Take a peek at Frank Black’s picture. Note the stern look. The dark glasses. The prairie-flat line of his mouth cutting across his face. Pair his last name with “Tuesday,” and you’ve got the worst day in Wall Street history. It all adds up to a storm cloud on the horizon, ready to flood your world with bad tidings.
Now look at Frank Jolley. The mischievous grin. The happy-sounding surname. Unshielded eyes able to discern the silver lining around every thunder-head. He’s got sunshine on a cloudy day.
Appearances can deceive. Black is actually the one apt to look on the bright side. “I’m always enthusiastic about the market,” he says. “I’m particularly enthusiastic about the market now.” Listen to Jolley long enough, and it’s hard not to think that his first name is more indicative of his demeanor than his last.
But those who listened to either of them last year when they picked their top stocks for 2005 for Business North Carolina have good reason to see the world through Black’s eyes. He, Jolley and three other pros each chose three stocks they thought would yield the best average total return in the 52-week period that ended Oct. 14. Black’s mini-portfolio led the way with a 29.5% gain.
He picked Raleigh-based Closure Medical, which makes a liquid bandage and was bought eight months later by Johnson & Johnson for nearly double what it traded for at the start of the period. Closure proved more than a Band-Aid for Black - it was the cure for another pick. Greensboro-based RF Micro Devices bled his portfolio with a 17.7% price drop. Charlotte-based Duke Energy contributed a 12.8% return.
He hasn’t soured on RF Micro, which specializes in power amplifiers and Other products used in wireless communication. In fact, he picked it again for the year that started Oct. 28. After all, if at first you don’t succeed, try, try again. He figures RF Micro will rebound sooner or later - it sold for about $5 on Oct. 28 - and he thinks Wall Street often unfairly punishes good companies that report bad news. He likes to buy then and wait for the stock to cycle up - as long as he’s confident the company isn’t going out of business. “Based on everything I know, they’re not going out of business. Well, at $5, what are my odds of making money? Pretty good.”
He also likes Family Dollar Stores, the Matthews-based discount chain, which traded near its 52-week low at $21.51 on Oct. 28, and US LEC, a Charlotte-based phone company, which sold for just $1.94.
Jolley did almost as well as Black last year, posting a 21.8% overall return. None of his picks packed the punch of Closure, but they all wound up in the, um, black. Goodrich, a Charlotte-based maker of aerospace equipment, led the way with a 48.9% return. The rest of the panelists - Bobby Edgerton of Raleigh-based Capital Investment Counsel, Alex Miles of Charlotte-based WealthTrust Advisors and Doug Smith of Charlotte-based First Charter Investment Services - had a tough year. Edgerton, a former champion, finished with a 2.4% return. Miles barely broke even at 0.6%, and Smith’s stocks fell 9.5%.
This year, Jolley likes Charlotte-based food-related stocks - Coca-Cola Bottling Company Consolidated, snack maker Lance and Ruddick, a thread maker and owner of the Harris Teeter grocery chain. They’re defensive picks that pay dividends, aren’t affected much by macroeconomic swings and, except for Lance, were trading well below their 52-week highs.
He thought about picking Family Dollar. “But I’m pretty negative on the consumer. I think the consumer is going to have a tougher time. There’s too much retail square footage being added every year, and I think the consumer is going to be squeezed by the higher gas and heating bills this winter.”
The economy has been boosted, he says, by high real-estate prices, easy credit and low interest rates. People have borrowed against their homes to support their lifestyles, and spending has grown faster than incomes. With higher oil prices and interest rates and real-estate markets slowing, he thinks American consumers will start saving more. But he’s not totally down on the economy. “The last two years the markets have kind of muddled along, but the economy has been pretty good. I think next year the economy slows, but I don’t think the markets are going to be terrible. I don’t think they’re going to be great.”
Black - no surprise - is more sanguine. News, like most stocks, is cyclical, he says. "We've been hit by everything under the sun. You’ve got oil prices sky high, interest rates going up, and the market refuses to go down. It's time for the good news."
Editor’s note: Stock pickers in this section, their companies or their cients may have a position in the stocks they’ve chosen.
- Frank H. Black
- Southeast Investments N.A. Inc.
Family Dollar Stores Inc.
This Charlotte-based company operates more than 5,600 stores in 44 states. Organized in 1959, Family Dollar has demonstrated the ability to survive and thrive in good times and bad. The stock is cyclical and in the low $20s represents a good buy.
RF Micro Devices Inc.
This Greensboro-based manufacturer of radio-frequency integrated circuits designs and makes products used in cell phones, base stations, wireless local-area networks and other products. The trend to wireless Internet connections should benefit RFMD.
US LEC Corp.
Through its subsidiaries, this company provides integrated voice, data and Internet services to mid-size and large businesses in the eastern U.S. In October, it announced that it has more than 25,000 business-class customers. While speculative, the current low price and the stock¹s cyclical behavior suggest an opportunity for good price appreciation.
- Bobby Edgerton
- Capital Investment Counsel Inc.
Bank of America Corp.
