The Latest Bear CaseFirst let's hear from one of those cerebral bears. Robert Drach, a Florida trader with an enviable long-term record, says investors chasing stocks today are ignoring a fence labeled "Land Mines" as they jump into a field of beautiful daisies. "What can look appealing can equate to jumping into the cloak of the ... Grim Reaper," he wrote in a letter to clients last week. "We have watched jumpers for a quarter of a century. Always giddy during periods of excessive speculation, at final count they are the fodder that feeds those who conduct themselves professionally," he added. Drach has found the market so dangerous that his asset-allocation recommendation has been stuck at around 13% stocks and 87% cash for months. He has a lot of intelligent company. My office adjoins a municipal bond underwriting and trading firm, and two of its top employees -- an investment banker and a trader -- confessed to me this month that they sat out the entire 2003 surge in equities. They missed the postwar start last spring, then got hamstrung by the powerful emotion of regret. They waited for the pullback that never came, and still have stubbornly not put their resources back to work.
Profitable Picks That Aren't OverboughtWithout much effort, I found 700 profitable companies within 4% of their all-time highs last week that had P/E multiples below their peers and the average of the S&P 500. Many of these are under accumulation both by the sort of patient, deep-value private and public funds that are usually really early on incipient trends, as well as -- surprise -- insiders. Consider Abraxas Petroleum ( ABP), an independent oil and gas producer based in San Antonio. Its P/E multiple is listed as 1.20, which, if Media General's figure is accurate, is about as low as a P/E can go. The company owns properties in Texas, Canada and Wyoming. It earned $52 million over the past 12 months on sales of $33 million, a neat trick accomplished by an asset sale. Sporting a tiny $65 million market cap, Abraxas isn't covered by any major brokerage analysts, and isn't a big part of any major mutual fund. But Peter Lynch, the vice chairman of Fidelity Investments and legendary manager of ( FMAGX) Fidelity Magellan Fund in its heyday, last month filed documents at the Securities and Exchange Commission showing that he acquired the largest independent stake in the company -- 3.3 million shares, or 9.3% -- on behalf of family and related charitable trusts. The stock traded as high as $5 a couple of years ago before natural gas prices broke down, and it could well retrace its steps if the energy group stays strong this year.
- Parlux Fragrances (PARL), with a minuscule $49 million market cap, made $3.4 million last year on $69 million in sales. It designs, makes and distributes perfumes and related beauty products under licenses from the likes of Perry Ellis, Fred Hayman Beverly Hills and Ocean Pacific. CEO Lekach Ilia was buying tens of thousands of shares from $3.42 to $5.06 in December and earlier this month. Its P/E multiple is around 16, its price-to-sales multiple is 0.6 and its price-to-book multiple is 0.8 -- all very low. Major private-fund complexes Pequot, Bridgeway and Brandywine own the largest independent stakes in the company, which traded as high as $15 back in 1996 and sank as low as 85 cents in 1999.
- Comfort Systems USA (FIX) designs and makes heating, ventilation and air conditioning units for office buildings, malls, apartment complexes and manufacturing plants. The president and the chief executive were buying shares from $2.64 to $4.87 in the spring and winter last year, and among the three largest institutional holders are three of my favorite value spotters: Wellington Management, Royce & Associates and Heartland Advisors. The company has a market cap of $259 million, a price-to-sales multiple of 0.32 and a decent price-to-book multiple of 1.3. Business was challenging and profitability was squeezed the past few years, but the company has paid down debt, cut expenses and said in its last earnings report that it saw "signs of improving conditions" for 2004. The stock traded as high as $26 back in the 1990s, and could certainly get halfway back there in the next 12 to 18 months with a decent economic tailwind.
- American Capital Strategies (ACAS) is a buyout and merger-financing firm that provides money to small- and medium-sized companies that want to restructure, do a buyout, emerge from bankruptcy or simply grow. It's fairly cheap, with a P/E multiple of 13, pays an 8% dividend, and company directors and senior officers have steadily bought tens of thousands of shares in the open market at prices between $23 and $28 over the past year, with the latest in November. Wellington, Franklin Advisers and Capital Guardian Trust are among top institutional holders. American Capital has taken stakes in companies as far-ranging as maple-syrup maker Specialty Brands of America; ATM machine and safe-security products maker 3SI Security Systems; nSpired Natural Foods; Piper Aircraft; Electrolux; and Bumble Bee Seafoods. Because American lends to some companies experiencing weakness, its asset quality is a concern, but again, they also make it highly leveraged to the success of the global economy.
Please note that due to factors including low market capitalization and/or insufficient public float, we consider Comfort Systems USA to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.