Minnesota stocks set good pace

Paced by the surging performances of companies such as H.B. Fuller, Digital River and Select Comfort, Minnesota-based stocks are outperforming the Standard & Poor's 500 index of large companies so far this year.

The Bloomberg-Star Tribune 100 index of the state's 100 largest companies (ranked by revenue) rose a strong 7 percent in value over the first 13 weeks of the year, compared with 5 percent for the S&P 500.

Most Minnesota-based stocks have market values of $1 billion or less, unlike the big-cap names in the S&P 500 list.

The Minnesota index has posted a 10 percent annual total return, including dividends, since January 2001, compared with a 1.6 percent annual return for the S&P 500, which is still a third off its bull-market peak price.

By comparison, the Russell 2000 index of the nation's smallest companies -- which has a median market value of about $600 million -- is up an eye-popping 13.9 percent in the first 13 weeks of the year and 11.5 percent annually since 2001, slightly better than the Star Tribune 100.

The continued resilience of smaller companies has surprised some market strategists, many of whom had forecast that the S&P 500 would gain 6 to 15 percent this year, delivering the first breakout year of the decade for large-company growth stocks.

"The economy was surprisingly strong in the first quarter, and that's why small companies did so well," said Mark Thompson, chief investment officer of Riverbridge Partners in Minneapolis, a private money manager recently named by InvestmentAdvisor.com and Standard & Poor's as one of the two best small-capitalization account managers in the country for 2005.

"Large companies tend to do better later in the economic cycle, as money gravitates toward larger companies that are seen as safer," he said. "We haven't seen that happen yet. That will happen, but not yet as long as the economy runs so strongly."

Small-cap stocks generally boast market values of less than $2 billion and constitute the majority of America's 5,000-plus publicly traded companies. Fuller, Digital River and Select Comfort have been excellent companies to own since 2001 -- each up more than 100 percent in value -- for different reasons:

• Fuller, under CEO Al Stroucken, has evolved from an adhesives provider to several specialty industries into an innovative and more-profitable chemical company.

• Digital River, doubted several times along the way by short sellers, continues to post growing revenue and profits as a preferred e-commerce intermediary for dozens of household-name companies.

• Select Comfort has established itself as the premier, high-end mattress company among people who like to dial themselves to a better night's sleep and don't mind paying for the privilege.

The bulls still believe this will be a good year for large companies, which should be more insulated from further Fed interest rate increases than smaller companies. The small firms also tend to have more-volatile earnings and are more susceptible to hits from fuel prices.

Jim Paulson, chief investment strategist at Wells Capital Management, the investment arm of Wells Fargo & Co., noted recently that the S&P 500 price-to-earnings ratio for the trailing 12 months -- essentially the price of all those stocks divided by last year's earnings -- has declined from more than 30 times earnings in 2000 to about 17 times 2005 earnings. At that level, the S&P 500 is trading at about the same relative price as it was in 1986 and 1996 -- just prior to posting big surges.

"Why is today's stock market valuation about average when it is surrounded by a current economic environment that is much 'above' average?" Paulson asked in his monthly report to clients.

Sure, wary investors are worried about oil prices, inflation and the human and economic toll of the increasingly costly and unpopular U.S. occupation of Iraq. But oil prices as a percent of the economy and non-oil imports as a percent of the U.S. trade deficit are at the same levels as 20 years ago. Inflation seems under control and the economy is perking along.

Even famous bear investor and commentator Steve Leuthold has moved from negative to neutral on the stock market recently.

Staff researcher Patrick Kennedy contributed to this report. Neal St. Anthony • 612-673-7144 • nstanthony@startribune.com