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
Avoid
	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.

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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.

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