Target prices

After a year when only one was in the black, the stock portfolios picked by our
panel of pros all scored in 2003. Will their aim be true in ‘04?

Frank Jolley is trying to play it cool. He says he doesn’t take Business North Carolina’s annual stock-picking competition seriously. Yet last year’s champ, who’s president of Jolley Asset Management in Rocky Mount, knew before the official numbers were crunched this year that someone else had captured his crown.

He had set up an electronic spreadsheet with all the panelists’ picks and a data feed that continually updated the prices throughout the year. In the contest, each panelist picks three stocks he thinks will produce the biggest average percentage gain, adjusted for splits, over a set 52-week period.

Every three or four weeks, Jolley would check on his picks: Charlotte-based Duke Energy, Charlotte-based Wachovia and Hickory-based cable maker CommScope. Shortly after the contest’s conclusion, he was asking if his reign was over. It’s not that he has a compulsive desire to win, mind you. “I don’t want to go out and embarrass myself. I don’t care if I’m at the top, but I don’t really want to be near the bottom.”

That defensive mindset served him well a year ago, when he was the only panelist to eke out a positive return. And it worked pretty well during the 52-week period that ended Oct. 17 — when all the panelists finished with a positive return. Though Jolley didn’t win, he came close, finishing second behind George Shipp, chief investment officer of Richmond, Va.-based Scott & Stringfellow. Jolley had picked what he thought were depressed stocks with potential and was rewarded by CommScope, which gained 81%, and Wachovia, which increased 31%. He, like another panelist, lost his bet that Duke would pull out of its slump. It fell 2%.

Shipp, who won two years ago, rebounded from a dismal performance last year to take back his title. He did it with cheap, unglamorous stocks that investors learned to love during the 52-week period. High Point-based textile maker Culp nearly doubled in price while Raleigh-based trash hauler Waste Industries USA shot up 49%. His dark horse, Charlotte-based MedCath, took a beating and, despite a late rally, lost 15.8%.

This year, the rules change: The return, and best percentage gain, also will be adjusted for dividends. In 2004, Shipp likes Wilmington-based Cooperative Bankshares and a couple of life-science stocks — Burlington-based Laboratory Corporation of America Holdings and Wilmington-based Pharmaceutical Product Development. LabCorp runs diagnostic tests for hospitals and doctors’ offices. PPD shepherds drug candidates through the regulatory process.

Jolley likes PPD, too, along with Charlotte-based Coca-Cola Bottling Company Consolidated and Charlotte-based aeronautics-parts maker Goodrich. “We’ve had a huge rally off the bottom since March, and the smaller-cap names rallied much more than the larger-cap indexes. I was trying to come up with companies where the fundamentals were improving and that hadn’t participated in the rally. Coke Consolidated fell into that camp, and PPD fell into that camp.”

Goodrich has been caught in an industrywide downturn for much of the past two years. Commercial aviation is still down, Jolley says, but defense spending should cushion it. The stock of aircraft maker Boeing, which buys parts from Goodrich, rose about 50% between March, just before U.S. troops invaded Iraq, and October.

Despite uncertainty about how the United States will fare in Iraq, the general economic outlook is a far cry from a year ago, when fears of terrorist attacks and a looming war, along with investor discontent over a sluggish economy and corporate scandals, kept stock values in the tank and investor confidence in a bunker. “Anybody that uttered an optimistic sound last year was down 5% or 10% in a week,” Shipp says. “There are still plenty of things to worry about, but economically it looks like we’ve turned the corner.”

Frank H. Black
  • Bobby Edgerton
  • President
  • Capital Investment Counsel Inc.
  • Raleigh

Red Hat Inc.

This cash-rich company sells and services the Linux computer operating system. Red Hat is finally showing profit and carries a market cap north of $1 billion. Sales have increased from $2 million to more than $100 million within eight years.

Duke Energy Corp.

Duke strayed from its utility roots to become a globetrotting, energy-trading disaster. Under former CEO Rick Priory, its debt ballooned to $24 billion. And net debt rates moved from 38% to 67% in 10 years. But someone can turn this debt-ridden company around. Buy on the bad news.

