A year ago, Frank Black gave this characteristically optimistic outlook on the economy: “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.” The CEO of Charlotte-based Southeast Investments N.C. was right. “No. 1, [the Fed] quit raising interest rates. No. 2, oil prices finally peaked and are coming down.”And the prices of many stocks of companies based in North Carolina have been rising, good news for all participants in Business North Carolina’s annual stock-picking contest — but especially for Black. His faith in a struggling telecom plus solid performances by his other picks won the contest for the second straight year. And this time, it wasn’t even close.
Each panelist selected three Tar Heel stocks they thought would yield the best average total return during the 52-week period that ended Oct. 27. None of the picks lost money, and only one underperformed the S&P 500. Black’s choices, led by Charlotte-based telephone company US LEC, averaged a whopping 144.4% — nearly equaling the gains of his four competitors combined. Bobby Edgerton, president of Raleigh-based Capital Investment Counsel and 2004’s champ, wound up in last place with 28.8%. Some years, that would be good enough for first or second.
The market was so bullish for so many stocks you might even have done well with random choices. Charlotte magician Eric Treese did. Last year, BNC had him pull three cards from a deck marked with ticker symbols of the state’s largest public companies. That trick produced a return of 72.8% — better than all the panelists but Black.
It will be a tough act to follow, but our stock pickers are game. In fact, Black has a card up his sleeve. He chose US LEC again, but it plans to merge with Fairport, N.Y.-based Paetec Communications, a private phone company. The deal was expected to close in the fourth quarter and should allow the combined company to cut costs. (His return will be based on that US LEC’s investors pick up in the new stock.) He also picked RF Micro Devices for the third straight year and Krispy Kreme Doughnuts, a takeover candidate. RF Micro rose nearly 44% last year, and Krispy Kreme’s price more than doubled.
Two stocks were picked by more than one panelist — hardware retailer Lowe’s and Progress Energy, which has been selling assets, reducing debt and focusing on power generation and distribution. “Progress Energy is coming out of a significant transition that I think is going to give them a catalyst for accelerated growth,” says Alex Miles, managing director of Charlotte-based WealthTrust Advisors. Tom Moore, principal at Winston-Salem-based Littlefield Capital Management and runner-up to Black, chose Lowe’s despite a slowdown in the housing market. In late October, Lowe’s was trading at about $30, just 2% above its price a year before, adjusted for splits and dividends. Moore says it’s an opportunity to buy Lowe’s on the cheap.
What goes up must go down. Even Black admits the market magic can’t last, but he doesn’t think it will run out in 2007. “Then the question is the next year. Ask me next year.”
Editor’s note: Stock pickers in this section, their companies or their clients may have a position in the stocks they’ve chosen.
- Frank H. Black
- Southeast Investments N.A. Inc.
Krispy Kreme Doughnuts Inc.
Once a Wall Street darling, after hitting a high of about $50 a share in 2003 Wins-ton-Salem-based Krispy Kreme has fallen out of favor, giving bargain hunters a chance to pick up this doughnut maker cheaply. Krispy Kreme is a great candidate for a turnaround and a logical take-over candidate.
RF Micro Devices Inc.
This Greensboro-based manufacturer of radio-frequency integrated circuits designs and makes products used in cell phones and other products. The trend toward wireless Internet connections should benefit RF Micro. After a nice gain in 2006, the stock is poised for further gains in 2007.
US LEC Corp.
Charlotte-based US LEC provides voice, data and Internet services to midsize and large businesses in the eastern U.S. Its merger into Paetec Communications should produce cost savings. They’re similar businesses and serve the same kinds of clients.
- Bobby Edgerton
- Capital Investment Counsel Inc.
This semiconductor company, which specializes in light-emitting devices, has been struggling but still produced $150 million cash in a slow year. Cree’s balance sheet remains pristine, with cash escalating from $150 million to $250 million in the last two years. Good new products and a new CFO bode well.
Duke Energy Corp.
This formerly great utility continues to rebuild, a process started by Paul Anderson and continued by new CEO James Rogers. They’ve slashed debt from $24 billion to $16 billion. This slimmed-down company is pushing $5 billion in cash flow for this year. After the spinoff of Duke’s gas subsidiary, stockholders will have shares in two companies. Duke’s 4.4% dividend also is a point in its favor.
Charlotte-based Ruddick owns Harris Teeter grocery stores and a thread maker, American & Efird. I like Harris Teeter’s dominant market share in the upper-end grocery market. Its locations in upscale neighborhoods mean Wal-Mart isn’t a threat. Ruddick produces cash flow of $150 million-plus on a market cap of $1.2 billion, and dividends have increased 50% over 10 years. Plans to expand in Northern Virginia and Washington, D.C., will only strengthen it. The sewing operation could be sold.
