Timing is everything when you’re buying and selling stocks. And autumn 2006, it turns out, was a bad time to fall in love with financial companies — at least it was for those who participate in Business North Carolina’s annual stock-picking contest. A subsequent slump in the housing market and concerns about loan losses, among other things, punished financial stocks this summer and into the fall. One of last year’s selections, mortgage insurer Triad Guaranty, lost more than 80% of its value during the 52 weeks that ended Oct. 26, plunging from more than $50 a share to less than $10. Three of the panel’s four worst-performing picks came from the financial sector.
Contestants who steered clear did better. Alex Miles, managing director of the Charlotte office of Nashville, Tenn.-based WealthTrust Advisors, posted the best three-stock average total return. A big gain by the young drug company Targacept made up for a less-spectacular increase by Progress Energy and a loss by yellow-pages publisher R.H. Donnelley.
Savvy investors will often buy a stock when it’s down, but several of our panelists say they expect continued problems for financial stocks, so this year they lean more toward the tangible — rocks, steel, cigarettes — though drug research and energy management also got nods. Some of our pros expect individual stocks to rebound from bad years, but the overall outlook for 2008 isn’t pretty. Some panelists think the country is heading for recession. Miles thinks it’s already there. On the fourth day after the contest started, the Dow Jones Industrial Average dropped more than 350 points.
As if our pickers didn’t have enough to worry about, we’ve sicced pro wrestler Ric Flair on them. As you’ll discover in this story, the Nature Boy came to BNC suited-up and settled-down but still ready to rumble.
2008 Stock Picks
- Bobby Edgerton
- Capital Investments Counsel Inc. —
With a price-earnings ratio of 13 and everyone down on housing-related stocks, this looks like a bargain. Cash flow is much larger than earnings. Last fiscal year, operating cash flow was $4.5 billion, compared with earnings of $3 billion. Management, led by Robert Niblock, is excellent.
Strong cash flow and a good dividend bode well for this traditionally dull stock. Lance has compressed its distribution system to save on fuel costs. Cash flow far exceeds earnings. The snack maker has a great product, and I like its private-label business with Wal-Mart and others. Rising commodity prices are a negative.
Krispy Kreme Doughnuts Inc.
This stock looks like a huge turnaround possibility. The biggest negative is getting lawsuits settled. The biggest positive is the product: great doughnuts. Chairman Jim Morgan turned around Interstate Securities in the early ’90s. If the balance sheet improves, five years out looks strong.
- Frank G. Jolley
- Jolley Asset Management LLC — Rocky Mount
Reynolds American Inc.
Reynolds is the second-largest producer of cigarettes in the U.S. Brands include Winston, Camel, Salem and Pall Mall. The stock is trading at less than 13 times the 2008 earnings estimate of $4.84 per share. The dividend yield of 5.5% should provide downside protection for the stock and excellent total-return potential. As of this writing, the price is down about 9% from its 52-week high of $67.60. This defensive pick should fare well in a slowing domestic economy.
The Pantry Inc.
The Pantry operates more than 1,600 convenience stores in 11 Southeastern states and sells a broad selection of merchandise. Gasoline contributes about 76% of sales. Its share price is down more than 63% from the high of more than $70 reached in early 2006 — largely because of weaker gasoline margins. The stock trades at less than 12 times projected 2008 earnings of $2.24 per share. A rebound in the shares is likely over the next year as the gasoline margins return to normal.
Progress Energy Inc.
This electric utility has operations in North Carolina, South Carolina and Florida. It has strengthened its balance sheet by selling off noncore businesses over the past year. Progress represents good total-return vehicle, with dividend yield of approximately 5.4%, and could become an acquisition target in a rapidly consolidating industry.
- Alexander B. Miles
- Managing director
- WealthTrust Advisors Inc. —
Martin Marietta Materials Inc.
Martin Marietta is a leading producer of construction aggregates and magnesia-based chemical products. It will benefit from the “think globally, act locally” mantra. Barriers to entry are significant, and the highly fragmented industry is in the midst of a consolidation phase that will provide a stock-price floor for the company while it weathers the residential-construction and credit challenges. Infrastructure spending on roads, ports and airports represent half the company’s revenue. About one-fifth comes from residential construction, which is likely to remain in recession for at least another 12 months.
