Revenge of the losers: little guys soared in 2003 but investors are now gunning for larger quarry.

After three years of bear markets, bulls broke out of their stalls last year, pushing stocks upward to gains of 25 percent and higher for all major indexes.

For 2004, however, the best strategy might involve the elephant, an animal known for its memory. Judging from last year's biggest winners, investors have little of it.

The issues that performed the best, in L.A. and elsewhere, were the same ones that gave investors indigestion the previous three years--technology stocks, and Internet stocks in particular.

Six of 10 best performers of the LABJ 200 Stock Index in 2003 were small-cap technology or financial services stocks that trade for less than $10 a share. (Stocks that started and ended the year below $1 were excluded.)

Many of the year's winners are unprofitable. Others have been sued by shareholders, or worse.

They include biomedical firm CytRx Corp., whose shares skyrocketed 644 percent this year, to $1.86. CytRx is a development-stage biopharmaceutical company with no revenues and no products on the market. It is working on compounds that may some day treat obesity, diabetes and amyotrophic lateral sclerosis, or Lou Gehrig's Disease.

Also near the top of the list: online real estate marketing firm HomeStore Inc., up 457 percent to $4.73. Homestore, caught in a fraudulent scheme to inflate revenues, cleaned house and cooperated with authorities. Several of its former executives have pleaded guilty to fraud charges. It has resolved several disputes with former partners, but it's still lost $67 million in its last four reported quarters.

"Many of these companies were left for dead so when they had any piece of news or sign of life, buyers went crazy," said Jason Sam, a senior research analyst covering small cap technology stocks for Seidler Cos.

He said many penny stocks got a shot in the ann this year precisely because they had been beaten down for so long. "The lottery mentality never entirely goes away in the stock market," Sam said. "Investors still like the concept of buying at 4 cents a share and doubling their money if it goes to 8 cents a share."

Strong showing

While there were gains to be made in small-cap stocks last year, it's not a world for the timid. Because many of these companies trade limited share volume, they can be illiquid--there may be a scarcity of buyers just when a shareholder needs to sell. As a result, their prices tend to fluctuate more than larger companies.

The risks are magnified when a stock trades for less than $10 a share. Many institutional investors shun such issues, because they can be a sign of shrinking prospects.

Nevertheless, there's no denying last year's performance. The LABJ 200 Stock Index--laden with small-cap and technology issues--had 166 advances and just 31 decliners for 2003. (The remaining three companies went public this year: Molina Healthcare Inc., Digital Theater Systems Inc. and Maguire Properties Inc.) Of those advancing issues, 45 rose 100 percent or more.

Among the major national indexes, only the technology-driven Nasdaq composite index bested the local group, rising a whopping 50 percent for the year.

The LABJ 200 rose 40.4 percent, while the Dow Jones Industrial Average and the S&P 500 lagged with 25.3 percent and 26.4 percent gains, respectively.

In the early stages of an economic recovery, low-quality issues tend to outperform higher--quality investments. As a result, many suspect that the best gains have already occurred for most small-cap stocks, and they will either tread water or hit the wall in 2004.

Not so for stable Blue Chips.

Market analysts point to the Dow's breaking through the psychological barrier of 10,000 on Dec. 11 as a sign that 2004 will be a year of solid gains for companies with stable earnings.

Among some of L.A.'s largest companies, Amgen Inc. posted a 27.8 percent rise, to $61.79. Walt Disney Co., despite performance issues and ongoing board scuffles, still logged a 43 percent gain, to end at $23.33. Occidental Petrolenm Corp. posted a 48.5 percent increase to $42.24. Northrop Grumman Corp. missed last year's rally, falling 1.4 percent to $95.60 per share.

Larry Tekler, director of Citigroup's private banking business in Los Angeles, said he expects larger companies to lead the market in 2004.

"It was a very interesting year (in 2003) with small cap outperforming medium and large issues, and growth outperforming value," Tekler said.

