Bottom of the Barrel: Old-Timers Take the Field

It's time for a bit of fall cleaning in the Bottom of the Barrel portfolio.

Last week, I reviewed the names I had added to this portfolio of underfollowed, small-cap stocks and found some nice surprises in the roster. But what about the names that have lingered over the past few years?

Although there are certainly a handful of dogs, many of the small-caps profiled over the past 30-some months have done pretty well. This eclectic group has, for the most part, scraped out nice gains in a difficult market and rose along with the overall market tide in the past several months.

In the Bottom of the Barrel column, I look for companies with unique products and services that are underfollowed by the Street. I generally profile companies that I find somewhat interesting from an investment perspective, but I also sometimes look at companies that readers request as well as names with "special situations." With few exceptions, the Barrel stocks have little Street sponsorship and are often unknown by most investors.

I developed a general rating system for the stocks -- from zero to four barrels -- that represented a quick thought about the strength of the business. Simply, with a quick look at a company's financials, management team, product and service lines and other intangibles, I tried to capture a snapshot of its overall health.

That doesn't always translate into short-term performance. I also break the portfolio into current market stars, average performers and underachievers. The Barrel ratings typically don't change unless the underlying fundamentals of the business undergo a material change. In contrast, the companies are frequently shuffled among the market categories. Finally, a portion of the portfolio is devoted to income-oriented small-caps, which are listed at the end of the table.

Let's take a look at the old-timers in the portfolio. (The table below provides a look at the ratings as the time of the most recent published update.)

Barreling Along
Assessing the old-timers in the Barrel Portfolio
Barrels Company/Ticker Date ofMentionAD CurrentPrice MentionPrice Change DividendYield
Above Average Performance
Energy Partners (EPL:NYSE) 12/5/2002 $10.97 $9.40 16.7%
WebMD (HLTH:Nasdaq) 10/30/2002 10.20 6.51 56.7
Superior Industries (SUP:NYSE) 7/10/2002 43.46 43.87 -0.9
Fidelity National (LION:Nasdaq) 5/8/2002 12.88 10.58 21.7
Cost Plus (CPWM:Nasdaq) 3/6/2002 41.26 25.83 59.7
Coastal Bancorp (CBSA:Nasdaq) 12/12/2001 31.08 27.84 11.6
Average Performers
Huffy (HUF:NYSE) 12/12/2002 $7.20 $6.97 3.3 %
Men's Wearhouse (MW:NYSE) 11/20/2002 28.86 16.22 77.9
Coachmen (COA:NYSE) 8/21/2002 13.31 15.05 -11.6
RARE Hospitality (RARE:Nasdaq)* 2/20/2002 26.32 17.15 53.5
NetBank (NTBK:Nasdaq) 2/6/2002 12.56 13.45 -6.6
Hibbett Sports (HIBB:Nasdaq)* 10/24/2001 25.17 13.36 88.4
Trico Marine (TMAR:Nasdaq) 5/1/2002 $2.40 $8.25 -70.9 %
Bottom of the Barrel Income Portfolio
Ameron (AMN:NYSE)* 11/6/2002 $34.00 $25.30 34.4 % 2.32 %
Hawaiian Electric (HE:NYSE) 7/31/2002 43.65 41.86 4.3 5.83
UGI Corp (UGI:NYSE) 6/26/2002 30.98 31.30 -1.0 3.71
Acadia Realty (AKR:NYSE) 6/5/2002 10.20 7.03 45.1 5.50
Capital Automotive (CARS:Nasdaq) 4/3/2002 29.05 22.95 26.6 5.67
Alexandria Real Estate (ARE:NYSE) 2/13/2002 47.87 40.25 18.9 4.50
Empire District (EDE:NYSE) 1/16/2002 21.95 21.23 3.4 5.79
Integra Bancorp (IBNK:Nasdaq) 1/2/2002 19.67 20.75 -5.2 4.75
*Price adjusted for stock split.
Source: TSC research

Feasting on Retailers

Since the Barrel portfolio's inception, the best performers hail from the retail and restaurant sectors. Both Men's Wearhouse ( MW) and Cost Plus ( CPWM) have done well, benefiting especially from the recent run in the retail group. However, both continue to execute in their respective niche markets, the primary reason I profiled each company.

