L.A.'s small cap stocks rise sharply in early 1993.

LABJ Small Cap 100 outperforms broader indexes

Despite the Southland's stagnant economy, a newly created stock index of 100 small public companies headquartered in Los Angeles County outperformed three broader stock indexes for the first five months of this year (see accompanying charts).

For the five months ended May 28, 1993, L.A.'s small companies outperformed companies on the S&P 500, the California Small Cap Index and the Wilshire Small Cap Index, a national index compiled by Santa Monica-based Wilshire Associates Inc.

"It was definitely a good five months for L.A. stocks, which was largely an entertainment and travel and leisure phenomenon," said Dave Borger, director of research at Wilshire Asset Management, a division of Wilshire Associates, which created the "LABJ Small Cap 100" index.

He said 6.4 percent of the market value of companies in the LABJ Small Cap 100 are in the entertainment, travel and leisure categories, which is a much greater percentage than such industries represent in the other indexes. Among these companies are Players International Inc. -- the No. 1 stock performer on the LABJ index. That Calabasas-based gaming company, involved primarily with riverboat casinos, saw its stock jump 220 percent during the five-month period, from $6.25 a share to $20 a share.

Other companies among the top 20 performers of the LABJ Small Cap 100 were Republic Pictures Corp., Carolco Pictures Inc., Ventura Entertainment Group, American Film Technologies and CST Entertainment Imaging Inc.

The stock of energy and utilities companies was also pretty strong, Borger said.

In giving his analysis, Borger cautioned against reading too much into the performance of the LABJ Small Cap 100. He pointed out that the comparison of the three indexes was done for a relatively short period of time (five months), and the companies' shares are thinly traded.

As a result, the spread between the bid and ask price is very large. If owners of top-performing LABJ Small Cap 100 stocks were to try to cash out, the bid price -- the price at which a prospective buyer offers to pay -- would likely be a lot less than the asking price -- or price acceptable to the holder of the stock, said Borger.

"We've been putting out indexes for 10 to 15 years, and people always get excited about the performance of small companies," he said. "Because the spreads are so big at the low end, investors need to be wary. They shouldn't expect to make a fortune overnight because these paper returns may not be realized."

Another factor that skews the picture is that, because LABJ Small Cap 100 companies are so small, their stock prices are low. Therefore, large percentage gains may reflect a minor stock price increase. For example, a 100-percent gain might reflect a stock price increasing from only 12 cents a share to 25 cents.

The LABJ Small Cap 100 is composed of companies that have a market capitalization of between $7 million and $70 million. Market capitalization is the value of a corporation as determined by the market price of its issued and outstanding common stock. Institutional investors often use market capitalization as an investment criterion. For example, they may decide that only companies with market capitalizations of $100 million or more would be considered for investment.

By comparison, the 384 companies in the California Small Cap Index also have market capitalizations ranging from $7 million to $70 million. The 250 companies in Wilshire (national) Small Cap Index have market capitalizations ranging from $58 million to $1.7 billion. And the companies in the S&P 500 have market capitalizations of between $77 million and $75 billion.

The Business Journal specified that its index contain companies with capitalizations of between $7 million and $70 million because it wanted 100 small businesses in the index. L.A.-based companies with capitalizations of much more than $70 million are among L.A. County's largest 100 public companies, which would seem to contradict the concept of a "small cap" index. Hence, starting at $70 million and working downward, the 100-company mark was reached at a company with a $7 million market cap.

During the first three months of the year, the LABJ Small Cap 100 index roughly mimicked the pattern of both the California Small Cap Index and the Wilshire (national) Small Cap Index.

The LABJ index, however, pretty much outperformed the S&P 500 for the entire five-month period. All four indexes dipped dramatically Feb. 26, 1993, the date President Clinton unveiled his economic package.

After March 31, however, the LABJ index broke off on an upward trend, which Borger attributed to the surge in performance of travel, entertainment and leisure stocks.