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Small Caps, Big Momentum

From Standard & Poor's Equity Research

Blue-chip issues have lagged in recent years, with stock prices of stalwarts such as General Electric (GE) and Microsoft (MSFT) barely budging (see BW Online, 4/17/06 "Blue-Chip Blues"). Instead, investors have found greater opportunity in small-capitalization issues. The S&P SmallCap 600 index has posted an average annual return of 13.6% over the past 5 years, while its big-cap stablemate, the S&P 500 index, has returned just 1.8%.

For this week's screen, we decided to focus on the small fry. So we started with the list of stocks in our database with a market capitalization between $100 million and $1 billion.

FEEDBACK LOOP. Then, since the category has showed such persistent strength, we decided to take a momentum approach. The basic premise of momentum investing is that what goes up can continue to go up, using the notion that strong investor demand for a stock can continue to feed on itself for a certain period of time.

To find stocks with strong momentum, we looked for those with an S&P 13-week relative strength ranking greater than 90 (meaning over the past 13 weeks they have outperformed 90% of the stock universe).

We then wanted to ensure that the stocks on our list were attractive in other ways. So we next looked for issues with the highest score of "bullish" under S&P's proprietary technical investing measure.

POSITIVE OUTLOOK. In addition, each stock had to have the highest rank of our proprietary insider activity rating. Favorable insider activity may signal that management and others crucial to a company's success view its prospects favorably.

Our search turned up these six names:

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