Take a Tour of Smallville

 | Jun 06, 2012 | 11:30 AM EDT
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One of the interesting facets of the market mini-purge that we've experienced over the past two months is that as a group, the smallest names are not getting punished to a much greater extent than the bigger names. I can point to several small individual names that have had the stuffing knocked out of them, but in general, the punishment has been no different in Smallville. Case in point, the Russell Microcap Index is down about 9.4% since April 2, which is on par with the S&P 500's performance. I don't remember the last time that happened.

Keep in mind that the Russell Microcap Index is comprised of the 1000 smallest companies in the Russell 2000 Index, and represents less than 3% of total U.S. equity market cap.  Just how small are the names in the Index?  The weighted average market cap is $364 million, while the median market cap is just $153 million. The largest name has a market cap just under $1.9 billion.  This is right up my alley.  It's certainly not for everyone, and if you want exposure to this index but not necessarily individual names, you can get it via the iShares Russell Microcap Index (IWC), also known as beta in my world.

In terms of index members, you'll find names like Arctic Cat (ACAT), a member of my JIMS CRAB FEST portfolio for cheapskates, which went on an incredible run the past year and tripling in value before giving some of that back last month.  While the maker of ATVs beat fourth-quarter estimates, management cautioned that 2013 wouldn't live up to earlier expectations. That sent shares 20% lower between May 14 and May 16.  Shares now trade at 14x the lower end of 2013 company guidance of $2.40-$2.50 per share. The balance sheet is still very strong. Arctic Cat ended the year with $62.6 million, or just under $5 per share, in cash and short-term investments, and no debt.

You'll also find names that you've forgotten even existed. A.T. Cross (ATX) is best known for its writing instruments, but it has quietly expanded its product line to include high-end sunglasses. The optical unit accounted for nearly half of first-quarter revenue, and both the top and bottom line are growing.  The last time I looked at this name, many years ago, it had lots of cash and a great balance sheet, but the pen business was stagnant. I wonder if the move to sunglasses is indeed a game-changer.  The balance sheet is decent, with $15 million, or $1.20 per share in cash, and $18 million in debt.  This is one to keep an eye on.

Other names in the Index that I currently hold include Limoneira (LMNR), Consolidated Water (CWCO), Alico (ALCO), Biglari Holdings (BH), Denny's (DENN), Electro Scientific Industries (ESIO), and LoJack (LOJN).

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