If You Think There’s a Momentum Play in Small-Company Funds . . .

In investing, just as in politics, seizing momentum is only half the battle. You’ve got to hang on to it too. Just ask George W. Bush.

Right now, many small stocks and small-stock mutual funds have the “big mo,” to use a phrase coined by George W.’s father. They’ve had it since the last two months of 1999.

The Russell 2,000 index of small stocks is up more than 6% year to date, whereas the Dow Jones industrial average is down more than 9%.

Meanwhile, the average small-growth-stock mutual fund is up nearly 12% so far this year.

But which of those stocks, and funds, have the best chance of keeping that momentum?

A good place to start looking for the answer is in small companies’ earnings trends.

Thus far, small-capitalization companies’ earnings for the fourth quarter of 1999 “have been robust,” says Steven DeSanctis, Prudential’s small-stock analyst in New York. The universe of small stocks that Prudential tracks shows profit growth of 25.8% for the quarter versus year-earlier results, beating analysts’ estimates by about 4.3 percentage points, on average.

If the trend continues among companies still to report results, it will mark the first quarter in nearly three years in which small-cap earnings growth exceeded 20%.

For that, we can probably thank the robust U.S. economy.

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Prudential also analyzed the performance of individual small-cap sectors.

“Technology has thus far been the big winner,” says DeSanctis, stating the obvious. Among small-cap tech companies, fourth-quarter profits were up 78.4%, on average, Prudential figures show. That means they beat analysts’ estimates by nearly 13 percentage points.

Other sectors in the small-cap universe in which many companies are exceeding Wall Street expectations include business and consumer services, and health care.

Meanwhile, sectors that are lagging expectations (and have been or are likely to be punished for it) include utilities, consumer-staples companies and cyclicals.

And median earnings growth for the smallest small-cap companies--the so-called micro-caps, with market capitalizations (that’s stock price times the total number of shares outstanding) of $250 million or less--was basically flat in the fourth quarter versus a year earlier.

To be sure, this information may be more meaningful for individual stock investors, but mutual fund investors can use it too.

For instance, by screening for small-cap stock funds that overweight tech, health care and services (which include many of the telecommunications names) but underweight utilities, consumer staples and cyclicals--and by screening out all funds whose stock holdings have a median market-cap of less than $250 million--you can come up with an interesting list of funds, many of which happen to be leading the small-cap universe in year-to-date performance.

In fact, many of these funds are delivering 15%-plus returns year to date. In other words, these funds have momentum and appear likely to keep it if earnings growth trends and Wall Street’s sector preferences hold.

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The caveat, of course, is that momentum could shift at any time. If you’re going to play the momentum game, you’ve got to realize that it’s mostly a technology play, and that you may be taking substantial risk for the chance of earning substantial returns.

The funds listed below all meet the requirements of the aforementioned screen. They are listed in order of year-to-date total returns. (Note that one of the funds, RS MicroCap Growth, calls itself a micro-cap fund. But because the median market cap of the holdings in this fund are above $250 million, we included it in this list.)

* Nevis Fund (no load; minimum initial investment: $10,000; YTD return: 26.9%; 1999 return: 286.5%; phone: [888] 263-5597).

* Kemper Small Capitalization Equity A (5.75% load; minimum initial investment: $1,000; YTD return: 26.4%; 1999 return: 33.6%; [800] 621-1048).

* First American Small Cap Growth A (5.25% load; minimum initial investment: $250; YTD return: 19.3%; 1999 return: 66.8%; [800] 637-2548).

* RS MicroCap Growth (no load; minimum initial investment: $5,000; YTD return: 18.4%; 1999 return: 56.7%; [800] 766-3863).

* JP Morgan U.S. Small Company Opportunities (no load; minimum initial investment: $2,500; YTD return: 18.0%; 1999 return: 61.7%; [800] 521-5411).

* RS Diversified Growth (no load; minimum initial investment: $5,000; YTD return: 17.9%; 1999 return: 150%; [800] 766-3863).

* Provident Investment Counsel Small Company Growth (5.75% load; minimum initial investment: $2,000; YTD return: 15.7%; 1999: return: 90.9%; [800] 618-7643).

* Columbia Small Cap (no load; minimum initial investment: $2,000; YTD return: 15.7%; 1999 return: 59.3%; [800] 547-1707).

* Wells Fargo Small Cap Growth A (5.75% load; minimum initial investment: $1,000; YTD return: 15.3%; 1999 return: 118.7%; [800] 222-8222).

* Berger Small Company Growth (no load; minimum initial investment: $2,000; YTD return: 14.4%; 1999 return: 104.4%; [800] 333-1001).

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Do you have ideas for mutual fund and 401(k) topics for this column? Times staff writer Paul J. Lim can be reached at paul.lim@latimes.com.