WHILE MOST BLUE chips have suffered sharp fluctuations in price due to the global economic downturn, B-liners, stocks listed on the second board, have come back into the spotlight and have found favour among stock-pickers. Several strategists have suggested small-cap stocks as investment alternatives. There are hundreds of B-liners, some making a steady profit. But most of them are worth a few cents only and have no trades for weeks. How do you pick a good-quality one? It would be better to go for mid- to long-term investment in companies that earn a steady profit every year despite unfavourable economic conditions, said Patrick Yiu Ho-yin, associate director at Kingsway SW Securities. 'Short-term investment in penny stocks is like speculation. There are not many of them in the market that can earn you money within a short period of time,' he said. If investors lacked the patience to wait a few months, they should look for a company with positive signs in the 10-day or 50-day moving average line and take note of transaction volume, Mr Yiu said. They also should pay attention to market changes and be prepared to react quickly. 'There are many cases where a short-term investment became a long-term one because investors missed the chance to sell out,' he said. 'The transactions are not as active with the B-liners and it may be hard to find a buyer sometimes. By the time they are able to sell the stock, the price may not be as good.' Small-cap companies with a good balance sheet and capable management may be worth the patience. If they do their business well, their stock prices will climb eventually, although they may be undervalued now. Investors may even be able to earn some interest if the company offers a good dividend. But only good companies can earn you money. Mr Yiu suggested investors evaluate the fundamental qualities of a company when making a mid- to long-term investment. Investors should check a company's dividend yield and price-earnings (PE) ratio, he said. The management's experience and the company's financial situation also were key considerations. 'Pay attention to the new projects launched by the company to see whether it can bring more business opportunities in the future,' said Mr Yiu. 'Vertical integration is a less risky move, which may also help its core business.' Mr Yiu said garment companies Carry Wealth and Fountain Set, both having a low PE ratio and high yields, could be good targets for mid- to long-term investment. Cafe de Coral and Kingboard Chemical, which are in the fast-food and laminate businesses respectively, might do well in the present economic situation, he said. Most small-cap stocks in Hong Kong are in the manufacturing business. Agnes Wu Mang-ching, director of brokerage Karl Thomson Holdings, said it was important to examine the basic conditions of a company to see whether it had a steady turnover, market share, cash flow and low liability levels. 'See whether the products it manufactures are diversified. Does it have its own brand name? Is the factory well established? Or does the production process involve high technology? Production cost and cost control are also important,' she said. Preparing a company profile is therefore helpful to make an investment decision. Apart from the company's core business, its marketing and product distribution also reflect its competency. 'Make sure the company's product is not cyclical, or is affected by an unfavourable economy. Also check who are its clients,' said Ms Wu. She said Fujikon Industrial, which produces bluetooth headsets for companies such as NEC, Sony and Kenwood, was worth investing in as it was making a steady profit. Sino Golf Holdings also would do well as demand for golf clubs would pick up when the economy rebounded. Chen Hsong Holdings, a well-established machinery producer, also was a good investment choice, she added. Louis Wong Wai-kit, head of research at Phillip Securities, agreed that a company's fundamental qualities were important in choosing the right investment target. Speculating on companies which had the potential to be acquired as a 'shell' also could yield profits, he said. 'If an investor bets on a company which will probably be acquired, he should be more patient, as the acquisition process takes a long time. Besides, it is important to pick a clean company with a reasonably good record,' he added. Mr Wong said investors should invest in a company that would pick up fast when the economy improved. He said second-tier property developer K Wah International, might be able to make a profit if there was a recovery in property prices, because it had bought several sites when the prices were down. Spectacles-maker Moulin International also was a good buy as it had a low PE ratio and high dividend yield, he said. Fairwood Holdings might earn a profit this year as there was a strong demand for fast food in the gloomy economy.