As the market continues to bounce around, this year's group of Bottom of the Barrel stocks -- at least, to date -- has shown signs of growing up. The small-caps that have been profiled in this column this year have posted varying levels of performance but have largely held their own.
With summer fading into fall, I thought it was time to review and reconsider the portfolio. Here's a quick look.
Of the 10 names added to the Bottom of the Barrel portfolio in 2003, the top two performers are
Wild Oats Markets
( OATS) and
. Both are niche businesses, targeting the affluent segment of their respective markets.
That focus has served both companies well. Wild Oats continues to execute its new-market growth and existing-store remerchandising strategies competently. Many who doubted the company's competitive savvy have toned down their criticisms, and that's reflected in the stock price.
Also reflected in the stock price is the recent rumor that
might make an offer -- some say as high as $17 per share -- for Wild Oats. The niche upscale, health-conscious grocery business could boost Kroger, which has been acquisitive in recent years. But an acquisition price much above $13.50 a share seems a stretch, especially given the relatively small footprint of Wild Oats stores and the competitive nature of the grocery business.
I believe it's critically important not to fall in love with stocks or ideas of what might happen to them, especially small-caps. As such, I'd be willing to secure some of my profits in Wild Oats now, even if that means giving up the possibility of a merger pop in coming weeks. The stock trades at more than 37 times this year's earnings estimates and 24 times next year's.
Although Boston Beer hasn't appreciated quite as much as Wild Oats, it has brewed some nice profits for investors. Its gains have been based on the initial success of its Sam Adams Light brand and the company's ability to navigate through a difficult economy and a very competitive business.
However, the boutique beer producer may be challenged in its ability to gain market share. In the second quarter, Boston Beer's sales volume slipped more than 6% compared with the year-ago period. The company expects sales in the summer months to be about 5% lower than last year's levels. A price increase did improve profit margins slightly, to 61% vs. 60.3% in the year-ago quarter.
Boston Beer remains a solid player in the premium beer market, but its future depends on its ability to build additional brand loyalty. The company plans to reduce brand marketing in the second half, so I expect market-share expansion to slow slightly. Boston Beer should earn about 68 cents a share this year and 80 cents next year. At 19 times next year's earnings, the stock trades at a fair multiple until signs of growth become more visible.
Poor Playtex Performance
The standout disappointment of the 2003 portfolio is
, a leading maker of consumer health products. As noted when Playtex was
first profiled, competitive challenges in the feminine health division were key to unlocking value at Playtex.
In short, new products from
Procter & Gamble
have further eroded Playtex's market share. Feminine care product sales declined 20% in the second quarter and the first half of the year when compared with 2002 levels, a majority lost to an advanced product from P&G. That decline may moderate, but the company will likely post negative sales comps through the balance of the year.
Although other product categories have fared better, sales across the board have been difficult. Accounting for the largest portion of Playtex sales at 40%, infant care sales declined 1.6%. In the second quarter, sun care product sales slipped 11% (partially due to poor weather), and household product sales fell 12%.
I had also said that management seemed committed to considering strategic alternatives to increase shareholder value and would likely make some decisions -- product-line divestitures or an outright sale -- by year end. However, management appeared to hedge on that pledge in its second-quarter conference call. Although that could mean that the company is in advanced talks about a deal, it could just as easily mean that no deals will be made.
When I reviewed the company in April, I suggested that the stock became interesting in the mid-$7 range. Now at $6.50, better visibility seems at least a quarter away. Any strategic move could give the stock some pep, but it remains a turnaround story without a catalyst in sight.
Winners and Losers
Plenty of other names in the portfolio deserve a quick mention, including
( MVK), first
highlighted in January. Although it's off its highs, it remains an intriguing play on the longer-term recovery in the oil and natural-gas drilling business.
Another energy name,
(RER:Toronto) is a micro-cap
Canadian E&P company that has sagged a bit, but still has solid prospects to drill in Canada.
( TOPP), the trading-card company, is a name that several readers suggested I
review. It has performed about as expected: It hasn't done anything.
The final four names in the 2003 group --
South Jersey Industries
( BEZ) -- are all members of the Bottom of the Barrel income portfolio. They still provide nice yield to patient investors. In addition, signs of an economic recovery have helped names such as Baldor, which is sensitive to the economy.
Next week I'll take a look at the old-timers that remain in the Bottom of the Barrel portfolio.
Christopher S. Edmonds is vice president and director of research at Pritchard Capital Partners, a New Orleans energy investment firm. He is 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