Debbie and Ross Goldberg have long invested in the shares of small companies for one simple reason: They can buy some of those stocks cheap.
With just a few thousand dollars, the Goldbergs can buy several hundred--sometimes even a few thousand--shares of a little company. If the company does well, the Woodland Hills couple make a killing.
Ralph Feldfeber, on the other hand, is a new entrant into the small-company stock market. The Los Angeles resident is investing because he is sure that economic and political changes will boost small-company fortunes and make their shareholders rich over the long haul.
Thanks in part to President-elect Bill Clinton, people such as the Goldbergs and Feldfeber are becoming the rule rather than the exception. Helped by individual investors pouring millions of dollars into the market or into mutual funds specializing in small-company shares, the NASDAQ composite index--a key indicator of small-company stock performance--has gained about 15% since the beginning of October.
On Friday, the NASDAQ composite closed up 5.24 points to a new high of 661.60, its seventh record close in the last eight sessions. Big company stock performance has been less impressive, with the Dow Jones industrial average gaining about 6.5% in the same period.
Although the small-company stock market is fraught with risks, many believe that it is primed to soar even further for a variety of reasons.
Democratic administrations tend to be good for small-company performance. Democratic regimes generally use tax laws to stimulate certain industries, and launch federal job and spending programs. Although large companies are likely to benefit as well, they can also be hurt by additional regulation. Indeed, experts say, the latest surge in small-company stocks started in early October as more and more investors bet that Democrat Clinton would win the White House.
Small-company stocks also usually benefit from the "January effect," a year-end phenomenon involving portfolio adjustment among big institutional investors that traditionally causes prices of small-company stocks to rise between November and January.
Additionally, developing technology-oriented firms--a mainstay of the small-company market--are getting a boost from big companies that are attempting to automate. The "information-processing equipment" segment of the economy is growing at a near-20% clip, while the rest of the economy is growing much slower, said Hugh Johnson, chief investment officer at First Albany Corp. in New York.
Clinton has also proposed reviving investment tax credits and other incentives that would help budding technology firms, Johnson notes. A variety of other promised federal programs should also give little companies a boost.
High-tech firms trading through the NASDAQ market system have soared as a result. For example, Autodesk, a computer software firm trading on the NASDAQ, has risen 12% in the last two months.
Institutional investors have picked up on the trend and they are restructuring their portfolios to add more stock in little companies. That, Johnson said, is a signal that it is time to buy.
"The trend is your friend," he quipped.
But investing in small companies isn't all wine and roses, as the Goldbergs can attest. They once doubled their money on a $2-a-share stock, for example. But they later repurchased the same stock at $2 a share and it tanked. It is now languishing at about 25 cents a share.
"I don't know that we're going to keep doing this," Debbie Goldberg said. "It hasn't been working out so well lately."
While the Goldbergs have concentrated on what many argue is the riskiest segment of the small-company stock market--thinly traded shares that go for a few dollars each--small-company stocks of all price ranges tend to be more volatile than shares in big companies.
In 1990, for example, the NASDAQ composite index tumbled 17.8% while the Dow Jones industrial average fell only 4.3%. On the other hand, the NASDAQ index posted a 56.8% gain in 1991, while the Dow gained about 20%.
Another risk: Small-company stocks have become so lofty in recent months that the entire market has become overpriced, some experts argue.
Charles Allmon, editor of the Growth Stock Outlook, maintains that investing in small-company stocks today is tantamount to throwing your money away.
"The odds are better with the slot machines in Las Vegas," he said.
Allmon maintains that small-company stocks are wildly overpriced, with many companies' stock prices at 40 or 50 times their current-year per-share earnings. Where fast-growing small-company stocks can support higher price-earnings ratios, Allmon maintains that the market is "discounting the hereafter" with such high ratios.
There are a few selected stocks that are worth buying, he says. But for the most part, he believes that the market has been fueled by the sort of rampant speculation that comes only before a dramatic market drop.