This stock has backtracked to where the dividend approaches 5% and the price earnings ratio is around 10. This is a well-run bank that has the ability to assimilate the two big acquisitions of MBNA and FleetBoston Financial. Higher interest rates and the dilution brought about by acquisitions have depressed these shares. This company earned over $14 billion in 2004.
Family Dollar Stores Inc.
It¹s down from the low $40s to the $20s within the last couple years, which is reason enough to own this cash-rich, debt-free company. Higher gasoline prices cut into customer spending and nicked fiscal fourth-quarter earnings 30% to $29 million. I am a contrarian investor, and this fits my style. Ten years ago, this company earned $60 million and last year earned $260 million. I don¹t see this growth rate slowing.
This conservative company whose dividend is approaching 4% seems to be improving operations. Debt is coming down, and cash is increasing. It also has a very large block of Charlotte real estate where it manufactures snacks. It has closed many of its peripheral operations, which makes the company leaner, and has announced a repurchase plan of up to 1 million shares. I would like for Lance to become debt-free like the old days, but that is probably not going to happen.
- Frank G. Jolley
- Jolley Asset Management LLC
- Rocky Mount
Coca-Cola Bottling Co. Consolidated
Charlotte-based Coca-Cola Bottling Consolidated is the second-largest Coca-Cola bottler in the U.S. Earnings have been weak lately due to slower sales of carbonated beverages and higher costs, but the company generates significant cash flow, which is used for its healthy dividend yield of 2.2% as well as a deleveraging of the balance sheet. The Coca-Cola Co. owns approximately 30% of the company¹s shares.
Lance products include sandwich crackers, potato chips and cookies. After years of little growth, it acquired Cape Cod Potato Chip Co. (1999) and most recently Tom¹s Foods Inc. The Tom¹s acquisition, while increasing the risk profile, could increase sales as much as 30% over the coming year. The jump-start in revenue growth coupled with a dividend yield that¹s been running at about 3.6% make Lance look tasty for investors over the coming year.
Ruddick is a Charlotte-based holding company with two major businesses, groceries (Harris Teeter supermarkets) and thread manufacturing (American & Efird). Ruddick trades at 14 times estimated 2006 earnings of $1.60 per share and yields over 2%. Harris Teeter has been able to compete with Wal-Mart in the Southeast and is expanding in the Washington, D.C., metro area.
- Alexander B. Miles
- Managing director
- WealthTrust Advisors Inc.
Bank of America Corp.
One of my picks last year, it provided disappointing, bondlike returns - no appreciation with about a 4% dividend yield - during a 12-month period in which it continued to integrate its acquisition of FleetBoston Financial and announced a major deal, acquiring MBNA, the largest independent prime credit-card lender. Cost savings and increased cash flow relating to the MBNA acquisition, scheduled to close this month, should help profits and fund additional share repur-chases during the coming quarters, lifting the ceiling on the stock price. At barely 10 times 2006 earnings estimates, the stock has been trading at a 10%-to-15% discount to its peer group multiple of 12.5, while providing a dividend yield north of 4.5%.
Duke Energy Corp.
While Duke's revenue is dominated by its traditional, strong-cash-flow businesses, it continues to pursue energy initiatives that could gain traction over the coming years in nuclear power generation and liquefied natural gas. With a dividend yield that's been running over 4.75% and the company trading at the low end of its historical valuation range, Duke¹s shares are poised to appreciate in 2006 as pressure from its proposed acquisition of Cincinnati-based Cinergy eases.
This Greensboro-based company designs, makes and markets the apparel and equipment of its diverse portfolio of brands including Lee, Wrangler, Nautica, Tommy Hilfiger, The North Face and Jansport. While we recognize that the consumer is facing some pressure over the immediate term, with rising interest rates and home heating bills, we still like buying best-in-class companies when they trade at discounts to their peers. In addition, VF is successfully focusing its portfolio on higher-growth lifestyle brands and is expanding its share-repurchase program, while yielding the highest dividend per share and highest gross margins within its peer group
- Tom Moore
- Littlefield Capital Management LLC
This bank holding company employs a disciplined and efficient business model and has quietly grown the bank to more than $100 billion in assets. Its most recent results showed healthy loan growth and good credit quality. It has hedged its earnings against rising interest rates by growing its noninterest income to nearly 40% of total revenue. Having paused to integrate some purchases, the bank should resume its search for acquisition candidates in 2006.
Nucor is one of the nation¹s largest and most diversified steel producers. It has a long record of profitability and a strong balance sheet. It uses an innovative production process that makes it the low-cost domestic producer and has wisely hedged a portion of its natural-gas costs through the spring of 2007. The company is using its strong cash flow to repurchase its stock.
Reynolds American Inc.
The recent merger with Brown & Williamson is a sound strategic fit that gives Reynolds two strong brands in Camel and Kool. RAI may enhance its growth prospects by entering the smokeless tobacco market via acquisition. With cost savings from the merger on track, management is targeting a 75% dividend payout ratio, more than a 25% increase from the current ratio.