Steep decline.

Russell 2000 beats Kenneth Johnson's small-cap picks

As the stock market continues its meteoric rise, small-capitalization stocks have been like bell-bottom jeans and the pet rock: out of style. Gargantuan companies--particularly those with "dot com" trailing their names--have ascended to nosebleed heights, while small caps have languished. This wasn't good news for money managers like 32-year-old Kenneth Johnson, who favors companies within this less-than-buoyant asset class.

You'll recall that Johnson, who ran 20 portfolios worth $150 million for St. Louis money-management firm Investment Counselors Inc., dug deeper than earnings and revenue figures when picking stocks ("Crunching the Numbers for Profit," Moneywise, September 1998). Johnson focused on smaller companies with higher growth rates and lower price-to-earnings ratios than their bigger counterparts.

But Johnson's five picks in last year's Private Screening scored a 7.34% loss. That's worse than the Russell 2000's decline of 2% for the same 12-month period. A $5,000 investment in the five stocks would be worth $4,633 now.

Chart Industries (NYSE: CTI) led the descent with a whopping loss of 37.7%; Technitrol (NYSE: TNL) plunged 20.6%; and Hughes Supply (NYSE: HUG) sank 11.2%. In fact, the three stocks performed so poorly that Investment Counselors' investment team sold them--dumping Chart Industries and Technitrol in August 1998, and Hughes Supply in January 1999. The company is still holding on to the other two picks, Symantec (Nasdaq: SYMC) and Spartech (NYSE: SEH).

It's no fault of the companies themselves, maintains Johnson, who is now Investment Counselors' vice president of marketing and co-owner of the company. "It's the asset class that continues to underperform," he says. Individual small companies "still look great fundamentally," he adds.

Johnson still likes Spartech, which makes thermoplastics used for housewares and toys. On May 25, the St. Louis company posted its 30th consecutive quarter of year-over-year earnings, recording net income of 38 cents per share for the quarter ended May 1, compared with 31 cents the previous year.

He also stands by Symantec, maker of specialty anti-virus and database software, citing the company's record fiscal fourth-quarter results, new products and the appointment of John Thompson, a former IBM executive, as CEO (see "Switching Tech Servers," Newspoints, July 1999). For the quarter ended April 1, the company earned 44 cents per share (excluding one-time charges); up from 40 cents per share a year ago. "We expect with his leadership that they'll continue to do well," Johnson says.

While Johnson cautions against trying to time the market, he says he expects smallcaps to recover "towards the middle or end of this year."

Small-Cap Slump

                               Current        Price at      Total
Stock (Exchange: Symbol)       Price(*)    Recommendation   Return

Chart Industries (NYSE: CTI)   $9.50(**)       $15.25       -37.7%
Technitrol (NYSE: TNL)         31.00            39.06       -20.6
Hughes Supply (NYSE: HUG)      29.88            33.63       -11.2
Symantec (Nasdaq: SYMC)        27.88            26.00         7.2
Spartech (NYSE: SEH)           27.56            21.94        25.6
Portfolio Performance                                        -7.34%

                               Current Value   Est. 5-Yr.
                                 of $1,000     Annual EPS
Stock (Exchange: Symbol)        Investment       Growth

Chart Industries (NYSE: CTI)      $  623          16.5%
Technitrol (NYSE: TNL)               794           N/A
Hughes Supply (NYSE: HUG)            888          15.2
Symantec (Nasdaq: SYMC)            1,072          19.0
Spartech (NYSE: SEH)               1,256          13.5
Portfolio Performance             $4,633

(*) As of 26/23/99

(**) Reflects 3-for-2 stock split July 1, 1998; price at recommendation before split was $23.44.

Sources: Yahoo! Finance; Zacks Investment Research.3