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Abstract

ABOVE THEIR WEIGHT It isn't a stock market, but a market of stocks, as someone or another said. Some stocks are big, and they are in the S&P 500. Others are medium size, and they are in the S&P 400. Still others--the subject of this essay--are so tiny, so infinitely insignificant in the eyes of Wall Street that they are beyond the pale of any familiar index. Following is a survey of the stock market's bantamweight division. In preview, we're bullish on it. Research of Kenneth French and Eugene Fama into returns on American equities by market cap suggests that smaller is better than bigger (French and Fama are professors of finance, respectively, at the Tuck School of Business at Dartmouth College and the Booth School of Business at the University of Chicago). Between 1927 and 2011, the average annual return of the smallest market-cap decile totaled 19.4%, that of the top market-cap decile just 10.9%. IMAGE1 These are historical findings, of course. Though history is never bunk, the application of historical observations to investing is sometimes perilous. So we take the French and Fama observations not as writ but as an invitation to explore the field of equity-market opportunity in the waning weeks of 2012. Microsoft, MetLife and Apple--just for instance--are trading at most reasonable price-earnings ratios. Each is well financed and each comes under the intense gaze of the corporate-governance police. To pass them over in favor of a $130 million commercial real estate service company, a $16 ...

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