This hasn't been a terribly kind year for stocks, or an easy one for investors to figure out. The markets have been meandering downward since January, and a set of forces well beyond Wall Street's control -- the election, interest rates and oil prices -- have put a premium on finding hidden value in unloved names.
With that in mind,
polled a number of small- and mid-cap fund managers for their top "under-the-radar" picks. These are stocks that might not rank as household names or widely held favorites. But going by what these managers are saying, these companies could possibly make some big noise in the coming year.
Don Hodges, portfolio manager for the $53 million Hodges Fund, says investors can find highly profitable, if nearly anonymous, companies by simply looking at the labels of products they use every day.
"Look at a company like
Helen of Troy
," says Hodges. "They manufacture and distribute hundreds of hair care products, including brand names like Vidal Sassoon, but most people are not aware of the strength of the company behind the various brands."
The stock, currently trading around $29, has only recently recovered from a mid-August press report questioning the firm's accounting. That setback pushed the stock below $25 for a short spell. But Hodges says the accounting flap is behind the company, and that the stock is cheap at 10 times projected 2005 earnings. He expects the stock to easily trade through its July 2004 high of $37 over the next 12 to 18 months.
Don't stop at the bathroom when searching for under-the-radar stocks, says Hodges. He also suggests a quick rummage through your closets, where you might find a long-forgotten brand in
( HGGR). Hodges says the apparel manufacturer's mere survival -- while a number of its competitors have either merged or gone out of business -- has helped it to add market share and boost pricing flexibility. And he says that "having
as your top three customers doesn't hurt either."
Before rushing to try Haggar on for size, investors should know that barely half of the 7 million shares outstanding actually float freely. And with average daily volume of less than 16,000 shares, Haggar isn't the most liquid name available.
You might find a spectacular selection of under-the-radar stocks without ever leaving your house. But Preston Athey, portfolio manager for the T. Rowe Price small-cap value fund, says you can get even more ideas hanging out at the mall, especially if you shop at Birmingham-based
Hibbett Sporting Goods
"They are one of the few stores that can thrive, let alone exist, in the shadow of a Wal-Mart," says Athey. "And few people know about them."
Unfortunately, the company's last quarter was less than a home run. In mid-August, Hibbett's management announced weaker-than-expected earnings due to poor sales of licensed apparel. Athey expects the retailer to rebound by growing earnings 20% to $1.20 in 2006, which he says should lift the stock back to its June high of $28 a share from its current level around $17.60.
Vincent Gallagher, portfolio manager for the Needham Growth fund, advises investors to check out the pharmacy before heading home so they can pick up some liquid Band-Aids. Why liquid Band-Aids and not the ordinary kind? Because Raleigh, N.C.-based
Closure Medical Corp.
( CLSR), Gallagher's below-the-radar choice, developed the technology for liquid bandages and now supplies it to megapharma
Johnson & Johnson
Gallagher says the company has its patents locked up for years to come, and its stock should double from the current $20 to where it was trading back in January 2004. But with the stock currently trading at a fairly pricey trailing-12-month P/E of 34, many analysts believe the adhesive stock may be stuck at its present levels.
The presidential campaign has been chock full of speeches about energy, education and health care. But from a stock perspective, the name that has consistently drowned out all others has been controversial energy services provider
. But portfolio managers say that beneath all the rhetoric, there are a number of stock opportunities for investors looking to vote with their pocketbooks on one of these three crucial issues.
Matt Patsky, portfolio manager for the Winslow Green Growth fund, says clean coal technology provider
has the potential to grow its yearly earnings from 4 cents a share in 2004 to 50 cents a share in 2006. He sees the stock doubling over that period from the current $4 and change.
"There has been a lot of focus on clean coal technology in both candidates' platforms because of the need to find domestic sources of energy," says Patsky.
But then again, this barely profitable micro-cap company could remain below the radar forever if the price of oil falls significantly and the promise of clean coal turns into the equivalent of an empty campaign pledge.
Martin Koenig, portfolio manager for the Integrity Technology fund, says a company at the forefront of medical technology, but lacking public awareness, is Israeli-based
. Given Imaging's principal product is a wireless imaging system for a visual examination of the gastrointestinal tract. Or in other words, a capsule-sized camera a patient swallows so that a doctor can examine his intestines.
Koenig won't give a price target, but says the company is sure to shine in the coming year after breaking into profitability over the past nine months. One item potential investors might have difficulty stomaching is that 30% of the company's shares are currently held short by doubting speculators, a fact sure to command attention as the company's profile grows.
Finally, both candidates have touted their plans to increase spending on education. But well-known education stocks like
taught investors a severe lesson in investing this summer, taking shareholders on a wild ride downward.
For an under-the-radar alternative, Michael Corbett, portfolio manager for the Perritt Micro Cap Opportunities fund, recommends a $100 million company called
( MODT) that builds modular classrooms in California, Florida and the southwestern U.S.
"The nation's classrooms across the country have to be expanded and Modtech has the contracts for the work," says Corbett. "The problem is the timing. But it will get done."
Corbett says the company should rise from its current multiple of 0.66 times revenues up to at least one times revenue, an increase that he expects will lift the stock past $12 from its current level at $7.50. Investors who learned to be skeptical about story stocks during the downturn might consider staying away from Modtech, though. The company has a spotty earnings history at best, losing $29.5 million in 2002 and earning $1.4 million in 2003.