Among the biggest gainers was computer reseller En Pointe Technologies Inc., whose shares have risen 269 percent, to $2.95. Kevin Ayers, chief financial officer of El Segundo-based En Pointe, said there were reasons beyond bottom-fishing that the stock rose more than three-fold.

It had been trading at 60 cents a share when it got a boost from a strong third quarter earnings report. In addition, Attiazaz Din, En Pointe's chairman and chief executive, retracted a much lower offer he had made earlier this year to take the company private.

"I do think it was circumstance driven," Ayers said. "People say a rising tide raises all ships but it's hard to believe it would raise us up that much. We had a pretty low starting point from which to grow."

Investors wondering about the dangers of investing in a fast-rising stock need only to look at one of the year's biggest losers, eUniverse Inc.

The Web marketing company's stock surged from $2.15 a share in October 2002 to a high of $7 each three months later. Then came word in May that the numbers weren't all that they seemed. The stock fell as low as $1.51 on Sept. 9, but worse than that was a nearly four-month trading halt while the company got its finances in order. During that time, the stock couldn't be sold at any price. For the year, eUniverse shares ended at $1.60, down 71.8 percent.

Other losers were on the wrong end of economic trends. Virco Manufacturing, a Torrance-based maker of desks and computer equipment for schools, saw its shares drop 37.7 percent to $6.35 a share, while On Assignment Inc., a Calabasas-based temporary placement firm specializing in health care, lost 38.9 percent of its value and now trades at $5.21 a share.

January effect?

For the new year, old-line economy sectors, including basic materials, manufacturing and energy sectors, are expected to outperform the market along with financial services, tourism, and technology.

There's already talk about the so-called "January effect," a phenomenon that occurs when investors sell off losing shares in December to take write-off-against capital gains, and then buy back shares in January, causing many microcap stocks to rise.

This year, a "reverse" January effect is expected as large-cap stocks return to favor, Sam ,said.

"The technology sector already had a pretty nice run and it has been fairly volatile and choppy," he said. "From a stock market performance standpoint, 2003 will be pretty hard to beat because the stocks have already had amazing runs and have come off very low levels."

On average, analysts predict profits for companies in the S&P 500 will jump 21.6 percent in the fourth quarter and 12.6 percent in the first half of 2004, according to estimates compiled by Thomson First Call.

In addition, companies in the S&P 500 are selling for 19 times this year's expected earnings estimates compared with a price-earnings ratio of 15 times earnings in March, when the S&P hit a five-year low, according to Thomson.

There are, of course, contrarians.

Peter Conley, managing director at MDB Capital Group in Santa Monica, has been sounding a warning about the falling dollar and its effect on the market next year.

"Here in the U.S. it looks like we've had a great year," he said. "But the dollar plays a key role and there's no way to tell how sustainable the performance of the market is when adjusted to the euro or the yen."

Small Victories

Undersized companies were some of the best performers in L.A. during
2003.

Company                                   Business

CytRx Corp.                            Drug developer
Electronic Clearinghouse           Transaction processing
Homestore Inc.                  Online real estate services
PC Mall Inc.                           Computer sales
Global e-Point Inc.                Computers and services
Fremont General Corp.                Financial services
Alpha Virtual Inc.                  Software development
En Pointe Technologies             IT sales and services
Wilshire State Bank                       Banking
MRV Communications              Telecommunications products

                                     Dec. 31      2003     Market Cap
Company                               Close       Gain     (millions)

CytRx Corp.                           $1.86       644%        $62.7
Electronic Clearinghouse              10.95       533          69.3
Homestore Inc.                         4.73       457         568.9
PC Mall Inc.                          16.23       370         175.4
Global e-Point Inc.                    4.89       294          52.6
Fremont General Corp.                 16.91       277       1,284.1
Alpha Virtual Inc.                     6.00       273          35.5
En Pointe Technologies                 2.95       269          19.8
Wilshire State Bank                   19.42       259         251.2
MRV Communications                     3.76       251         394.6