Lance Inc.

If trends continue, Lance will be debt-free in four years. It assumed $71 million in debt in 1999 in its purchase of Cape Cod Potato Chips. Lance’s real estate in Charlotte, its distribution system, its cash flow and its dividends are worth more than $270 million — the company’s market value. In a decent economy, its cash flow is $50 million a year.

Bobby Edgerton
  • Frank G. Jolley
  • President
  • Jolley Asset Management LLC
  • Rocky Mount

Pharmaceutical Product Development Inc.

Pharmaceutical Product Development in Wilmington offers a broad range of research and consulting services for drug and life-science companies. PPD stock is down from its historic high of $38.40 in 2001. Earnings in 2004 are projected at $1.90 per share, up from a 2003 estimate of $1.60 per share. Revenue for 2004 is projected at approximately $800 million. The company’s balance sheet is extremely strong, with equity of $491 million versus long-term debt of only $6.5 million. At approximately 14 times next year’s earnings, this has excellent potential.

Coca-Cola Bottling Company Consolidated

Charlotte-based Coca-Cola Bottling Consolidated is the second-largest Coca-Cola bottler in the United States. Earnings for this bottler have suffered in 2003, largely due to poor weather in its operating areas. Its 2004 earnings are estimated to rebound to $2.85 per share, up 18% from the 2003 estimate. It generates significant levels of cash, which is used for its healthy dividend of 2.1% and deleveraging of the balance sheet. The Coca-Cola Co. owns about 37.5% of the company’s shares.

Goodrich Corp.

Goodrich supplies parts and services to the commercial-, regional-, business- and general-aviation markets. Its earnings peaked in 1999 at $3.24 per share. For 2004, earnings are expected at around $1.50. However, the stock should start to reflect a recovery in the aerospace markets over the coming year. In the meantime, the company pays a dividend of just over 3%, so investors get paid while waiting for better times.

Frank G. Jolley
  • George F. Shipp
  • Chief Investment Officer
  • Scott & Stringfellow Inc.
  • Virginia Beach, Va.

Laboratory Corporation of America Holdings Inc.

Laboratory Corporation is a steady, cash-generating health-care business with a potential long-term upside driven by new genetics research. LabCorp has opportunities to pick up market share from hospital-based labs or via small acquisitions, but the base business can grow sales volumes at mid-single digits. Since LabCorp trades at only 12 times 2004 earnings forecasts, there is valuation upside.

Pharmaceutical Product Development Inc.

Since its January 1996 initial public offering, the stock has delivered 11% compound returns, beating the S&P 500. Earnings in the past five years have grown even faster — more than 30% per year. Don’t expect that to continue now that PPD is a $650 million company, but the need for drug companies to bring new compounds to market has never been greater. PPD’s third quarter showed record new business wins, so expectations of profit gains above 15% in 2004 seem reasonable, as does the 15 price-earnings multiple on those forecasts.

Cooperative Bankshares Inc.

Cooperative Bankshares has 19 branches in an attractive part of the state — from Corolla to Wilmington. That helps fuel healthy earnings growth — 16% in the first half of 2003, following 60% gains in 2002 and 42% in 2001. Profitability ratios are above the state's community-bank averages. And asset quality, as measured by nonperforming loans, is superior. The dividend is modest, but at only a 10% payout ratio, there's room for an increase.

Alexander B. Miles
  • Doug Smith
  • Asst. Vice president-
  • financial consultant
  • First Charter Investment
  • Charlotte

Duke Energy Corp.

Duke’s new management supports the current dividend, which was better than 6% in late 2003. Recent tax changes should attract investors to companies with high dividend yields. Duke’s stock is trading well below its historic high and offers a favorable risk/ reward opportunity. Energy companies continue to suffer from a crisis in confidence, and Duke is no exception. Investors should be patient.

RF Micro Devices Inc.

RF Micro Devices manufactures semiconductor parts used in wireless-communication products such as cell phones and cable-television modems. Technology stocks had a mild recovery in 2003. RF Micro Devices stock was part of it, moving approximately 20%. Analysts expect a more than 20% increase in semiconductor sales in 2004. RF Micro Devices is positioned to capture its share of these increased sales.

