Little Stocks That Rock
Our experts recommend 50 fast-growing small companies whose shares are poised to take off.
By John Curran, FSB magazine

(FORTUNE Small Business) -- (FORTUNE Small Business) - Call it the rally that wouldn't quit. After nearly six years of spiffy performance, small-cap stocks headed into 2005 were facing a wave of dire predictions. The widespread view of market seers: Small-cap prices were too rich, the Johnny-come-lately fans too many, the bargains too few. Yet small caps sailed through 2005, besting their larger-cap peers by a wide margin. For the 12 months ended May 1, 2006, the Russell 2000 index of small-cap stocks returned 31.5%, compared with 14.4% for the Standard & Poor's 500 index of large-company stocks.

50 small cap stocks to watch: See the picks

The longer view is even more impressive: Since March 2000 (the official start of this rally, when small caps bottomed out relative to their large-cap peers), the Russell 2000 index has posted an average annual return of 7.3%, vs. -0.6% for the S&P 500. Why? Analysts point to the superior earnings growth of the smaller companies and to their allure as takeover targets.

Yet even as small-cap fund managers count their gains, they are voicing cautions. Observes John Montgomery of Bridgeway Capital Management, where he co-manages ten funds with assets totaling $2.7 billion: "As a group, value in small caps is much harder to come by." Take those as words from one who knows a good value. Among the ten money managers polled by FSB at this time last year, Montgomery stole the show: His five stock picks rose, on average, 103% over the 12 months, soundly defeating the Russell 2000. (In the aggregate, the 50 companies our managers recommended last year returned 46.7%.)

But the success of small-cap mutual funds has a price. Since the beginning of 2005, more than 30 such funds have closed their doors to new investors, bringing the total number of shuttered small-cap offerings to 103 out of a total of 597 funds, according to Morningstar. (All the funds listed on page 47 are open to new investors.) And small-cap stocks are becoming expensive - the average price/earnings ratio for the Russell 2000 index is about 28, compared with 18 for the S&P 500.

Take heart, though. The fund managers featured here may see fewer great investing opportunities, but they say they're still finding winners.

Gallery: See their top 50 picks.

This is an excerpt from a FSB magazine feature. To read the full story, "Little Stocks That Rock," click here. Top of page

To write a note to the editor about this article, click here.

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.
Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.