Bottom of the Barrel: Sorting Through the Pile of Picks

As earnings season winds down, many readers have asked for a review of the stocks in the Bottom of the Barrel portfolio. So let's take a quick look at each of the nearly 30 companies in there.

I've reorganized and simplified the portfolio into three clear categories:
  1. Above-average performers: small-cap stocks expected to perform best in the coming months;
  2. Average performers: stocks that deserve your attention but don't quite make the elite list;
  3. Below-average performers: stocks that remain on the radar screen but have lost a bit of luster.

Plus, I've kept the income portfolio, focused on small-cap yield plays, and the special situations portfolio, focused on small-cap "story stocks."

Dressing Up the Barrel
Category changes and realignment
Current Rating Company/Ticker Date of Mention May 13 Price Mention Price* % Change From Mention First Call 2002 EPS Est. Current P/E Ratio
Above-Average Outlook
Fidelity National (LION:Nasdaq) May 8, 2002 $10.31 $10.58 -2.55% $0.55 18.75
Endocare (ENDO:Nasdaq) Jan. 23, 2002 19.35 18.21 6.26 0.34 56.91
SurModics (SRDX:Nasdaq) Dec. 19, 2001 37.65 34.60 8.82 0.42 89.64
FPIC Insurance (FPIC:Nasdaq) Nov. 14, 2001 14.37 12.83 12.00 1.25 11.50
Average Outlook
Trico Marine (TMAR:Nasdaq) May 1, 2002 $9.15 $8.25 10.91% $(0.26) NE
Arch Chemicals (ARJ:NYSE) April 24, 2002 24.20 22.52 7.46 0.55 44.00
Hines Horticulture (HORT:Nasdaq) April 17, 2002 4.64 4.75 -2.32 0.58 8.00
UCBH Holdings (UCBH:Nasdaq) March 27, 2002 39.71 35.65 11.39 1.84 21.58
Cost Plus World Markets (CPWM:Nasdaq) March 6, 2002 31.99 25.83 23.85 1.11 28.82
Rare Hospitality (RARE:Nasdaq) Feb. 20, 2002 28.25 25.72 9.84 1.44 19.62
VitalWorks (VWKS:Nasdaq) Nov. 21, 2001 7.60 4.30 76.74 0.33 23.03
NetBank (NTBK:Nasdaq) Feb. 6, 2002 15.97 13.45 18.74 0.65 24.57
Coastal Bancorp (CBSA:Nasdaq) Dec. 12, 2001 31.75 27.84 14.04 2.41 13.17
Coinstar (CSTR:Nasdaq) Nov. 7, 2001 29.95 19.96 50.05 0.73 41.03
Witness Systems (WITS:Nasdaq) Oct. 31, 2001 7.54 8.06 -6.45 0.16 47.13
Hibbett Sports (HIBB:Nasdaq)** Oct. 24, 2001 27.10 20.04 35.23 1.37 19.78
Quixote (QUIX:Nasdaq) Oct. 3, 2001 18.75 21.44 -12.55 0.72 26.04
Below-Average Outlook
Actrade (ACRT:Nasdaq) Jan. 30, 2002 $17.50 $20.65 -15.25% $3.05 5.74
Goody's Family Clothing (GDYS:Nasdaq) Nov. 28, 2001 10.96 4.50 143.56 0.51 21.49
Bridgford Foods (BRID:Nasdaq) Oct. 10, 2001 14.00 13.18 6.22 NA NA
Quanta Systems (PWR:NYSE) Jan. 9, 2002 13.60 16.05 -15.26 1.04 13.08
Bottom of the Barrel Income Portfolio
Capital Automotive REIT (CARS:Nasdaq) April 3, 2002 $23.70 $22.95 3.27% $2.03 11.67
Laclede Group (LG:NYSE) March 20, 2002 23.29 23.64 -1.48 1.20 19.41
Alexandria Real Estate (ARE:NYSE) Feb. 13, 2002 44.99 40.25 11.78 3.92 11.48
Empire District Electric (EDE:NYSE) Jan. 16, 2002 21.30 21.23 0.33 1.26 16.90
Met-Pro (MPR:NYSE) Oct. 17, 2001 15.41 11.16 38.08 NA NA
Integra Bancorp (IBNK:Nasdaq) Jan. 2, 2002 23.25 20.75 12.05 1.50 15.50
Bottom of the Barrel Special Situation Portfolio
Luby's (LUB:NYSE) Feb. 27, 2002 $6.70 $6.22 7.72% $(0.28) NE
*Average price on date of mention.
**Prices adjusted for 3:2 split on Feb. 20, 2002.
NE=No earnings.
NA=No First Call estimates available.
Source: Thomson Financial/First Call, TSC Research

For an explanation of our barrel rating system, see our description.

