About 175 U.S. stocks hit new highs in trading on the New York Stock Exchange or Nasdaq last Friday, while most of the rest of the market went poof -- evidence that even in a bear market, some stocks stay on the bull.
Most of the high notes belong to small- to mid-sized companies that are still relatively cheap and provide something their slip-sliding peers don't, such as dividend income or realistic earnings visibility. A plurality were deadly dull denizens of the least fascinating corner of the financial services sector: 32 savings and loans, 22 real-estate investment trusts , 30 regional banks and five property managers. If you've been staying away from these names because they're boring, you might be missing some of the perkiest opportunities around. I screened the new-high list for stocks that are ranked well by our new StockScouter rating system and found three that looked as if they've still got oomph, even if they won't make good party talk. price-to-sales ratio of 0.7 -- as well as consistently profitable with improving margins. Got pencils? These guys sell more than 80,000 different products to 18,000 schools -- and are just getting the hang of integrating their purchase of their largest competitor, J.L. Hammett. Chief Executive Dan Spalding told me Thursday that the ABCs of success for his Wisconsin company are its "stable market that is driven by the positive demographics of education." He notes that 500,000 more kids will attend school in the fall than last year, and you can't beat selling into a market in which the government demands participation for 12 years. (Now that's what I call recession-proof.) Plus, some states are giving his business a hand by extending kindergarten to a full day by law, or by following Georgia with the requirement that all children attend pre-K classes. Although his firm has seven times the revenue of its next-largest competitor, Spalding says he still has only 13% market share. He aims to grow that to 20% to 25% -- a goal that would take the firm to something like $1.4 billion in three years from its estimated $802 million in revenue for fiscal 2002. What could go wrong? This is a highly seasonal business in which you've got to have the capacity to supply millions of items in a very short period of time, essentially from June to September. School Specialty has 2.4 million square feet of warehousing in 10 locations across the U.S., so execution risk is an annual concern. Financially speaking, Goldman Sachs analyst Matthew J. Fassler said in a report Wednesday that the keys for his "outperform" rating are the company's ability to generate gross-margin expansion through selective price increases, as well as through the elimination of duplicative overhead from its many acquisitions. StockScouter warns that the company's insider picture is clouded by some high-level sales at the end of July, and a price-to-earnings ratio that's a tad high. Still, investors looking for shares of proven companies in a stable, growing business not tied to the economy could do a lot worse than printing S-C-H-S in their primers if the price declines to the $25-$26 area. Federal Reserve's campaign to cut interest rates put them in a sweet spot: They borrow money increasingly cheaply, but loan it out at relatively high fixed rates. They also use their debt assets as collateral to borrow and lend out even more money. While some REITs in this business borrow to the hilt, American Mortgage is pretty conservative, with a leverage ratio of just 1.9, compared with Anthracite at 5.9 and Annaly at 14. The way it works is illustrative of the world economic system: The world's greatest savers in Japan get about 1% or less from their money in passbook accounts at banks aligned with Nomura Securities ( NRSCY). Nomura lends that money to American Mortgage at about 4.2%; American Mortgage turns around and lends it to Ginnie Mae and others at north of 8% for commercial and residential mortgages. Chief Financial Officer Michael Wirth told me Friday that he then leverages that up to the point where he's earning about 12% on his money. Most of that is returned under REIT rules to shareholders, resulting in your 11.2% yield. Don't expect another 60% price appreciation over the next 12 months, but even a 10% rise in price added to an 11% yield offers the potential for a nice 20% return. StockScouter likes all the players in this business, giving American Mortgage, Anthracite and Annaly solid 10s for the past six months straight. But beware. Wirth himself cautions that "the real-estate cycle hasn't gone away" and the recent powerful move in the mortgage business won't last forever. The last time REITs got clobbered was 1998; Anthracite lost 73% of its value from March to October that year, while Annaly lost about 30%. (They both recovered smartly after that.) here to write me what you think of the prospects for these stocks, and I'll publish your remarks in coming weeks.