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February, 2004


In physics, so I understand, the smallest realm, involving the tiny particles or bits of energy that together make atoms, is arguably the most interesting and involves the strongest forces, with potential for release of the greatest power, of any in the universe.

In economics, too, as discussed in the little paperback gem Small is Beautiful, by E.F. Schumacher, society's needs are best met at the smallest unit levels, with the most dynamic, creative, positive, and transforming developments arising when capitalism is wed to the needs of the individual in a system at once frugal, balanced, humane, and conserving of energy.

For the world of stocks, one's total return potential often rises in inverse proportion to the company's market-capitalization. The smaller businesses, everything else being equal, are the more profitable for investors.

Those last statements are actually somewhat controversial. Much has been written in the debate over whether large-cap or small-cap equities turn out to provide better shareholder gains. According to the "AAII Journal" February, 2004, issue, "Why Well-Designed Portfolios Don't Depend on Cap Size and Style Categories," by James B. Cloonan, pp. 31-33, the confusion is partly a result of inadequate differentiation among the categories. Many stocks are called "small capitalization" when they are more properly in the mid-cap range, $1.5 billion to $2.9 billion. And often even the correctly labeled "small cap" category omits many qualifying companies. But when all of the very small publicly traded companies are properly considered, those in the small-, micro-, and nano-cap subcategories, there are "many more opportunities in the smaller small-cap issues," per Cloonan.

He defines the nano-cap group as below $200 million in market capitalization. Along with their cousins, the micro-caps ($200-399 million), the lowest capitalization groups in fact make up the majority of the total stock universe, and still "about half...even when all unlisted stocks are eliminated."

The trouble (and the advantage) is that many of these securities simply fly under the radar at first and are not noticed by most market makers, money managers, and analysts who are advising folks on what stocks to buy.

So the individual investor, using proven selection criteria, generally has plenty of time to do his or her own research, accumulate shares while they are still at bargain levels, and then wait for the professionals to eventually discover them too, at which point the laws of supply-and-demand kick in and the share prices (and average market-capitalization) of one's nano-cap portfolio tend to advance.

It works out consistently enough that holding low price-to-book nano-cap stocks usually is significantly more profitable, yet with lower risk, than an equal weighting of Dow Jones Industrial Average or S & P 500 Index stocks.

Last year this was remarkably the case. Our own portfolio of low P/BK nano-caps (unfortunately only about 10% of our nest egg) was up over 70% in 2003, vs. a total return of about 26% for the Standard and Poors 500.

While that kind of profit experience is unlikely to be repeated soon, carefully selected nano-caps, as a rule, do outperform the major averages. In almost any market there are at least a handful of nano-caps available that offer substantial appreciation potential.

Among those mentioned earlier in "larvalbug bytes," for example, one, MGP Ingredients (MGPI), is up over 300% and another, Parlux Fragrances (PARL), over 100% in the past year.

Here are my current nano-cap top picks:

CompanySymbolPricePrice to
Book Value
Debt to
Duckwall-Alco Stores, Inc.DUCK$$63.99 million
Everlast Worldwide, Inc.EVST$$9.39 million
Imperial Parking Corp. IPK$$46.45 million
Taitron Components, Inc.TAIT$$13.11 million
T-3 Energy Services, Inc.-ComTTES$$73.76 million

(All information is as of the close of market business, 2/18/04.)


Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)

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