Cree Inc.

Cree develops and makes semiconductor materials and devices based on silicon carbide, gallium nitride, silicon and related compounds. Its light-emitting diodes can be found in a variety of products, including automobile dashboards and traffic signals. It was Business North Carolina’s High-Tech Company of the Year in 2003 for “focusing on innovation, execution and the bottom line.” An intrafamily lawsuit was recently thrown out of court. With the legal issues resolved, the stock should trade more in line with its peer group.

Tom Moore
  • William W. Sutton II
  • Vice president
  • Deutsche Banc
  • Alex. Brown Inc.
  • Winston-Salem

BB&T Corp.

BB&T is quietly becoming one of the country’s best regional banks. It is the best acquirer in the banking industry. The First Virginia Bank acquisition, its largest yet, took it from fifth to second in that state. It’s now the 11th-largest bank in the country and 10th-largest insurance-agency network. BB&T shares have a dividend yield of 3.45%, and it has increased its dividend at a 16% rate for the last 10 years.

Krispy Kreme Doughnuts Inc.

There is controversy about this stock’s valuation, and the critics might be right — if Krispy Kreme never opened another store. It has 315. In 1992, Starbucks had 300 stores; today it has 7,225. Then, the critics were saying the same things about Starbucks’ valuation as they are saying now about Krispy Kreme’s. Since going public, Krispy Kreme has beaten Wall Street's earnings estimate every time.

Inspire Pharmaceuticals Inc.

The headlines about North Carolina’s troubled textile, furniture and tobacco industries have obscured the state’s thriving biotechnology industry. Chapel Hill-based Inspire develops drugs to treat respiratory and ophthalmic diseases. The FDA granted priority review to Diquafosol, its treatment for dry-eye disease. It has a number of other initiatives under development, as well.

 

 

Sweetening the deal

“I don’t want to go out and embarrass myself.” I know just how Frank Jolley feels. That was my goal when I became the first Business North Carolina editor to participate in our annual stock-picking competition. Sad to say, I did not meet my goal.

In a year when all of our panelists finished in the black, I landed 3.9% in the red. Two of my picks — Duke Energy and MedCath, both based in Charlotte — lost ground. My only winner: Winston-Salem-based R.J. Reynolds Tobacco Holdings. My only other consolation: This year’s top two panelists, Jolley and George Shipp, also bet wrong on Duke and MedCath, respectively.

Because thinking about my picks didn’t work very well, I’ve cast off the burdens of research and reason and sought refuge in randomness. I cut out our listing of the state’s 75 largest public companies from our August issue, taped it to a cubicle divider and started pitching darts at it. Three hits later — never mind how many throws that took — I had my picks. I’m not normally inclined to think that our little contest would merit divine intervention. But after looking at my three choices and their performances in the previous 52 weeks, it seemed as if an invisible hand guided my darts according to this precept: Buy high, kiss your fortune good-bye.

1st State Bancorp Inc.

At $25.77 on Oct. 17, Burlington-based 1st State was within $2 of its all-time high. It was also within $4 of its 52-week low. Consistency has been the theme here. The company went public in 1999 and hasn’t grown much since its IPO year: Assets are up just 5%, and annual earnings stayed between $3.3 million and $4.0 million in 2000, 2001 and 2002. A ray of hope: Third-quarter earnings per share were up 16% from 2002.

Old Dominion Freight Line Inc.

This is another stock not far from its all-time high, trading at $32.92 on Oct. 17. Old Dominion, a Thomasville-based trucking company, is coming off a year that will be tough to repeat. Net income jumped 55% in 2002, thanks partly to the collapse of a bigger competitor. Analysts were expecting EPS to slip from $2.14 in 2002 to about $1.71 in 2003.

Sonic Automotive Inc.

Charlotte-based Sonic Automotive has been trading well off its all-time high of $39.75, but at $26.55 on Oct. 17 it was just 8% below its 52-week high. Sonic Automotive owns 192 car dealerships and 42 collision-repair centers. EPS grew 29% in 2002 to $2.47. In 2003, analysts were expecting EPS to slip to about $2.21