Over-the-Counter Stocks Lead in Quarterly Growth

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By Eben Shapiro N.Y. Times News Service NEW YORK _ During a quarter in which the large stock exchanges advanced only modestly, the over-the-counter market showed robust growth.

"The over-the-counter market led the way," said Laszlo Birinyi, the head of Birinyi Associates, the Wall Street research firm.

He said the over-the-counter market gained more than 10 percent in the third quarter, compared with gains of about 4 percent for the other exchanges and indexes. The Dow Jones industrial average gained slightly less than 4 percent for the period.

With billions of dollars pouring into the stock market, investors are growing increasingly frustrated by the lackluster movement of Big Board stocks.

"The spirit is willing, but the flesh is somewhat reluctant,"

Birinyi said.

He said investors had become spoiled by the prolonged bull market.

"Now we are going back to eking out gains," he said. "The prevailing spirit here is frustration."

Hugh A. Johnson, the director of investment strategy for First Albany Corp. in Albany, N.Y., said, "The performance of the markets, with the exception of some of the small-capitalization issues, has been guarded, trendless and friendless.

"People are finding better value in the over-the-counter market,"

Johnson said.

Several experts said the strength of the over-the-counter stocks was unlikely to be a passing fancy.

"When small-company stocks come to life," Johnson said, "and begin to outperform the market, that outperformance tends to last not months, not days, but years."

Jack A. Sullivan, a principal with Van Kasper & Co., a San Francisco-based investment firm, noted that the strength in the over-the-counter market followed years of neglect.

"The NASDAQ's terrific performance shows that there has finally been a recognition that some of the smaller, entrepreneurial companies in this country have really learned how to manage their businesses," he said.

He said investors were increasingly interested in ferreting out companies in which the chairman is the founder and largest shareholder.

"That's the kind of company investors are paying for," he said.

Sullivan cited Advanta Corp., a financial-services company based in Horsham, Pa., as one company with high insider ownership and a strong growth rate. The company's stock rose 83 percent in the quarter, to $30.

The flip side of the enthusiasm for the smaller companies in the over-the-counter market is a growing impatience with the performance of the large-capitalization companies traded on the New York Stock Exchange. Many Big Board stocks are now considered too expensive, and investors are increasingly nervous that the companies will be unable to post earnings increases commensurate with the run-up in their stock prices earlier this year.

"There is intensifying concern that we will not get a strong enough recovery in the economy and earnings to valdidate those large-capitalization stock prices," said Johnson of First Albany. …