Great small companies often ride their success right out of the small-cap universe and into mid-cap territory. Such was the case with Corinthian Colleges Inc. (COCO
), which offers a variety of post-secondary degrees in health care, electronics, and business, both in classrooms and online. When BusinessWeek finished ranking the 50 top-performing small-cap stocks on Feb. 14, Corinthian landed in the No. 1 slot. One month later, Corinthian graduated out of Standard & Poor's SmallCap 600 Index and moved into the MidCap 400.
That an educational provider has done well in an economy rife with layoffs is no surprise. Other companies that made the list also reflect the times, from financial-services firms that capitalized on the home-refinancing trend, to craft and hobby suppliers that catered to the public's nesting needs, to oil and gas explorers profiting from shortage fears. No matter what the industry, most of the best companies prospered by increasing productivity and aggressively cutting costs.
Once again, small caps as a group outperformed the large-cap sector -- by a mile, in fact. The S&P SmallCap 600, comprising U.S. stocks with a market value of $1.5 billion or less, lost 8.4% during the three years ending Feb. 14, compared with a 6.3% drop for the S&P MidCap 400 and a 35.3% deficit for the S&P 500-stock index.
To identify the top 50 small-cap companies, BusinessWeek took the S&P SmallCap 600 stocks and ranked them by one- and three-year total returns as of Feb. 14 (table). Size isn't the only criterion for inclusion in the index. The stocks must be actively traded and have less than 60% of their shares owned by large entities, excluding mutual funds. S&P also requires companies to post net income on an operating basis, excluding merger costs, for four quarters.
Investors who bet that a faltering economy would send people back to school to enhance their skills were rewarded. Corinthian Colleges posted one- and three-year total returns of 60.3% and 545.9%, respectively. Another for-profit educator, ITT Educational Services Inc., ranked 15th, with a one-year total return of 20.8% and a three-year showing of 321.4%.
Corinthian profited not only by offering back-to-school basics in accounting and business management but also by broadening its curriculum to serve industries facing acute shortages of skilled workers. With 66 colleges in 21 states, the Santa Ana (Calif.)-based company saw the highest enrollment in its health-sciences courses, which train medical or dental assistants and nurses. It's no wonder this program is so popular: The Joint Commission on Accreditation of Healthcare Organizations found last August that 126,000 nursing positions were unfilled in hospitals nationwide.
The company reacts quickly when need arises. After September 11, it created a course on homeland security, offered at its Blair College unit in Colorado Springs. The program trains people for newly created corporate security positions. Chief Executive David Moore has his sights set next on aviation technology. Corinthian's nimbleness helped it increase net income by 73%, to $16.1 million, in its fiscal second quarter, ended Dec. 31, on a 56% rise in revenues, to $127.2 million.
Worries about the state of global affairs have people clinging to the comfort of home. That -- and an aggressive management -- have sent the shares of Jo-Ann Stores (JASB
), a hobby and crafts supplier, and Hancock Fabrics Inc. (HKF
), soaring. Hudson (Ohio)-based Jo-Ann, 10th on our list, had a spectacular 75% total return last year after a disappointing 2001. "We exceeded all our financial targets," says CEO Alan Rosskamm. He closed 120 nonproductive stores, increased inventory turnover, and opened 72 superstores. With an average of 35,000 square feet, the superstores have more than double the space of the 920 regular outlets. These stores, "a one-stop shop for the creative," as Rosskamm says, are on track to produce annual sales of $5 million to $6 million, compared with an average of $1.4 million at the smaller stores.
Hancock Fabrics, which sells sewing materials in 440 stores in 42 states, posted same-store sales increases of more than 8% last year. The company is doing big business with customers who are decorating new homes or freshening up the interiors of houses they've refinanced. Hancock also sells wholesale and direct to decorators.
The BW50 list also includes two footwear companies, but for different reasons. K-Swiss Inc. (KSWS
), No. 5 in the SmallCap 50, continues to beat its earnings estimates as teens and twentysomethings pay top dollar for its expensive athletic footwear. "We have highly focused marketing to reach our target consumers of 14-to-24-year-olds, who buy 50% of all athletic shoes today," says President Steven Nichols. To hit that demographic group, the company advertises on the ESPN and Fox Sports channels and in magazines such as Rolling Stone and Vibe. Nichols says that in the first quarter of 2003, retailers are placing 32% more orders than they did last year.
Brown Shoe Co. (BWS
) also climbed its way to the top ranks by improving profitability. It has trimmed costs by closing 106 underperforming Naturalizer and Famous Footwear stores in the past 18 months, while at the same time drawing down inventory by 21%, or $85 million. Ron Fromm, CEO of the St. Louis-based company, says such moves helped Brown reverse its fortunes and earn $45 million in the fiscal year ended Feb. 1. That's compared with a $4 million net loss in the previous year.
Consumers have also continued to take advantage of low interest rates by refinancing or borrowing gobs of money to buy homes. That has helped 14 financial-services companies become small-cap stars. Flagstar Bancorp Inc. (FBC
), No. 4, operates 89 banks in Michigan and Indiana and 96 loan origination offices in 21 states. In 2002, it closed $43 billion in residential mortgage loans, up sharply from $33 billion reported in 2001. Similarly, No. 6-ranked New Century Financial Corp. (NCEN
), based in Irvine, Calif., wrote $1.47 billion in new loans, up 74% from 2001. Looking ahead, portfolio managers are reducing financial-services stakes as they anticipate interest-rate hikes later this year. William R. Walker of Mason Street Small-Cap Growth fund in Milwaukee, has been backing away from financial services and adding health-care and consumer cyclical stocks.
Walker is also bullish on oil and gas exploration stocks, even beyond the horizon of a war with Iraq. He particularly likes natural gas, since the bulk of new housing in the U.S. is heated with it. New supplies of gas, he says, are not keeping pace with demand. In 2002, U.S. natural gas production fell 5.5% from a year earlier, to 48 billion cubic feet a day, Lehman Brothers Inc. says.
That suggests healthy long-term prospects for Patina Oil & Gas Corp. (POG
), No. 2 on the BW list, and Remington Oil & Gas Corp. (REM
), No. 17. "Patina has had double-digit earnings growth with several positive earnings surprises and should continue to do well," says John F. Clancy, portfolio manager of Fifth-Third Small Cap Growth Fund. If Clancy is right, don't be surprised if you see Patina and a host of other small energy companies on the mid-cap list one day.
MARCH 24, 2003 |
Copyright 2003, by The McGraw-Hill Companies Inc. All rights reserved.
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