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Buy Fast Cars, Drillers as Growth Slows

JACKSONVILLE, Fla. (TheStreet) -- Slower economic growth favors stocks such as Rent-A-Center (RCII) and Epiq Systems (EPIQ), says Mark Travis, manager of the Intrepid Capital Fund (ICMBX).

The $179 million mutual fund, which buys medium-sized companies, garners a full five stars from Morningstar (MORN). Intrepid Capital Fund has had consistent growth over three and five years -- 6.3% and 6.77%, respectively, landing it in the 98th percentile. It's performing even better this year: The fund is up 6.9%, beating all but 1% of its rivals.

Welcome to TheStreet.com's Fund Manager Five Spot, where America's top mutual fund managers give their best stock picks and views on the market in a five-question format.

What's your view of the economy?

Travis: We are in a slow growth environment. We have a lot of leverage in the system, probably three and a half times our gross domestic product of $14 trillion. We are going to have to work it off the hard way, either by repudiating it or paying it down. And consumer sentiment is low because U-6 unemployment [which also includes those who are discouraged and have stopped looking for work] is in the midteens and it's just tough out there. People have 201(k)s [401(k)s that lost half their value], house values below their mortgages and we have a political system that's not really helping anybody, in my opinion.

Why is Rent-A-Center a good stock for this environment?

Travis: I love businesses that sell to people who need and use a product regularly. Today, there are over 3,000 Rent-A-Center stores. It's a billion-and-a-half market cap. It generates over $200 million in free cash flow. Their debt has been brought down in the last year and a half from over $900 million to over $600 million. They've just initiated a dividend. And they've got a buyback in place. Shares are in the low $20s, and they're probably worth $30 a share. They have about a 30% to 35% market share in the rent-to-own space.

There's a moratorium on offshore drilling, but you are a big fan of Tidewater (TDW), which gets some of its business in the Gulf. Why do you want to own this stock considering all that's going on politically?

Travis: The media hysteria around the Deepwater spill has created an opportunity for a long-term investor like Intrepid Capital. So Tidewater today in the low $40s trades at a discount to a hard book value of $47.5. The book value is understated because over the past five years they've booked gains of several hundred million dollars and they've sold boats. On a discounted cash flow basis and an asset valuation basis, the shares are worth in the mid-$50s. Their competitive weapon is they have no net debt. It has a $2.1 billion market cap with $300 million in cash and debt that offset each other. And they are very strategic as far as when they build and acquire boats. Most of their competitors are heavily leveraged in what can be a very cyclical business.

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