Small Is Beautiful

Small-cap issues have held up well in the recent market turmoil -- and stand to benefit as tax-loss selling eases. Here are S&P's top picks in the group

By Arnie Kaufman

The S&P 500 index and Nasdaq Composite have fallen substantially over the past 12 months. But the S&P SmallCap 600 index is in the middle of its 2000-2001 range and still solidly above its level of a year ago.

In a market influenced mainly by the whims of institutional investors, the large-cap issues comprising the "500" and Nasdaq (and to be found in professional portfolios) are the ones feeling the brunt of selling pressure. These are the stocks that rose sharply in 1995-99 and became most overvalued.

On the other hand, small-cap issues, often too little for many funds to bother with and relatively reasonably priced, have been holding up comparatively well. As the traditional favorites of individual investors, moreover, the small caps are benefiting the most from the recent conclusion of year-end tax selling.

We searched our database for stocks with market capitalizations of less than $1.5 billion and Stars rankings of five (indicating S&P analysts expect them to outperform the market in the next 12 months).

The following issues emerged:

Constellation Brands (STZ )

Kaydon Corp. (KDN )

Patterson Energy (PTEN )

Pre-Paid Legal Svcs. (PPD )

Renal Care Group (RCGI )

Scholastic Corp. (SCHL )

Seitel Inc. (SEI )

Technitrol (TNL )

Watson Wyatt (WW )

Kaufman is editor of Standard & Poor's weekly investing newsletter, The Outlook

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