Just about every investor has a story about a small-company stock that produced dazzling returns. In 1981 a Swiss economist named Rolf Banz offered evidence of the outperformance of small caps. (That s short for companies with small market capitalizations the cost to buy all of their shares.) In a study published that year in the Journal of Financial Economics, Banz showed that the 50 smallest companies listed on the New York Stock Exchange outperformed the 50 largest companies by about 1 percent a year from 1931 to 1975, after adjusting for differences in trading volatility, which can affect returns. More recent, broader studies that adjust for more variables that affect stock returns, put the performance advantage of small caps at closer to 2% a year.

That s no reason to go all-in on small caps, of course. They sometimes lag large caps for stretches lasting several years. But most stock investors should keep a portion of their funds in small companies--a 5% or so weighting to mimic the broad stock market, and perhaps double that for aggressive investors.

The three small-company stocks listed below, selected from the S&P SmallCap 600 index, returned more than 30% during January and February this year, even though the index returned less than 1% during the same period. Recent share price momentum is another documented predictor of returns, especially among small companies and in rising markets. However, these stocks aren t for everyone. Momentum investing is best left to experienced traders who are comfortable with increased risk.

Perficient

Price Gain, 2010 through February: 32%

Perficient builds computer networks for large and midsize companies using software developed by partners like IBM (IBM) and Microsoft (MSFT) . A slowdown in sales last year crimped profit margins, but management in early January told Wall Street analysts that the company finished strong in 2009 and was off to a healthy start this year. Jonathan Maietta, who covers the stock for Needham & Company, a Manhattan investment bank, promptly changed his recommendation on the stock to buy from hold, and raised his 2010 sales growth forecast to 7% from 3%, writing in a note to clients that even 10% seems reasonable. The company is debt-free with a stock market value equal to 1.7 times its sales from the past 12 months about average for the broad stock market.

Brown Shoe Company

Price Gain, 2010 through February: 40%

Brown Shoe Company owns Famous Footwear, a 1,100-store U.S. shoe chain, and Naturalizer, a women s shoe brand with 250 specialty stores in North America, along with a scattering of other footwear properties. Management said in January that with improvements in store productivity and international expansion it can double earnings in 12 to 15 months. That seems believable, for two reasons. First, analysts already project that earnings per share will nearly triple to 74 cents a share in the company s fiscal year ending January 2011. Second, the company was earning closer to $1.50 a share per year before consumer spending turned soft beginning in late 2007. Brown is only modestly indebted and trades at just 0.3 times sales.

Hanger Orthopedic Group

Price Gain, 2010 through February: 35%

Hanger Orthopedic Group makes orthotics and prosthetics for patients with crippling diseases and injuries and lost limbs. Volume growth for the business is blessedly slow at the moment about 2% to 3% a year, owed to a rising population and an increase in the average age. But an increase in obesity has brought more cases of diabetes, a disease that can lead to limb loss. Hanger is growing faster than its peers; in four years, it has increased its market share to 28% from 21%. This year, the company s sales are expected to rise 8%, and its profits 11%. The two biggest risks to profitability are a rise in materials prices and a trimming of price reimbursement rates for participants in government health plans. Commodity prices have been stable of late, and reimbursement rates, following a three-year freeze ended 2006, have increased since. Shares of Hanger trade at 0.8 times sales.