- Frank G. Jolley
- Jolley Asset Management LLC
- Rocky Mount
This Winston-Salem-based apparel company produces and markets brands such as Hanes, Champion and Playtex. It was spun off from Chicago-based Sara Lee in September and has sales of about $4.5 billion. It plans to boost profitability by moving manufacturing overseas. The stock is trading at about 13 times projected 2007 earnings.
Progress Energy Inc.
Raleigh-based Progress is an electric utility with operations in North Carolina, South Carolina and Florida. It has strengthened its balance sheet by selling $1.7 billion in non-regulated businesses in the past year. The company represents a good total-return vehicle with a dividend yield of just below 5.4%. Progress could become an acquisition target in a rapidly consolidating industry.
Speedway Motorsports Inc.
This Concord-based company owns and operates speedways in or near Charlotte, Bristol, Tenn., Fort Worth, Texas, Las Vegas, and Sonoma, Calif. Despite growth in revenue and earnings per share, its shares remain well below their 1999 high of $47.50, and the stock is trading at only 14 times projected 2006 earnings. In 2005, NASCAR announced an eight-year, $4.48 billion television deal that will pay 40% more than the current contract. Speedway’s revenue from the new agreement will be lower next year than under the current deal, but by the middle of 2007 the market will begin to look for a earnings and revenue rebound in 2008.
- Alexander B. Miles
- Managing director
- WealthTrust Advisors Inc.
Progress Energy Inc.
Progress’ performance has lagged its peer group throughout the past year during a period of company restructuring but offers investors a dividend yield of more than 5%. The company has shifted from a diversified to regulated regional utility with core operations in North Carolina and Florida. With the market having digested the company’s phaseout of synthetic fuels and other business, the shares should benefit from reduced earnings volatility and reflect some expansion to its price-earnings multiple.
R.H. Donnelley Corp.
The company is the third-largest publisher of directories in the United States, with annual revenue of nearly $3 billion. Re- cent weak revenue trends have pushed the shares down for the last year, providing an excellent entry point for a steady cash-flow business trading at a 50% discount to peers. Its ongoing expansion into the online search market provides additional growth potential.
The company is developing a new class of drugs to treat disorders of the central nervous system by targeting receptors in the brain. As an early-stage biotechnology company, it’s risky until the drug pipeline yields marketable products. However, with Targacept’s potentially first-in-class drug for cognitive disorders such as Alzheimer’s disease, an exclusive global licensing and research collaboration agreement with AstraZeneca in place and a strong management team, the company is poised to grow significantly.
- Tom Moore
- Littlefield Capital Management LLC
This company’s capable management has consistently generated strong profits and returns on capital and is using the company’s ample free cash flow to repurchase its stock. Continued store expansion domestically and in Canada should keep earnings and market share growing. Lowe’s sells for 13.5 times estimated 2007 earnings, well below its historical average.
Southern Community Financial Corp.
This 10-year-old Winston-Salem-based bank has the third-largest deposit base in Forsyth County and is expanding across the state. It has $1.4 billion in assets and has enjoyed strong loan and deposit growth. Although earnings have been impacted recently by expansion-related expenses, long-term prospects appear promising. Selling for just 1.3 times book value, it could be an attractive acquisition candidate for an out-of-state bank.
Triad Guaranty Inc.
This Winston-Salem-based mortgage insurer should benefit from slower appreciation in home prices. Higher loan-to-value ratios on mortgages create more demand for mortgage insurance, and Triad is poised to take advantage with its innovative underwriting practices. It continues to gain market share from its larger rivals and will begin operations in Canada in 2007. It has strong profit margins and a shareholder-friendly management team that, along with directors, owns 7% of the firm's shares. Triad sells for nine times estimated 2007 earnings.
- John Woodard
- Woodard & Company Asset Management Group Inc.
Bank of the Carolinas Corp.
The Piedmont Triad region is growing, particularly in the western portion, which should impact this bank favorably. Trading at more than 20 times earnings, this bank should be a good stock for long-term opportunity. The impressive growth of earnings may moderate as the bank matures, but the 50% increase in the second quarter of 2006 over the second quarter of ’05 was handsome.
This company is a leading maker of cable and fiber for video and data communications. Since 2004, sales have been strong across all three of its units. CommScope seems able to pass through higher raw-material costs and benefit. Now that material prices are falling, it should benefit further. It appears to be a well-managed company when you consider its recovery from early in the decade. It should execute well in this improved economy.
Ride by a Lowe’s store, then go by their competitors’, and you will find the Lowe’s parking lot full, while other hardware stores’ lots usually are about half full. Its leadership is well-known for its careful use of shareholder money. Earnings have grown every year for 10 years. Estimating conservatively, solid earnings growth should continue through the decade, despite rising interest rates.