On with the show.

At the Top of the Barrel

Four stocks remain at the top of the list:

  • Fidelity National ( LION), an Atlanta-based community bank with lots of potential, was profiled last week. Although it looks expensive based on 2002 earnings, significant growth prospects in 2003 make this bank worth a look.

  • Endocare ( ENDO) reported its first profit in the first quarter, earning a penny a share. Plus, Endocare reported sales of $7.8 million, up 50% sequentially and more than 150% from the year-ago quarter. A rich pipeline and good management make this medical technology company one to watch.

  • SurModics ( SRDX) has pulled back as expected since the March hype over its coronary stent success. Its prospects are impressive, and shares are still attractive under $40.

  • FPIC Insurance ( FPIC) is a growing sleeper in medical malpractice insurance. St. Paul's ( SPC) exit from the business is FPIC's gain. It's neither a sexy nor an easy business, but FPIC's focus and expertise make it attractive.

    The Middle Tier

    A lot of good companies are in the middle group of stocks. I recently profiled Trico Marine ( TMAR), Arch Chemicals ( ARJ) and Hines Horticulture ( HORT). The stories on all three remain the same.

    Here's a quick look at the others.

  • UCBH Holdings ( UCBH) had a good first quarter, with net income up 29%. I still like its growth prospects among the ethnic population of Northern California and its new international finance business.

  • I also continue to like the growth story at Cost Plus ( CPWM), especially as it moves into markets outside California. The only reasons why it isn't on the elite list are its recent gains and valuation.

  • Rare Hospitality ( RARE), owner of LongHorn Steakhouse, is a solid economic recovery story. However, the company has been cautious on its first-half performance outlook, and I think the second half will play out better.

  • VitalWorks ( VWKS) is a health-care software play with solid growth prospects. However, its 76% gain since November should be noted.

  • With its Resource Mortgage merger complete, NetBank ( NTBK) should benefit from a recovering economy. I like its marketing agreement with Microsoft ( MSFT) and think earnings estimates may be a bit low.

  • Coastal Bancorp ( CBSA) continued to restructure its portfolio and posted a disappointing quarter. Coastal will benefit from a better economy and marginally higher interest rates. Its current price provides good long-term value.

  • Coinstar ( CSTR) has jumped up 50% since profiled in November. It looks fully valued based on current estimates.

  • Witness Systems ( WITS) remains one of my favorite names in the portfolio, but has telegraphed a weak second quarter. Look for a solid second half, but short-term enthusiasm has diminished.

  • Hibbett Sports ( HIBB) has benefited from a strong retail group and consumer spending. It's now near fair value.

  • Quixote ( QUIX) has suffered as highway construction spending has slowed. It needs a better economy and improved states' financial health to show signs of growth.

    The Real Bottom of the Barrel

    I continue to avoid four companies in the portfolio:

  • When a stock trades at only five times estimated earnings, there must be a reason. For Actrade ( ACRT), the reasons are uncertainty about the business plan, lack of confidence in estimates and a whole host of issues regarding the past pursuits of senior management. Well-reasoned or not, the stock can't get out of its rut, and it will likely take a few quarters for investors to regain their confidence.

  • Trading at more than 21 times 2002 estimates, Goody's Family Clothing ( GDYS) is fully valued. In the hot retail sector, this average regional soft-line retailer has been lifted by the rising tide.

  • Bridgford Foods ( BRID), which makes frozen bread, pepperoni and a lot of other culinary basics, is trading at the top of a very tight price range. Nothing is terribly wrong with this company, but better opportunities exist elsewhere.

  • I've moved Quanta Systems ( PWR) from the special situations portfolio to the below-average list and reduced its barrel rating from 3 to 1.5. With diminished hope that Aquila ( ILA) will win its proxy battle for control and with weakness in Quanta's core power and telecom contracting businesses, it's hard to find a catalyst that will push this stock higher. It has become cheaper for good reason.

    Looking for Income

    The stocks in the income portfolio all sport nice, safe dividends. Gains in Alexandria Real Estate ( ARE) and Met-Pro ( MPR) have pushed yields lower, and taking profits is not unreasonable. The best total return prospects are Laclede Group ( LG), which sports a 5.76% yield, and Empire District ( EDE), which has a 6% yield. The 6.6% yield of Capital Automotive ( CARS) is also attractive.

    Finally, the Pappas brothers' turnaround plans for Luby's ( LUB) are on track. It's still a year away from earnings, but keep this stock on the screen.

    I'll continue with weekly portfolio updates and will try to provide a whirlwind look at the entire portfolio each quarter. Next week, look for another addition to the portfolio. Keep your eye on the barrel.

    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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