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Bottom of the Barrel: Heads and Tails of the First Quarter

With the first quarter of 2002 in the books, it's time to assess the performance of the Bottom of the Barrel portfolio, check in on first-quarter earnings reports and make a few small adjustments.

Solid Small-Caps

The small-cap stocks that have filled the Bottom of the Barrel portfolio since its October inception have performed admirably in a very mixed market. Excluding those on the "avoid" list, Barrel stocks have returned an average of more than 14% since being profiled.

The best performers on the list are Coinstar (CSTR), the company that puts the green coin-counting machines in your local grocery, up nearly 63% since November , and Witness Systems (WITS), a customer-service software company, up more than 62% since its Halloween profile .

One of the more promising Barrel stocks is SurModics (SRDX), a manufacturer of medical device coatings, which has gained more than 27% since being profiled in December. SurModics has partnered with Johnson & Johnson (JNJ) in the production of drug-coated stents, which have shown great promise in advancing the efficacy of angioplasty. The company is scheduled to report its quarterly earnings April 16, and I expect solid results and an encouraging outlook. However, the stock now seems fairly valued, trading at about $43. An entry around $42 seems likely in the coming weeks.

Not All Winners

Among the worst performers is the first-ever Barrel stock, Quixote (QUIX), which manufactures highway safety equipment and has slipped about 6% since it was highlighted in October. Although its short-term prospects are still cloudy, an upbeat surprise in its late-April earnings call could push the stock back to even. I still think Quixote will track broader-market performance.

Rare Hospitality (RARE), owner of the LongHorn Steakhouse chain, is down more than 2% since its February portfolio debut . I like its management and strategy, but I noted at the outset that its first quarter would be tough. The company will likely report earnings in mid-May, and sources suggest the outlook should be upbeat.

Endocare (ENDO), a medical technology company focused on developing cryogenic treatments for prostate disease, has lost about 2% since being profiled in January. The company should also report earnings in mid-May, and I look for a strong quarter. I like the stock in the mid-$17 range and am adding a half-barrel to the rating, making the tally 2 1/2 barrels. (For an explanation of the barrel rating system, see this description .)

Finally, FPIC Insurance (FPIC), an insurer specializing in medical malpractice coverage, has suffered with other specialty insurers. The stock has lost 2.34% of its value since its November profile , and the company recently had to revise the terms of its credit facilities after seeking a waiver for a loan covenant violation. Yet I think the recent boost in reserves improves the company's financial position, and it could gain substantial market share after rival St. Paul recently left the medical malpractice business. Because its financial status has improved, FPIC should be able to avoid a possible rating downgrade from A.M. Best and enjoy a better second half. However, if you want to be in this name, you'll need patience.

Avoid the Unpredictable

Companies like Actrade Financial (ACRT), Bridgford Foods (BRID) and Goody's Family Clothing (GDYS) remain at the bottom of the Barrel, so avoid them. Actrade has legal and financial uncertainties; margins in Bridgford's business remain under pressure; and Goody's faces stiff competition from other retailers, especially the fast-expanding and well-financed Kohl's (KSS).

Stirring the Barrel

The table shows the performance of each Barrel stock and earnings release dates, either released by the company or estimated based on past earnings reporting dates.

