Bottom of the Barrel: Cleaning Out the Portfolio

Last year was a pretty good one for the Bottom of the Barrel portfolio, but it's starting with a clean slate in 2003, along with a few New Year's resolutions.

First, the main purpose of this column remains the same: to expose small-cap companies that have little, if any, institutional sponsorship, but offer interesting stories to tell and opportunities to profit. I won't always be right on the investment merits -- although I'll try my best -- but I'll work tirelessly to keep current on the names in the portfolio and present both long-term and short-term perspectives on each company.

In a slightly new twist for 2003, I also aim to provide more in-depth information on the Barrel stocks. To that end, I hope to feature a few new names each month and devote other weeks to revisit stocks already in the Barrel.

With that in mind, I've decided to use the first Barrel column of 2003 to take one last look at the Barrel stocks as of 2002's close.

Starting next week, the Barrel begins afresh, with 21 of the current names remaining in the portfolio. Each quarter, I'll cull the portfolio to 21 stocks, those that have the most interesting stories and/or provide the most intriguing opportunities on either the long or short side.

I'm removing both winners and losers from the portfolio. In some cases, the choices were difficult, but I think the final remaining 21 stocks best represent Bottom of the Barrel, a laboratory to explore small-cap ideas across a wide range of industries.

New Year, New Opportunities
Looking at 2003 through small-cap eyes
Barrels Stock/Ticker Date of Mention Current Price MentionPrice Change
Above Average Outlook
Energy Partners (EPL:NYSE) Dec. 5, 2002 $10.45 $9.40 11.17%
WebMD (HLTH:Nasdaq) Oct. 30, 2002 9.74 6.51 49.54
Superior Industries (SUP:NYSE) July 10, 2002 42.40 43.87 -3.35
Roadway (ROAD:Nasdaq) June 19, 2002 38.30 34.03 12.55
Fidelity National (LION:Nasdaq) May 8, 2002 10.20 10.58 -3.59
UCBH Holdings (UCBH:Nasdaq) March 27, 2002 44.36 35.65 24.43
Cost Plus (CPWM:Nasdaq) March 6, 2002 28.76 25.83 11.34
Coastal Bancorp (CBSA:Nasdaq) Dec. 12, 2001 32.08 27.84 15.23
Average Outlook
Huffy (HUF:NYSE) Dec. 12, 2002 $7.00 $6.97 0.43%
Men's Wearhouse (MW:NYSE) Nov. 20, 2002 15.44 16.22 -4.81
Chattem (CHTT:Nasdaq) Oct. 9, 2002 17.66 20.25 -12.79
Oceaneering International (OII:NYSE) Oct. 2, 2002 23.76 26.01 -8.65
Rollins (ROL:NYSE) Sept. 18, 2002 27.25 19.17 42.15
Coachmen (COA:NYSE) Aug. 21, 2002 16.01 15.05 6.38
Rare Hospitality (RARE:Nasdaq) Feb. 20, 2002 27.97 25.72 8.75
NetBank (NTBK:Nasdaq) Feb. 6, 2002 10.30 13.45 -23.42
Surmodics (SRDX:Nasdaq) Dec. 19, 2001 31.00 34.60 -10.40
Coinstar (CSTR:Nasdaq) Nov. 7, 2001 22.46 19.96 12.53
Hibbett Sports (HIBB:Nasdaq) Oct. 24, 2001 25.34 20.04 26.45
Below Average Outlook
Trico Marine (TMAR:Nasdaq) May 1, 2002 $2.97 $8.25 -64.00%
Arch Chemical (ARJ:NYSE) April 24, 2002 19.30 22.52 -14.30
Goody's (GDYS:Nasdaq) Nov. 28, 2001 4.38 4.50 -2.67
Bottom of the Barrel Income Portfolio
Ameron (AMN:NYSE) Nov. 6, 2002 $57.80 $49.83 15.99%
American States Water (AWR:NYSE) Sept. 4, 2002 23.45 23.60 -0.64
Hawaiian Electric (HE:NYSE) July 31, 2002 45.04 41.86 7.60
UGI Corp (UGI:NYSE) June 26, 2002 38.30 31.30 22.36
Acadia Realty (AKR:NYSE) June 5, 2002 7.50 7.03 6.69
Capital Automotive (CARS:Nasdaq) April 3, 2002 23.59 22.95 2.79
Laclede Group (LG:NYSE) March 20, 2002 24.26 23.64 2.62
Alexandria Real Estate Equities (ARE:NYSE) Feb. 13, 2002 42.01 40.25 4.37
Empire District Electric (EDE:NYSE) Jan. 16, 2002 19.27 21.23 -9.23
Integra Bancorp (IBNK:Nasdaq) Jan. 2, 2002 19.01 20.75 -8.39
Met-Pro (MPR:NYSE) Oct. 17, 2001 13.98 11.16 25.27
Bottom of the Barrel Special Situations Portfolio
Martha Stewart Omnimedia (MSO:NYSE) Oct. 16, 2002 $10.22 $7.20 41.94%
Cimarex Energy (XEC:NYSE) Aug. 7, 2002 17.38 17.30 0.46
Luby's (LUB:NYSE) Feb. 27, 2002 2.90 6.22 -53.38
Source: TSC research

Here are the names I'm keeping to start 2003.

Above Average Outlook

  • Energy Partners ( EPL)
  • Superior Industries ( SUP)
  • Roadway ( ROAD)
  • Fidelity National ( LION)
  • Cost Plus ( CPWM)
  • Coastal Bancorp ( CBSA)

Average Outlook

  • Huffy ( HUF)
  • Men's Wearhouse ( MW)
  • Coachmen ( COA)
  • Rare Hospitality ( RARE)
  • NetBank ( NTBK)
  • Hibbett Sports ( HIBB)

Below Average Outlook

  • Trico Marine ( TMAR)

Income Portfolio

  • Ameron ( AMN)
  • Hawaiian Electric ( HE)
  • UGI ( UGI)
  • Acadia Realty ( AKR)
  • Capital Automotive ( CARS)
  • Alexandria Real Estate Equities ( ARE)
  • Empire District ( EDE)
  • Integra Bancorp ( INBK)

My final resolution is to remain responsive. If I've left names off this list that have a large following among Barrel readers, let me know. If I get enough emails about a particular company, I'll add it back to the mix to keep the dialogue going. I'll include these "reader wildcards" next week.

Small-Cap Resolutions

Finally, here are some resolutions that will guide the Barrel small-cap adventure in 2003:

  • I'm looking for small-cap companies that are or will be imminently profitable. There's no substitute for earnings, but small-caps on the verge of profitability with good products, honest management and a solid business model often provide great opportunities for investors right before turning a profit. I always strive to be right, but in the small-cap world, being right and early offers an even bigger benefit.

  • I'll be intently focused on balance sheet issues in this year's picks. Although debt has a place in the capital mix, small-caps are more likely to fail when their credit is extended. That isn't rocket science, but the "we can grow out of it" mentality still seems prevalent in the small-cap world. Debt will probably become a larger issue this year, as the cost of debt certainly won't fall much.

  • The hallmark of 2003 will be simplicity. Business innovation and niche markets make great small-cap plays, but I want financials that are both transparent and easy to understand. I'm willing to wade through quarterly reports and other filings, but straightforward talk will be worth more as the market continues to raise reporting expectations, especially for smaller-cap names.

That's just a starting point. I also hope to explain some additional rules of thumb used in small-cap analysis.

Next week, I'll add the first 2003 company to the Barrel. Have a great year.

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 Chris Edmonds.

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