MicroCap1000 Index Aids Investors Who Think Small

MicroCap Financial Services Inc. wants to become the source for information on a group of companies you’ve probably never heard of.

The Santa Monica company’s Web site (https://www.microcap1000.com) offers information on some of the smallest but fastest-growing publicly traded companies in America.

“Micro-caps,” which the site defines as companies with market capitalization of $25 million to $400 million, can provide stellar returns. But this is also one of the riskiest and most fraud-ridden areas of investing.

The site, just a month old, is the brainchild of Matthew Stasior, a former Microsoft corporate account executive who hopes to turn his company into an information authority for individual investors seeking guidance on small companies.

MicroCap Financial Services is a subsidiary of Capital Growth Holdings, a Greenwich, Conn.-based financial-services firm that trades on Nasdaq. MicroCap Financial was launched with a $2.5-million infusion from Capital Growth, said Stasior, the company’s president and chief executive.

The new site offers updates on an index of 1,000 micro-cap stocks (chosen mainly for their growth characteristics), profiles of small companies and other information on micro-caps from analysts at such firms as Prudential Securities, Merrill Lynch and Schroder & Co. Although still in the fledgling stage, the Web site has had 130,000 hits since it was formed, or about 3,500 a day, according to Stasior.

The index requires that companies have revenue of at least $25 million, total assets of at least $8 million and rising year-over-year revenue growth. About 70% of the companies on the index are listed on the Nasdaq market.

The index includes several California companies that completed initial public offerings, or IPOs, this year, including Bebe Stores, the women’s clothing chain based in the Bay Area, and Balance Bar, the Carpinteria-based line of energy food.

The two best-performing California companies in the index so far this year, as of Wednesday, were Hansen Natural Corp., a Corona-based natural foods company, whose stock jumped 197%, and Sequus Pharmaceutical, a Menlo Park drug company, whose shares zoomed 149%.

Still, those kinds of numbers are the exception, and the index is volatile. From its Oct. 5 debut through Oct. 30, the MicroCap1000 gained 2%, compared with the Russell 2,000’s 12.2% gain for the same period.

For the year through Oct. 30, the MicroCap1000 lost 6.6%--based on backward projections--compared with the Russell index’s loss of 13.6%.

Access to the Web site is free, so MicroCap Financial hopes to make money through advertising, including sponsorship arrangements with brokerages and investment banks.

It also plans to offer “investor relations” services to small companies, charging $20,000 to $25,000 for a package that would help small firms create news releases, set up Web sites and get information to their shareholders. So far, seven firms have signed up, Stasior said.

Company Chairman Jay Matulich hopes to capitalize on the growing interest in micro-cap stocks, especially among return-hungry investors who saw some of their blue-chip stocks take a tumble during recent market swings.

Though these small companies carry greater risk of failure, some investors say that the smaller a company is, the greater the potential to profit from growth.

The MicroCap1000.com index is one of the few widely available to the public that specialize in tracking these smaller firms, but unlike benchmarks such as the Russell 2,000 and indexes maintained by Dow Jones and Wilshire Associates, it is geared to individuals and highlights tiny companies.

Other indexes, such as Callan Micro-Cap and Schroder Micro-Cap, have been prepared mostly for institutional investors, such as pension funds and insurance companies.

Companies in the Russell 2,000, the main benchmark for the small-cap market, have an average market cap of $592 million. In the MicroCap1000 index, by comparison, the average market cap is about $150 million.

The smaller the firm, the greater the chance that Wall Street will overlook it, Matulich said.

Indeed, though the average small company (typically between $300 million and $1.5 billion in capitalization) is covered by 5.1 analysts, according to Dan Coker, Schroder & Co.’s emerging-growth strategist, only 60% of micro-cap stocks are followed at all. And the average micro-cap is tracked by only 1.7 analysts, he said.

That’s part of the danger.

This year, the Securities and Exchange Commission has focused new attention on the increase in fraudulent trading among micro-caps during the ‘90s bull market. In September, as part of a nationwide crackdown, the SEC filed 13 lawsuits related to such fraud. And last month, the SEC cracked down on alleged Internet fraud, accusing some investment advisors of touting stocks while not fully disclosing payments they were getting from the companies they recommended.

Small companies can be susceptible to stock manipulation because there are usually fewer analysts and others watching them and the stocks are usually cheaper and often volatile in price.

Stasior says executives of MicroCap Financial are aware of the danger and are creating a Fraud Watch feature to inform visitors about fraud and provide a link to the SEC’s Web site.

But some small companies have already called MicroCap1000, asking how much it would cost to be included in the index, Stasior said.

“Those are the kinds of things we want to stay completely away from,” he said.

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Debora Vrana covers investment banking and the securities industry for The Times. She can be reached by e-mail at debora.vrana@latimes.com.

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Small Companies, Big Returns

MicroCap1000.com is a new stock index designed to track the performance of small, fast-growing, public companies. The index defines “micro-caps” as companies with a market capitalization of between $25 million and $400 million. Of the 1,000 companies in the index, about 20% are from California.

Here are the 10 best-performing California-based companies in the index year to date, as of last week:

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Share price Name City Industry Dec. 31 Nov. 4 Hansen Natural Corona Food $1.81 $5.28 Sequus Pharm.* Menlo Park Drugs 7.44 18.56 Tarrant Apparel Los Angeles Clothing 7.81 19.00 Macrovision Sunnyvale Video manf. 15.88 36.13 Applied Micro San Diego Comp. manf. 12.38 27.13 Resmed Intl San Diego Med. manf. 28.13 57.25 Power Integrs. Sunnyvale Circuit manf. 9.25 18.38 Impco Tech. Cerritos Tech 10.81 17.13 CKS Group Cupertino Advertising 14.13 22.31 Emulex Costa Mesa Manf./Networking 13.75 20.81 +51%

Name % Change Hansen Natural +192% Sequus Pharm.* +149% Tarrant Apparel +143% Macrovision +128% Applied Micro +119% Resmed Intl +104% Power Integrs. +99% Impco Tech. +58% CKS Group +58% Emulex

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*In October, Sequus announced a merger agreement with Alza Corp.

Sources: MicroCap1000.com, Securities Data