If you own Men's Wearhouse, you have to love the way it looks. The stock has been strong ever since announcing solid numbers days after I profiled the stock last November. Chairman and CEO George Zimmer and the gang have also done a good job positioning the company as the leading men's business clothing boutique. With a return to a slightly more formal workplace, its sales should benefit.

Go into a Cost Plus store and you'll find an eclectic mix of upscale merchandise for the home, from coasters to a selection of specialty foods and wines. Management has done an exceptional job of streamlining merchandising and controlling costs in recent months, and that will continue to benefit the company as the economy improves.

Another retailer, Hibbett Sports ( HIBB), fills the small-town sporting goods niche. The distribution network can raise costs a bit, but Hibbett has done a great job of bringing "chic" sporting goods to Main Street America. As the economy improves, Hibbett should also benefit.

Finally, another solid performer has been Rare Hospitality ( RARE), which owns the Longhorn Steakhouse and Capital Grille concepts and continues to beef up investors' portfolios. CEO Philip Hickey and the management team have successfully grown the company's core brands and focused on cost control. In the mass-market, upscale dining sector, this company has posted decent same-store growth at a difficult time while also growing through new locations. The stock recently split 3-for-2.

So what happens next? Clearly, the outperformance of these four stocks means they're more expensive now. To investors with a value bent, they aren't as attractive anymore. At the same time, the businesses of all four continue to show signs of growth, with solid management teams. Don't look for 50%-plus returns in the coming months, but as the economy improves, these businesses will benefit.

Barrel Floaters

The have-nots in the portfolio still deserve some support. First, Superior Industries ( SUP), a maker of automobile components, has suffered from the slump in the auto business and the ailing economy. The recovery may be slow, but this stock -- now trading at year-ago levels -- is worth a look for patient investors. The auto industry will come back, and Superior's strong balance sheet and management make it one of the more attractive plays leveraged to the auto industry. That recovery is likely an early 2004 event, however.

I thought Coachmen ( COA) would be an interesting play on the aging Baby Boomers and increasing leisure expenditures, but it too has been hurt by the economy. It's hard to peg a direct catalyst for this stock.

The financial dog of the portfolio has been NetBank ( NTBK), an Internet bank that has grown both its retail banking and mortgage businesses. Although higher rates will likely slow the growth of the mortgage business, the company's deposit base continues its steady growth. However, the stock has suffered -- in my view -- from investors' worries about Internet-based banking's ability to make inroads into the traditional bricks-and-mortar system.

Finally, Trico Marine ( TMAR) suffers from a dismal market for energy-related marine vessels, a challenged balance sheet and a fleet of older equipment compared to competitors like Tidewater ( TDW). Many may argue that Trico is cheap at these levels, but I need to see a recovery in Gulf of Mexico drilling activity before I can get excited about its prospects.

Quick Hits

Here's a quick hit on other names in the portfolio:

Energy Partners ( EPL) is moving forward with its Gulf of Mexico shelf-drilling program. As usual, the company will end the year in a drilling frenzy, and it wouldn't surprise me to hear about a major asset acquisition in the coming weeks. A selling shareholder may still loom over the stock, but it's a good exploration-and-production name for small-cap investors.

WebMD ( HLTH) has been on a tear, which may come to a quick halt as a result of a just-announced Justice Department investigation related to its physician-services program. One of my mantras in the small-cap world is, when regulatory investigations linger, exit first and ask questions later. You can always buy the stock back, but the taint may be enough to cause a real stumble. I'd consider taking what gains I could get here, at least for now.

The move in Fidelity National ( LION) supports the aforementioned WebMD thesis. This Atlanta-based bank had been harnessed by ongoing dealings with federal banking regulators. It took years to resolve the issues, and only when most were resolved did the stock begin to work higher. It was in the penalty box for a long time. I think Fidelity National is ripe for a partner if and when another super-regional decides that Atlanta is an attractive market.

Next week, I'll take a look at the stocks in the Bottom of the Barrel income 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 Chris Edmonds.

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