Don't Fear the Small Caps

Now may be a good time to invest in the little guys.

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It's a no-brainer: When the market is struggling, investors favor size and stability. Large-company stocks, which regained market leadership over small companies in 2007 after years in the dog house, are likely to retain that throne for a while. But that's no reason to abandon the little guys. After all, over long periods of time, small-company stocks generate greater returns than their large-company brethren. Since 1926, small caps returned an average of 12.5 percent per year, compared with 10.4 percent for large caps, according to Morningstar.

The guys over at Oberweis say now is an opportune time to buy small companies. The group has fallen off more than 17 percent since mid-July, and valuations are substantially below average. Jim Oberweis and Ken Farsalas put it like this in their February 2008 newsletter: "This doesn't happen too often folks, and when it does, our research suggests that those bold enough to buy tend to be rewarded with significantly above-average returns over the subsequent three-year period." Adventurous investors (read: those willing to take on some risk) might consider their picks:

  • Anadigics (ANAD), chipmaker for wireless and broadband communications
  • Guess? (GES), clothing designer and retailer
  • Lululemon athletica (LULU), yoga-wear designer and retailer
  • Phoenix Technologies (NGM), maker of system software for personal computers and servers