Bargains to be found for small-cap investors

NEW YORK — Investors who managed to remain calm during Wall Street's latest tempest could find they have what it takes to invest in small-cap stocks.

While they often outperform many of their larger rivals, small-capitalization stocks tend to show more volatility. And it often requires the hand of a deft investor to pluck the sound picks from the shaky ones.

Jonathan Vyorst, portfolio manager of the Paradigm Value Fund, said while many investors flock to bigger companies for safety during economic slowdowns, such moves are now less appealing because so many investors have already shifted their holdings to favor bigger names.

Vyorst, who helps run the small-cap value fund with about $113 million in assets, said there are bargains to be found for investors who can stomach the outsize ups and downs that many small stocks show.

"Right now there are plenty of companies you can find that are selling at dirt-cheap prices that require you maybe to put up with volatility for a half-year or year. Their values are real. Nobody makes money in this business without being very conscious of what the valuation of the stock is and what they're paying for it," he said.

And, of course, not all small-cap names are poised to move higher should the economy begin to show signs of recovery. Wall Street's glum mood in recent months shows that few investors are expecting a quick turnaround in the economy.

"This is clearly a stock-picker's market," he said. "There are plenty of good small-cap companies out there that have been cut in half. It's going to be a tougher time, but that's how you make your money."

Stephen Wood, senior portfolio strategist of Russell Investments, notes that the classic situation in which small-cap stocks can do well is when the economy is beginning to climb out of recession. He added that the punishing atmosphere on Wall Street doesn't offer investors an ideal time for making significant changes to portfolios.

Wood said investors should search for well-managed operations of any size and be willing to wait for returns.

"The stock market is a very effective mechanism to take money from the impatient and give it to the patient," he said.