Past, Present and Future
Can solid performance find support from first-quarter earnings?
Current Rating Company/Ticker Date of Mention April 8 Price Mention Price* % Change From Mention % Change Weekly Appx. Earnings Release Date
Positive Outlook
UCBH Holdings (UCBH:Nasdaq) March 27, 2002 $36.24 $35.65 1.65% 2.66% April 11, 2002
Cost Plus World Markets (CPWM:Nasdaq) March 6, 2002 26.08 25.83 0.97 -4.47 June 20, 2002
Rare Hospitality (RARE:Nasdaq) Feb. 20, 2002 24.22 25.72 -5.83 -2.14 May 14, 2002
Endocare (ENDO:Nasdaq) Jan. 23, 2002 18.04 18.21 -0.93 -9.80 May 19, 2002
SurModics (SRDX:Nasdaq) Dec. 19, 2001 44.86 34.60 29.65 -2.69 April 16, 2002
VitalWorks (VWKS:Nasdaq) Nov. 21, 2001 5.74 4.30 33.49 1.06 April 24, 2002
FPIC Insurance (FPIC:Nasdaq) Nov. 14, 2001 12.25 12.83 -4.52 -0.89 May 21, 2002
Witness Systems (WITS:Nasdaq) Oct. 31, 2001 13.96 8.06 73.20 -1.76 April 29, 2002
Market Outlook
NetBank (NTBK:Nasdaq) Feb. 6, 2002 14.90 13.45 10.78 -11.73 April 30, 2002
Coastal Bancorp (CBSA:Nasdaq) Dec. 12, 2001 34.08 27.84 22.41 4.54 April 15, 2002
Coinstar (CSTR:Nasdaq) Nov. 7, 2001 32.77 19.96 64.18 4.86 May 2, 2002
Hibbett Sporting Goods (HIBB:Nasdaq)** Oct. 24, 2001 23.00 20.04 14.77 -2.13 June 14, 2002
Quixote (QUIX:Nasdaq) Oct. 3, 2001 18.25 21.44 -14.88 4.29 April 24, 2002
Special Situation
Luby's (LUB:NYSE) Feb. 27, 2002 6.76 6.22 8.68 1.05 June 7, 2002
Quanta Systems (PWR:NYSE) Jan. 9, 2002 17.22 16.05 7.29 3.11 May 14, 2002
Actrade (ACRT:Nasdaq) Jan. 30, 2002 15.80 20.65 -23.49 -4.70 April 24, 2002
Goody's Family Clothing (GDYS:Nasdaq) Nov. 28, 2001 8.00 4.50 77.78 12.68 June 20, 2002
Bridgford Foods (BRID:Nasdaq) Oct. 10, 2001 10.70 13.18 -18.82 -0.19 June 15, 2002
Income Portfolio
Capital Automotive REIT (CARS:Nasdaq) April 3, 2002 23.00 22.95 22.82 0.22 May 5, 2002
Laclede Group (LG:NYSE) March 20, 2002 24.40 23.64 3.21 2.09 April 24, 2002
Alexandria Real Estate (ARE:NYSE) Feb. 13, 2002 44.80 40.25 11.30 1.47 May 7, 2002
Empire District Electric (EDE:NYSE) Jan. 16, 2002 21.20 21.23 -0.14 -1.85 April 25, 2002
Met-Pro (MPR:NYSE) Oct. 17, 2001 14.40 11.16 29.03 2.13 May 21, 2002
Integra Bancorp (IBNK:Nasdaq) Jan. 2, 2002 19.33 20.75 -6.84 -2.18 April 18, 2002
Source: TSC Research
*Average price on date of mention.
**Prices Adjusted for 3:2 split on Feb 20, 2002

Next week at the SunTrust Robinson Humphrey conference, I'll be catching up with managers of many of the Barrel companies, including Coinstar, Endocare, FPIC, Hibbett Sporting Goods (HIBB), NetBank (NTBK), Quanta Services (PWR), Rare Hospitality, SurModics, VitalWorks (VWKS) and Witness Systems.

I'll have a complete update in the weeks ahead. Plus, next week, I'll add another company to the portfolio. Stay tuned.

Do you have candidates for Bottom of the Barrel? If so, shoot me an email with the company's name, why you think it qualifies and your full name and hometown. If I profile your suggestion, I'll send you a TSC gift to commemorate your pick.

Christopher S. Edmonds is president of Resource Dynamics, a private financial consulting firm based in Atlanta. At time of publication, neither Edmonds nor his firm held positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send it to Chris Edmonds.

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