By Wall Street standards, anyway, the Second Industrial Revolution that many have thought would be sparked by small-company, big-growth innovation has not yet taken hold. All the major averages declined significantly since last March, when INC. first pitted its annual compilation of the country's fastest-growing public companies against the Dow Jones Industrials, the Standard & Poor's 500, the American Exchange Index, and the NASDAQ Composite. At that time, the table showed that the INC. 100 average -- a figure arrived at by calculating how $100 invested in each stock would have fared for 12 months -- gained an enviable 76%. That was double its closest rival, the NASDAQ Composite, at 38%. The Amex Index was up 27%, the S&P 500 was up 22%, and the creaky old Dow a mere 19%.

This time around, the tables have turned. INC.'s new gathering of the fastest growers turned in the worst collective performance. But, taken in the context of a recessionary cycle, it wasn't that bad. Where last year's 100 list soared head and shoulders above the other four averages, this year it is simply bringing up the rear of a bedraggled lot. For that doubious distinction, it dropped below the Amex by a single percentage point, both indexes being sprinkled liberally with oil stocks, which fared particularly badly in the 12-month period. Even the conservative Dow and the S&P were well into doubledigit declines. Perhaps the biggest surprise -- if there are any surprises -- comes in the breadth of the difference between NASDAQ and INC., since both are largely made up of the same breed of modestly capitalized, often high-tech smaller company. NASDAQ is the exchange of choice (or necessity) of no less than 90 of this year's INC. group. But after outstripping the NASDAQ index by double last year, INC. nearly doubled NASDAQ's loss this year. Again, the unusual preponderance on INC.'s list of energy-related issues -- a group whose rapid revenue growth is destined to be slowed by recent oil oversupply -- would help to explain INC.'s downside proclivity. Despite this reversal of fortunes, for both years taken together INC. is still ahead by a healthy 25%. This two-year return approximates that of a money fund, but it would be far more breathtaking for an investor.

In any event, for two apparent reasons, such comparisons are academic. One is that the 1982 INC. enumeration is different from last year's version. Forty-seven entries are on the list for the first time (no fewer than 26 of which went public during the 12 months). The other reason is that, factually speaking, the INC. 100 could not have been invested in last March, since no one could have known then which companies would be included.

Unlike some indexes, such as the DJI, which "weight" certain components more or less heavily than others, INC.'s is a true average of how each of its 100 stocks performed. Here's how it was arrived at: The mean bid (or, in the case of the 10 NYSE and Amex stocks, the close) was tabulated between the month's high and low for March 1981 and for March 1982 (at press time). INC. then "bought" the number of shares and fractional shares that it could have purchased with $100 for the March 1981 mean, and "cashed out" at the March 1982 mean. The result is shown in the right-hand column. The total was then added, and divided by 100 to get the average. Brokerage commissions were not considered, nor were cash dividends. Most of the INC. 100, because of their nature, are not cash payers. But 10 of them voted stock splits or stock dividends, down from 32 last year.

That the INC. 100 can gain 76% one year and lose 27% the next is not particularly puzzling. As myopic as the stock market may often seem, Wall Street looks well beyond expanding sales and fears the problems that a recession can bring to small business. Although a company may remain fiscally sound, chances are that it will be touched to some degree by the general dispirit and downturn of a troubled economy. The market simply doesn't like taking such chances, no matter how dynamically earnings may be growing.

It ought to be some encouragement, then, that 21 members of the class of '82 managed to show a stock-market profit. They are, for the most part, young companies with little experience so far in facing adversity. The list's largest gainer -- Ferrofluidics Corp. of Nashua, N.H. -- is just such a company.Only 13 years old and newly public, Ferrofluidics has experienced soft earnings periods. With many sophisticated technology products under development, the company says, this performance is in accordance with its business projections. The company has kept functioning well, has quietly managed to come up with financing when needed (see "R&D Partnerships Come of Age," INC., March) and seems quite untouched by the fiscal turmoil taking place outside its doors. If the Second Industrial Revolution is indeed just around the corner, it may well be that such fearless youths will lead it. In the meantime, for those whose portfolios are replete with last year's high-fliers, it's well to remember that what went down can also go up -- and that the volatility of stocks like those represented on the INC. list can turn frowns into smiles in a matter of weeks.

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.


3/10/81 3/10/82 % Loss

INC. 100 73.36 27

Dow Jones 972.66 804.89 17


Standard & 130.46 109.41 16

Poor's 500

American 336.94 249.19 26

Exchange Index

NASDAQ 199.03 170.42 14