Inc. -- Symantec, up 233% in 1991; Borland International, up 159%; Ben & Jerry's Homemade, up 151%; Paychex, up 89%; and Dell Computer, up 39%.

By contrast, GM and IBM -- which you have not read about in these pages -- lost 16% and 21%, respectively. Not to mention 114,000 jobs. -- Robert A. Mamis

Relative Market Performance
Industrial average 3/1/91 2/28/92 % Change

INC. 100 11.8 18.7 +58%

NASDAQ 510 722 +42%

AMEX 348 416 +20%

DJIA 2,910 3,268 +12%

S&P 439 491 +12%

THE FALLOUT

Better private-equity markets, more venture capital, increased eagerness among prospectivebig-company partners ? How the stock market's enthusiasm will change your small company's life

At the heart of the bull market for small-capitalization stocks lie forces that will favor small companies in the years ahead and in turn will reshape the economy in their image.

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