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Market Survey

So. Cal. Small-Cap Growth Stocks Break From the Pack

Investing: A handful of Southland-based issues have zoomed 20% in the last month alone.

November 10, 1998|WALTER HAMILTON | TIMES STAFF WRITER

Impressive as the last four weeks have been, their most notable aspect isn't the way the stock market has roared back from its summer swoon.

It's the fury with which beaten-down small-capitalization stocks have seized the lead from larger issues. And nowhere is that more on display than in the stocks of some Southern California companies.

In the last month, the large-cap Standard & Poor's 500-stock index has jumped 14.8%. But the small-cap Russell 2,000 has leaped a startling 25.1%.

Will the gains continue? Who knows? After all, small-cap rallies have fizzled repeatedly in recent years. And many experts believe the Russell is due for at least short-term profit-taking. If nothing else, they say, small caps could be clipped as individual investors clean out their losers for year-end tax selling.

Still, of all the small-cap moves in recent years, this one stands the best chance of durability, some experts say. The reason for their optimism? The Federal Reserve Board's two interest rate cuts have stirred hope that the economy will stay vibrant and that corporate earnings will improve.

That enthusiasm has coaxed investors into so-called small-cap growth stocks, which have fast-growing earnings but are extremely volatile. In the last four weeks, the growth component of the Standard & Poor's Small-Cap 600 index has risen almost 28%, compared with 22.6% for the value equivalent.

"We have a very good chance that [small stocks] are going to do well for a while," said Claudia Mott, small-cap market strategist at Prudential Securities Inc. in New York.

In Southern California, a number of small stocks have jumped in the last four weeks.

The Times regularly monitors about 600 local companies on the New York and American stock exchanges and on the Nasdaq Stock Market. To find some of the hottest small-cap companies, The Times sifted through Nasdaq-listed companies with shares trading for $10 or more whose prices have risen more than 20% in the last month.

In some cases, stocks have come off their lows but remain well below their 52-week highs. Wet Seal, a clothing retailer, and RemedyTemp, a staffing company, are two examples.

Other stocks, however, have surged to 52-week highs--in some cases, to all-time highs--a sign that demand is robust. The stocks of QLogic, Xircom and Gemstar International Group all have streaked to new ground recently.

Newcomers to these stocks should be careful. After such run-ups, the shares may be "extended," meaning they've risen so much in a short period that they may be vulnerable to short-term pullbacks. But historically, the stocks that break out to new highs immediately after a deep market pullback--such as the drop that followed the market's mid-July peak--often are the strongest moving forward.

Several of the companies on our list have semiconductor-related businesses, a hot sector of late. Included in that group are Irvine-based Broadcom, an Internet technology company that unveiled a computer chip Monday that lets users view Web pages and TV pictures on the same screen; and Camarillo-based Vitesse Semiconductor, which sells high-performance communication chips.

Other chip-related companies include Newbury Park-based Semtech, which makes so-called analog and mixed-signal chips, and Align-Rite International of Burbank, which makes "photomasks" used in the production of semiconductors.

Costa Mesa-based QLogic makes products that link disk drives and other peripherals to computers. Rather than focusing on commodity-oriented products that connect equipment to desktop PCs, QLogic's products are geared toward the high end of the market, such as workstations and servers.

The stock has zoomed 45% since Oct. 15, the day it reported a jump in third-quarter earnings to 68 cents a share, from 39 cents a year earlier. That far surpassed Wall Street's estimate of 54 cents.

The company is being helped by a shift toward what's known as fiber-channel technology, which is an enhancement over the previous generation of products, said H.K. Desai, QLogic president and chief executive.

Shares of San Juan Capistrano-based RemedyTemp remain 51% off their April 21 high of $35.75, even though they've jumped almost 46% since their Oct. 14 low of $12, .

The stock was hurt by fears of a recession: In the past, personnel firms have suffered because temporary workers were the first to be let go when the economy weakened, said Paul Mikos, RemedyTemp president and chief executive.

However, companies nowadays increasingly rely on temps and are less likely to drop them in a downturn, Mikos said. Also, temps have greater skills and are more valuable to companies today than in the past, he said.

RemedyTemp provides office workers such as secretaries and administrative assistants, as well as light industrial and light manufacturing personnel. Some investors have shied away from stocks of such traditional temp companies, preferring those that can earn higher profit margins by providing higher-skilled technology workers.

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