Bottom of the Barrel: Midyear Report Card Searches for Value

After a tumultuous quarter for many stocks in the Barrel, most of their earnings results are in. So, this week, let's review the quarter's highlights and lowlights and try to answer many of your recent questions about how to play the current names in the Bottom of the Barrel portfolio.

Recently, I penned a column with four tenets of finding successful small-caps, advising you to look for companies with:

  1. A market niche.
  2. Real and sensible growth.
  3. A pristine balance sheet.
  4. An honest management team.

Not coincidentally, the top performers in the Barrel portfolio exude those characteristics. Here's a snapshot of several companies in the portfolio.

A Superior Play

Among the Barrel's upper echelon, Superior Industries ( SUP) continues to run on all cylinders. The company posted a 54% increase in second-quarter earnings over the year-ago period, and its 78 cents in per-share earnings beat the consensus estimate by more than 8%. Superior continues to roll along, last week announcing a new contract to provide wheels for the Dodge Dakota and Durango. In addition, the company's balance sheet remains pristine and sports a 1.1% yield to boot. Superior remains one of the top prospects in the portfolio.

Here's a quick look at other potential winners:

  • Roadway ( ROAD) continues to feel the challenges of an uncertain economy. Although this over-the-road carrier has strong leverage to an economic recovery, CEO Michael Wickham said July traffic was softer than expected. The company is positioned to weather the softness, but its stock will keep trading on economic news.

  • Fidelity National ( LION) posted a solid second quarter, increasing net interest income, reducing problem loans and keeping tight control on costs. When this is combined with the release from a consent order from regulators, you'd think the stock would rally. Small-cap financials, however, have been caught in the recent market downdraft, and this one's no different. Loan growth in the third quarter should be good, and company financials continue to strengthen. I also think Fidelity remains a prime acquisition target for a larger bank looking to enter the core Atlanta market.

  • Both UCBH Holdings ( UCBH) and Coastal Bancorp ( CBSA) are niche-market banks that posted solid second-quarter financials. Both have seen nice gains in the past week and should enjoy above-average appreciation in the coming months.

  • Cost Plus World Markets ( CPWM) has felt the pain of most retailers in recent weeks, although comparable-store sales have been positive. There's still plenty of growth left in this story in both total stores and same-store sales. Plus, a new East Coast merchandise hub will begin to show benefits of increased efficiency as it is fully operational and can serve additional stores in the East. Performance of California stores -- the company's largest market -- is also improving.

Assessing the Possibilities
Churning the barrel for value
CurrentRating Company/Ticker Date ofMention CurrentPrice MentionPrice* % ChangeFrom Mention % ChangeLast Week
Above Average Outlook
Superior (SUP:NYSE) July 10, 2002 $45.40 $43.87 3.49% 13.22%
Roadway (ROAD:Nadsaq) June 19, 2002 29.32 34.03 -13.84 15.89
Fidelity National (LION:Nasdaq) May 8, 2002 9.50 10.58 -10.21 -1.35
UCBH Holdings (UCBH:Nasdaq) March 27, 2002 42.08 35.65 18.04 9.58
Cost Plus World Markets (CPWM:Nasdaq) March 6, 2002 22.52 25.83 -12.81 13.22
Coastal Bancorp (CBSA:Nasdaq) Dec. 12, 2001 29.02 27.84 4.24 3.64
Average Outlook
Champps Entertainment (CMPP:Nasdaq) May 29, 2002 $9.85 $13.01 -24.29% 0.72%
Trico Marine (TMAR:Nasdaq) May 1, 2002 3.86 8.25 -53.21 0.78
Rare Hospitality (RARE:Nasdaq) Feb. 20, 2002 25.64 25.72 -0.31 6.92
NetBank (NTBK:Nasdaq) Feb. 6, 2002 8.96 13.45 -33.38 2.28
SurModics (SRDX:Nasdaq) Dec. 19, 2001 28.93 34.60 -16.39 8.03
VitalWorks (VWKS:Nasdaq) Nov. 21, 2001 7.44 4.30 73.02 10.88
FPIC Insurance (FPIC:Nasdaq) Nov. 14, 2001 8.86 12.83 -30.94 -12.45
Coinstar (CSTR:Nasdaq) Nov. 7, 2001 29.99 19.96 50.25 1.87
Witness Systems (WITS:Nasdaq) Oct. 31, 2001 4.55 8.06 -43.55 5.81
Hibbett Sports (HIBB:Nasdaq)** Oct. 24, 2001 18.00 20.04 -10.18 -3.38
Quixote (QUIX:Nasdaq) Oct. 3, 2001 16.00 21.44 -25.37 7.31
Below Average Outlook
Innotrac (INOC:Nasdaq) June 12, 2002 $2.30 $4.79 -51.98% -11.54%
Wilsons Leather (WLSN:Nasdaq) May 22, 2002 8.79 14.96 -41.24 2.33
Arch Chemicals (ARJ:NYSE) April 24, 2002 20.65 22.52 -8.30 5.14
Hines Horticulture (HORT:Nasdaq) April 17, 2001 3.15 4.75 -33.68 0.00
Actrade (ACRT:Nasdaq) Jan. 30, 2002 1.74 20.65 -91.57 -21.97
Endocare (ENDO:Nasdaq) Jan. 23, 2002 14.05 18.21 -22.84 18.07
Quanta (PWR:NYSE) Jan. 9, 2002 1.90 16.05 -88.16 -4.52
Goody's Family Clothing (GDYS:Nasdaq) Nov. 28, 2001 4.69 4.50 4.22 11.40
Bridgford Foods (BRID:Nasdaq) Oct. 10, 2001 11.54 13.18 -12.44 -3.43
Bottom of the Barrel Income Portfolio
Hawaiian Electric (HE:NYSE) July 31, 2002 $44.13 $41.86 5.42% 6.34%
JDN Realty (JDN:NYSE) July 17, 2002 $11.80 $11.57 1.99 2.25
UGI (UGI:NYSE) June 26, 2002 33.61 31.30 7.38 7.04
Acadia Realty (AKR:NYSE) June 5, 2002 7.90 7.03 12.38 8.82
Capital Automotive REIT (CARS:Nasdaq) April 3, 2002 24.36 22.95 6.14 0.04
Laclede Group (LG:NYSE) March 20, 2002 23.26 23.64 -1.61 9.20
Alexandria Real Estate (ARE:NYSE) Feb 13, 2002 42.76 40.25 6.24 3.41
Empire District Electric (EDE:NYSE) Jan. 16, 2002 18.74 21.23 -11.73 6.66
Integra Bancorp (IBNK:Nasdaq) Jan. 2, 2002 21.25 20.75 2.41 2.02
Met-Pro (MPR:NYSE) Oct. 17, 2001 14.10 11.16 26.34 5.62
Bottom of the Barrel Special Situation Portfolio
Key Production (KP:NYSE) Aug. 7, 2002 $18.29 $17.30 5.72% 12.90%
Luby's (LUB:NYSE) Feb. 27, 2002 $5.43 $6.22 -12.70 2.07
*Average price on date of mention. **Prices adjusted for 3:2 split on Feb. 20, 2002. Source: Thomson Financial/First Call, TSC Research