PowerSecure International Inc.
This is a speculative, early-stage company in an emerging industry. PowerSecure and its peers help utilities and their customers manage peak electricity demand, conserve energy and design infrastructure for transmission and distribution. The company trades at a steep discount to its peers because of its reliance on just one customer — the supermarket chain Publix — for 50% of its 2006 revenue and recent high-cost executive departures. But if PowerSecure can increase strategic and operational transparency while tapping into the fragmented $300 billion electric-utility market, the shares could soar.
RF Micro Devices Inc.
RF Micro designs, manufactures and markets semiconductors, primarily for use in wireless handsets. The stock price has been under pressure for much of 2007 as margins have compressed and revenue from Motorola contracted. But its pending acquisition of Sirenza Micro Devices and uncertainty at competitor Freescale Semiconductor, provide opportunities for revenue diversification and market-share growth.
- William Mitchell
- Financial planner
- Southeast Investments NC Inc. —
products include rebar, billets, steel joists, joist girders, steel fasteners, metal building systems and light-gauge steel framing. Investors appear to be looking past the second half of 2007 to a strong first half of 2008. A higher pricing environment then, as well as the benefits from recent expansions, should allow Nucor to report earnings growth of 5% to 10% in 2008. Any increase in world steel prices will add to forward estimates.
Pharmaceutical Product Development Inc.
PPD is a global contract-research organization engaged in providing drug-discovery and -development services, post-approval expertise and compound partnering programs. Increasingly, biotechnology companies will be contracting out research and development, resulting in increased revenue and earnings for PPD. It offers growth at a reasonable price.
RF Micro Devices Inc.
This company designs and manufactures power amplifiers and other radio-frequency components for mobile communications. RF Micro anticipates increased demand for its industry-leading compound-semiconductor process as a result of favorable market trends in its primary markets. With the expansion of radio-frequency devices into consumer products, this top player in the industry offers investors a good opportunity to profit.
- John Woodard
- Woodard & Company Asset Management —
CommScope is a global leader in the design and manufacture of cable and fiber for aerospace, broadcast, cable, security, industrial, and other areas. Business fundamentals are strong, sales growth and net revenue has increased handsomely, and I expect that trend to continue. Management has a clear focus on future industry trends and opportunities but with a careful regard for operational efficiency and cost savings.
RF Micro Devices Inc.
RF Micro designs and manufactures radio-frequency integrated circuits for wireless-communication devices. This company has been out of favor for a while, but this might be a good time to buy. Better business for its customers should lead to an improving bottom line for RF Micro. Worldwide cell-phone sales should grow faster in 2008. New cell-phone features such as data processing and television, as well as its new gallium nitride-based products, should benefit the company in 2008.
This company makes products essential for industrial infrastructure such as thermal equipment, flow technology, test and measurement equipment, wet and dry cooling systems, heat exchangers, power transformers, pumps, metering systems, valves and boilers. The confidence of management at SPX is evidenced by their share repurchase programs. SPX is global and will benefit from a global economy that will remain strong through 2008.
- Ric Flair
- Ric Flair Finance LLC —
The Mooresville-based hardware chain. Its share price at the end of October was down about 10% from a year earlier, but Flair is sanguine about its prospects. “Lowe’s is in 49 of the 50 states and employs, I think, 210,000-plus people. And home improvement is what America is all about now. I think there are like 13 million people a week who go through Lowe’s nationally.”
He occasionally is among them, but he admits that his home-improvement projects so far have been limited to changing light bulbs, putting up Christmas lights and, um, planting flowers. Well, he is the Nature Boy.
The Concord-based — for now, at least — racetrack owner. Its shares also were down a bit from a year earlier, but Flair is confident in the abilities of CEO Bruton Smith. “He doesn’t do anything in a small way. I just don’t think it’s ever going to get smaller. I think it’s going to continue to grow.”
An Asheville-based grocery chain. Its stock surged past $40 earlier this year, but it ended the 52-week period where it began — about $28. After rattling off some stats, Flair gets to the heart of the matter. “They really appeal to the smaller towns. They’re more accessible to people.”