The Companies No One Appreciates

 
• By Mary Stuart

Interest in small cap stocks is dwindling on the part of buy-side funds., This is partly due to funds' need for liquidity. But last year's gain of over 50% by stocks of large pharmaceutical companies makes the smaller, riskier stocks even less attractive now. Portfolio manager Skip Klein of T. Rowe Price was a casualty of the relatively poor performance of small cap stocks.

Most buy-side funds are heavily invested in big-cap companies, some as much as 70%, because big-cap stocks offer solid growth, stability, and greater liquidity. The average biotech stock trades about 130,000 shares per day, while large-market caps like Merck & Co. Inc. turn over 5 million shares. But some aggressive fund managers, looking for higher-than-industry average growth rates, will put a disproportionate amount of their money in small, overlooked companies with exciting technologies, hoping to catch lightning in a bottle.

Over the last year or so, the phenomenal growth of Big Pharma stocks has turned this strategy on its head,...

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