Stock of Small Firms Touted, Scouted by Market Specialist : Investment: Mood of caution tempers enthusiasm of portfolio managers at Growth Stock Conference.

It was no coincidence that UC Irvine professor Robert A. Haugen delivered the keynote speech at the Southern California Growth Stock Conference Thursday.

Haugen, an investment-markets specialist and author of “The Incredible January Effect,” is a firm believer in the investment value of smaller, publicly traded companies.

His book argues that small companies’ stocks pay higher investment returns than large companies’ stocks and that small stocks show their biggest gains in January.

The conference is an annual event dedicated to showcasing smaller, publicly traded companies to potential investors and stock analysts, thus, Haugen’s message and his prediction that small stocks will continue to outperform large stocks was greeted enthusiastically.

But the enthusiasm of the nearly 100 investment portfolio managers and stock analysts attending the two-day session at the Le Meridien Hotel in Newport Beach was tempered by the mood of caution that has enveloped the investment industry as it departs the high-flying ‘80s.

“The small stocks are owned by the public, and the general public is scared to death,” said Joseph Sullivan, vice president of Renaissance Capital Group, a Dallas investment firm that specializes in smaller public companies with $125 million in capital or less.

“That has made it a bear market for small stocks for the past two years, and it means that, in terms of public sentiment, the economic outlook is definitely unsettled.”

But Sullivan, who came to the conference looking for leads on companies that might make investment candidates, said the trick to doing well in a fuzzy or even depressed market is to “really do your homework and tend to the fundamentals. Investors in this kind of climate are less likely to extend themselves and take a shot at a high flier.”

Still, many investors believe that the current climate bodes well for the stock of small firms. “There are a lot of companies out there that are really undervalued in the market,” said Michael T. Jackson, a general partner at Hambrecht & Quist Equity Management in San Francisco.

Jackson, who said he attends half a dozen or more investment conferences a year looking for companies with potential, said he believes that investors’ disenchantment with smaller firms is ending. “We are at the bottom of the cycle, and it will shift away from large companies that have leveraged their balance sheets,” he predicted.

Professional investment managers didn’t worry too much about heavily debt-laden companies in the past because profits were heading up, said Joel Tillinghurst, manager of Boston-based Fidelity Management’s new Low Price Stock Fund.

“But this year, we are all looking for solid balance sheets,” he said. “Last year, leveraging didn’t matter much because most surprises were good ones. This year, most surprises are going to be negative surprises.”

Ronald Murray, a private investor and former computer-industry executive, said he believes that the economy has entered a period in which many companies’ profits and stock performance will deteriorate.

“In positive times, you look at the best of the winners” in making investment choices, the Anaheim Hills resident said.

“In flat times, like these, you look at the micro-economic scene and focus on small-growth companies with lots of potential. It takes a lot more research than just picking the best-of-a-bunch of winners, but that’s what this business is about.” he noted.

Murray said he finds investment shows like the Southern California Growth Stock Conference valuable as a research tool because they enable investors to listen to a company’s top officers and to ask them questions and get a feel for their personalities.

“When you are investing in IBM, it really doesn’t matter what the president is like,” he said. “But in these small companies, the president is really what you are investing in, and it is critical to have a chance to see them perform.”

In all, the presidents, chairmen or other executives of 39 companies are scheduled to pitch their firms during the conference, which ends this afternoon. All are from Southern California and 18 are headquartered in Orange County.

The high proportion of locally based firms underscores the county’s role as a major business incubator, said Walter Cruttenden II, president of Cruttenden & Co., the Newport Beach investment banking firm that sponsors the conference.

And that is what attracted Peter Lablans, area director of the Netherlands Foreign Investment Agency.

The Netherlands, with a centuries-old tradition as a trading nation, is one of Europe’s most aggressive recruiters of foreign investment. Lablans, who works out of a regional office in Los Angeles, said his government is especially hungry for medical and computer firms.

While the Dutch government doesn’t make direct equity investments in foreign companies, it offers tax breaks, grants for plant construction and employment training, and other incentives.