Three-plus years into the economic recovery, the explosive growth of Minnesota's small-capitalization companies is waning.
In 2010 and 2011, the bottom 50 companies on the Star Tribune 100 ranking of the state's largest public firms outpaced growth rates of the top 50 companies in sales, profits and market value.
The last year, amid the continued bull market, small-caps saw a 22 percent increase in market value, compared with a 17.4 percent rise for the entire Star Tribune 100.
But sales rose just 4 percent, profits declined 73 percent and employment dropped 2.4 percent at the small companies, underperforming the overall Star Tribune 100, where sales rose 4.8 percent, profits 3.5 percent and employment nearly 4 percent.
Market analysts recognize that smaller companies, which tend to be more volatile performers, dive early and deeper during a recession and rebound faster early in economic recoveries. And this four-year bull market, in which the broad market index is up more than 125 percent, including reinvested dividends, is starting to look like it needs a small-cap breather.
"Small-caps have performed well and now look expensive relative to large-company stocks," said Keith Tufte, chief investment officer of Adam Smith Advisors. "On a relative valuation basis, the price-to-earnings ratio, small-cap stocks are trading near a 30-year high relative to large-cap U.S. stocks. For this reason we are tilting our portfolios less toward small-cap stocks now than we normally do. Investors are still bullish … but this year they want to buy the more conservative and safe stocks."
Sales rose at 28 of the bottom 50 companies in 2012, compared with 38 last year.
Jim Paulsen, chief investment officer at Wells Capital Management, said the investors in the rally are shifting from "smalls to the safety of larger-cap stocks as the market is perceived to get a little less hospitable."
It's not all bad news. One of the fastest-growing bottom 50 companies in recent year, Stratasys, leapt into the top 50 thanks to a merger. Another member, Caribou Coffee, which was reporting revenue and valuation increases recently, was acquired by a German consumer goods company.
A number of the smallest Minnesota companies, including Image Sensing, Electromed, Lakes Entertainment, Juhl Energy, Wireless Ronin and Aetrium, experienced significant revenue declines in 2012 for a variety of reasons.
A few of the interesting developments over the past year:
Stratasys
Stratasys moved up to No. 49. The company is part of the surging "3-D prototyping" manufacturing movement. It takes Internet-delivered designs from customers to produce everything from small tools to car parts using layered thermoplastics made on its 3-D printers. The company, which merged with Israel's Objet Ltd. last year, had a 60 percent increase in profit to $59.6 million on a 30 percent increase in revenue to $359 million. The company's market value rose by nearly 300 percent to about $3 billion. Stratasys, excluding merger costs, had a profit of $17.6 million on revenue of nearly $100 million in the first quarter.
Tile Shop Holdings
A Plymouth-based retailer of manufactured and natural-stone tiles and maintenance materials debuts at No. 58. Tile Shop became a public company through a merger with a dormant, or "shell," public company. The company lost money last year on $183 million in revenue.
Proto Labs
The 13-year-old Internet-enabled manufacturer of molds and precision short-order parts that went public in early 2012 continued to be one of the state's fastest-growing manufacturers. Profits grew 34 percent to $24 million in 2012 and revenue grew 27 percent to $126 million. The value of the company is now more than $1.25 billion. the shares, which priced at $16 a share in February 2012, closed at $55.12 on Friday. The company employs more than 600 people. Proto Labs moved from No. 68 last year to No. 60.
SPS Commerce
A fast-growing provider of supply-chain management software services that helps retailers put product on the shelf at the right time, doubled in market value amid 33 percent revenue growth in 2012. It jumped from No. 76 to No. 69 on the Bottom 50 list.
Rochester Medical Corp.
The maker of urinary medical products jumped from 78 to 70 last year, thanks to a 16 percent rise in 2012 sales.
nstanthony@startribune.com • 612-673-7144