JACKSONVILLE, Fla. ( TheStreet) -- Slower economic growth favors stocks such as Rent-A-Center ( RCII) and Epiq Systems ( EPIQ), says Mark Travis, manager of the Intrepid Capital Fund ( ICMBX).
The $179 million mutual fund, which buys medium-sized companies, garners a full five stars from Morningstar ( MORN). Intrepid Capital Fund has had consistent growth over three and five years -- 6.3% and 6.77%, respectively, landing it in the 98th percentile. It's performing even better this year: The fund is up 6.9%, beating all but 1% of its rivals. Welcome to TheStreet.com's Fund Manager Five Spot, where America's top mutual fund managers give their best stock picks and views on the market in a five-question format. What's your view of the economy?Travis: We are in a slow growth environment. We have a lot of leverage in the system, probably three and a half times our gross domestic product of $14 trillion. We are going to have to work it off the hard way, either by repudiating it or paying it down. And consumer sentiment is low because U-6 unemployment which also includes those who are discouraged and have stopped looking for work is in the midteens and it's just tough out there. People have 201(k)s 401(k)s that lost half their value , house values below their mortgages and we have a political system that's not really helping anybody, in my opinion. Why is Rent-A-Center a good stock for this environment?Travis: I love businesses that sell to people who need and use a product regularly. Today, there are over 3,000 Rent-A-Center stores. It's a billion-and-a-half market cap. It generates over $200 million in free cash flow. Their debt has been brought down in the last year and a half from over $900 million to over $600 million. They've just initiated a dividend. And they've got a buyback in place. Shares are in the low $20s, and they're probably worth $30 a share. They have about a 30% to 35% market share in the rent-to-own space. There's a moratorium on offshore drilling, but you are a big fan of Tidewater (TDW), which gets some of its business in the Gulf. Why do you want to own this stock considering all that's going on politically?Travis: The media hysteria around the Deepwater spill has created an opportunity for a long-term investor like Intrepid Capital. So Tidewater today in the low $40s trades at a discount to a hard book value of $47.5. The book value is understated because over the past five years they've booked gains of several hundred million dollars and they've sold boats. On a discounted cash flow basis and an asset valuation basis, the shares are worth in the mid-$50s. Their competitive weapon is they have no net debt. It has a $2.1 billion market cap with $300 million in cash and debt that offset each other. And they are very strategic as far as when they build and acquire boats. Most of their competitors are heavily leveraged in what can be a very cyclical business.
According to your economic outlook, Epiq, which does software for bankruptcies, seems ideal for your portfolio.Travis: It's a great stock for this environment. The unique part about this business, which we think is an unhidden catalyst, is that whether it's a Chapter 7 or Chapter 11 bankruptcy, Epiq is entitled to earn the interest income on those balances until they're disbursed. And with short rates below 1%, they're really not making much off those trustee-held balances. If we get back into a more normalized short-term rate environment, you'll see a higher share price. Today, the shares are in the mid-$12 range. It's probably worth $15 to $16. It has a nice balance sheet, and it's family-controlled and -owned. You're also a fan of Dover Motorsports (DVD).Travis: Dover today is around a $2 stock, but if you look at the enterprise value and comps on racetracks and evaluation, you can see a $4 share price. There was a meeting held between Bruton Smith and the France family with the owners of Dover not too long ago, where they tried to buy it. It's kind of a hidden gem. It has a small market cap. You need to be patient, but we can show you how you'll end up with a higher share price. But in the short run, NASCAR and the track attendance is obviously down across all those businesses. -- Reported by Gregg Greenberg in New York.