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Small-company stocks take big lead as investors refocus on U.S. economy

March 2, 2010 |  4:19 pm

Suddenly less confident about the rest of the world, some investors and traders have been turning back to stocks of companies that are mostly dependent on the U.S. economy’s fortunes.

Key indexes of small- and mid-size shares on Tuesday hit new 52-week highs, becoming the first of major market gauges to fully recover their losses from the mid-January to early-February pullback.

If you own a mutual fund that invests in small- or mid-size stocks it may be one of the few bright spots in the equity portion of your portfolio year to date.

Standard & Poor’s index of 600 small-company stocks rose 0.8% to 344.39 on Tuesday, surpassing the year’s previous closing high of 343.99 reached Jan. 19. The index has rebounded 10.4% since Feb. 8, recouping all of its 9.3% drop from Jan. 19 to Feb. 8.

Among the stocks in the S&P 600 at 52-week highs: industrial electric motor maker Baldor Electric, shoe retailer Brown Shoe Co., and MWI Veterinary Supply, a distributor of animal health products.

S&P’s index of 400 mid-size stocks also hit a one-year high Tuesday, and is up 9.3% since Feb. 8.

By contrast, the S&P 500 index of the largest U.S. stocks is up a less impressive 5.8% since Feb. 8, and at 1,118.51 on Tuesday still was 2.8% shy of its recent high reached Jan. 19.

Year to date, the S&P small-stock index is up 3.5% and the mid-size-stock index is up 4.2%. The S&P 500 lags well behind, up just 0.3%.

Satya Pradhuman, whose firm Cirrus Research in Tarrytown, N.Y., focuses on smaller stocks, says small- and mid-size U.S. issues are attracting money that has been scared away from foreign stocks and U.S. multinational issues this year.

Worries about a potential slowdown in China’s economy, and fear of fallout in Europe from the Greek government’s debt woes, have depressed many Asian and European stock markets. And the dollar’s strength against most other currencies has compounded losses for U.S. investors overseas.

Through Friday, the average foreign-stock mutual fund was down 3.9% for the year, compared with a 0.4% loss for the average domestic stock fund, according to Morningstar Inc.

“The ‘global exposure’ theme hasn’t played favorably this year,” Pradhuman said.

Or to put it another way, “Investors are thinking, ‘The U.S. economy isn’t great, but it’s better than most’ ’’ at the moment, said Anthony Conroy, head trader at brokerage BNY ConvergEx in New York.

Although many smaller firms do at least some business overseas, many of them rack up most of their sales domestically -- which is why Wall Street’s knee-jerk reaction is to load up on those stocks whenever the investment focus turns to the home front.

-- Tom Petruno
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