Looking for Stability...

Two stocks among the average performers stand out: Rare Hospitality ( RARE) and NetBank ( NTBK).

Rare reported earnings of 40 cents a share for the second quarter, a nickel above consensus. Moreover, comps were strong, with nearly 5% same-store increases at its flagship Longhorn chain, well above expectations of just 1%. The company has one of the most solid management teams in the industry and a very conservative growth strategy. Again, an economic-sensitive play, it remains appealing as the economy turns the corner.

NetBank had what SunTrust Robinson Humphrey analyst Christopher Marinac called "a noisy quarter." Its acquisition of Resource Mortgage created sloppy second-quarter numbers, yet the mortgage business should add incrementally to this year's earnings. At conservative per-share earnings estimates of 55 cents this year and $1 next, the current stock price is discounting additional bad news. Although I haven't been right in assessing NetBank's potential this year, it presents compelling value for patient investors.

... Avoiding Instability

Small-caps with bad stories, bad karma and bad numbers can be the death of investors in a skeptical market. Take, for example, Actrade ( ACRT) and Quanta ( PWR). I get a lot of email asking if investors shouldn't take a chance on these stocks. My answer is simple: If you have money to lose, go to Vegas. Yes, there's a chance for big gains here, but there are better-than-even chances for greater losses.

Quanta may present opportunity when the power and telecom sectors turn, but just like larger brethren such as Shaw ( SGR) or Flowserve ( FLS), these stocks have been punished because their customers face mountainous challenges. I like Quanta's business, but I don't like its business prospects.

Actrade's story gets cloudier by the week. The company recently announced the closure of a foreign subsidiary and an internal investigation into accounting issues related to the subsidiary.

Looking for Income

One potential sign of a solid balance sheet and positive management outlook is consistent dividends. This portfolio has focused on a number of those names in recent months, and all have performed well. Here are a couple of highlights:

  • Hawaiian Electric ( HE) has been a solid performer after only two weeks in the portfolio. If you're in the stock for the dividend, consider staying. However, I'd wait until the stock pulls back to around $40 before I'd establish a new position. This stock looks fully valued at current prices.

  • Another utility, Empire District ( EDE), has been hurt by a secondary offering, concerns over earnings and regulatory issues. However, the current depressed price offers both an attractive entry point and an attractive 6.8% yield.

  • JDN Realty ( JDN) continues to pay a 9.2% dividend, which appears safe. While there's not significant appreciation beyond current prices, income-oriented equity investors might be attracted to the coupon.

  • Two other real estate investment trusts remain attractive. Acadia Realty ( AKR), with a 6.7% yield, and Capital Automotive ( CARS), with a 6.6% yield, present compelling yield plays. Alexandria Real Estate ( ARE) remains a good growth play in biotech real estate, although it's approaching fair value and only yields 4.7%.

There's a quick look back at the second quarter and how many of the stocks in the portfolio look today. Of course, your questions and ideas about the portfolio are always welcome. Shoot me an email with your thoughts.

Next week I'll add another stock to the Barrel.

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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