JPMorgan Picks 26 Small, Mid-Cap Equities to Beat U.S. Market

By Michael Patterson

Nov. 3 (Bloomberg) -- JPMorgan Chase & Co. recommended 26 companies with a market capitalization of $7 billion or less, including Agco Corp. and Dean Foods Co., that may outperform the U.S. stock market as the global economy slumps.

The list includes companies identified by Thomas Lee, JPMorgan's chief U.S. equity strategist, as ``core investments'' for the next 12 to 18 months, according to a research note today.

The companies were selected from a group of 1,370 small- and mid-capitalization U.S. stocks because they have high net current assets as a percentage of market value, large dividend or stock-buyback yields, high free-cash flow yields and profit margins as well as ``price momentum'' greater than their peers, as measured against the 200-day moving average. They're also viewed by JPMorgan analysts as having the ability to prosper as the global economy weakens, Lee wrote.

``The SMid cap investor faces considerable challenges, given the lack of clarity on the depth of this economic downturn, coupled with the dislocations in financial markets,'' wrote New York-based Lee. ``These companies needed some combination of pricing power, market dominance, counter-cyclical profile, revenue visibility or a secular story outweighing the cyclical.''

The Standard & Poor's Smallcap 600 Index and Midcap 400 Index have dropped more than 20 percent this quarter, compared with a 17 percent retreat in the S&P 500 Index of the largest American companies, as concern deepened that the credit crisis may prompt banks to cut back lending to smaller companies and push the U.S. economy into a recession.

The following is a list of all 26 companies recommended by JPMorgan today:

Agco Corp.
Alberto-Culver Co.
Alkermes Inc.
BJ's Wholesale Club Inc.
Cabot Microelectronics Corp.
Cephalon Inc.
Dean Foods Co.
Equifax Inc.
Gen-Probe Inc.
Global Payments Inc.
Idexx Laboratories Inc.
McAfee Inc.
MFA Mortgage Investments Inc.
Minerals Technologies Inc.
MKS Instruments Inc.
Myriad Genetics Inc.
National Instruments Corp.
NeuStar Inc.
Omnicare Inc.
PrivateBancorp Inc.
Robert Half International Inc.
Strayer Education Inc.
Volcano Corp.
Waste Connections Inc.
Wind River Systems Inc.
WMS Industries Inc.

To contact the reporter on this story: Michael Patterson in London at mpatterson10@bloomberg.net.