Hot stocks for 2011
Business North Carolina celebrates its 30th anniversary this year, and it’s been almost that long — since the January 1983 issue — that we’ve been polling the pros, asking some of the state’s top stock pickers to select the North Carolina companies whose shares they think will be the best performers in the year ahead.
Not only have participants had to go up against each other, but some years we’ve compared their choices with those by less traditional sources of financial insight, among them a trio of psychics, an astrologer and professional-wrestling legend Ric Flair. Other times we’ve resorted to chance: using a bingo machine, tossing darts at our annual ranking of public companies and even loosing the dogs on them (or rather, on canine treats scribed with stock symbols). Never have we repeated ourselves — well, we did do the dog bit twice, but it was with different dogs and different treats — until this, the return of Jackson Martin Kinney.
Rationale for the rematch: nepotism. He is, after all, eldest grandson of the magazine’s editor in chief and son of its publisher. Besides, he didn’t do all that well in his first appearance, back in 2005, when the average return of his picks was -23.7%. That might say more about his sweet tooth than savvy. Barely 2 years old, he had been surrounded by candy bearing stock symbols. Those pieces he plucked became his picks.
This time, he was better equipped. Arrayed against financial wizards, with all their research, insight and experience, he would wield a Magic 8 Ball — Mattel versus intellectual mettle. He would begin by drawing lots — each slip with a number corresponding to a company's rank on the Top 75 as it appeared in BNC’s August issue — then ask the ball if this should be one of his picks. But first he had to make a key decision. The venerable fortunetelling toy, which has been around since 1946, turns up 20 possible answers, 10 of them affirmative.
He settled on one investors yearn to hear: “You may rely on it.” The first three to receive that reply were: Carlisle Cos., a diversified manufacturing company based in Charlotte; Flanders Corp., a Washington maker of air-filtration products; and PowerSecure International Inc., a Wake Forest provider of energy and smart-grid services. That done, the editors picked up the ball, getting its opinion on each of the panelists’ predictions.
2011 Stock Picks
- Frank G. Jolley
- Jolley Asset Management LLC
- Rocky Mount
Lowe’s is the second-largest home-improvement retailer in the world and operates 1,710 stores in the U.S. and Canada. In mid-November, its shares were more than 39% below highs of more than $35 reached in early 2007 — largely because of sluggish economic conditions and a weak home-improvement market. A rebound in the shares is likely over the next year as it becomes more evident that housing has likely hit bottom.
Martin Marietta Materials Inc.
The company is the second-largest producer of aggregates for the construction industry. Its results have been hit recently by weak pricing and a weak construction market. The stock is down approximately 49% from the 2007 high of about $166 per share. I expect a rebound in 2011 as previously allotted federal stimulus money is put to work in key regions. The company pays a 1.9% dividend.
Economic weakness resulted in the steel maker losing money in 2009 and a tepid recovery in 2010. However, it is well-positioned with a strong balance sheet and low cost structure. While challenges remain, I expect an earnings recovery in 2011. The stock is down approximately 50% from its 1998 high of around $75. The company pays a 3.8% dividend.
- Bobby Edgerton
- Capital Investment Counsel Inc.
Insteel Industries Inc.
Insteel sports a clean balance sheet and a great reputation. Its main product is steel wire used to reinforce concrete products. The balance sheet shows $44 million cash and no debt. Spreads between wire-rod costs and selling prices have narrowed, hurting profits, but that should change over time. Pricing pressure is tough now, but this company, with its strong balance sheet, is very resilient.
This company carries a market value of over $30 billion, and I think its land, buildings and equipment are worth that much. Lowe’s owns 88% of its locations. Cash is 50% of debt, and virtually all of its debt is fixed. The stock is selling at the same price as 2002. Company cash flow should be north of $4 billion this fiscal year. Its technology and supply chain are superior to archrival Home Depot.
RF Micro Devices Inc.
This well-run company has cleaned up its balance sheet recently, paying debt down by $400 million. Coupons on its debt are less than 1%. Cash flow last year was $150 million. Its radio-frequency products are found in roughly half of all cell phones. Principal OEM customers Nokia, LG, Samsung and Motorola should do fine long term. The power-saving gallium-nitride process should ensure strong growth.
- John Woodard
- Woodard & Company Asset Management Group Inc.
Family Dollar Stores Inc.
Discount retailers such as Family Dollar typically thrive in environments where the economy is difficult and consumers are cautious. Bottom-line growth was 30% year over year in the fourth quarter of the fiscal year ended August 28. Management has implemented cost-containment measures and stock repurchases indicating confidence in the company. The stock appears poised for growth with the economic uncertainty ahead.
Laboratory Corp. of America Holdings
One of the nation’s largest independent clinical-laboratory companies, LabCorp has a strong balance sheet and good cash position. It announced a $250 million stock buyback in August. The difficult economy and uncertainty in the health-care sector should accrue benefits, because LabCorp is a low-cost lab service provider. It also is among the few that can screen for hepatitis C.
Duke Energy Corp.
Duke is a holding company for utilities that provide electricity to 4 million customers and natural gas to 500,000. Its nearly 6% dividend should generate handsome income and support the stock price if markets turn down again. Duke is building gas- and coal-fired capacity to serve the Carolinas, as well as a coal-gasification plant in Indiana. It is well-managed, and earnings should increase.
- Certified financial planner
- Southeast Investments NC Inc.
Family Dollar Stores Inc.
The company operates more than 6,700 discount stores in 44 states and is well-positioned to profit from a slow-growth economy of 1% to 2% in 2011. With an expected three-year earnings growth rate of 20% and a dividend yield of 1.25%, Family Dollar offers stable growth in uncertain times. The shares are trading about 16 times forward earnings, which allows for price-earnings-ratio expansion in 2011.
Polypore International Inc.
Polypore develops membranes used in separation and filtration processes in the energy and health-care industries. It's an excellent play on the ever-expanding use of lithium-battery technology in consumer electronics and electric vehicles. Polypore sports a three-year EPS growth rate of 56% and a price-earnings ratio in the mid 20s. Shares still offer growth at a reasonable price.
Salix Pharmaceuticals Ltd.
This company develops drugs for the treatment of gastrointestinal disease. While not yet GAAP-profitable, it has been reducing losses and increasing revenue by as much as 23%. Growth has been attributable to Xifaxan, the company's main drug. The Food and Drug Administration is expected to rule on an expansion of Xifaxan use for irritable bowel syndrome in 2011.
- Larry Carroll
- Carroll Financial Associates Inc..
Park Sterling Bank
This was one of my picks last year and, in the interest of full disclosure, I serve on the company’s board. In 2010, the bank raised $150 million of new capital with a stock offering at $6.50 per share. With the price in mid-November under $6 per share, the stock trades only a little above the value of cash on the balance sheet. I believe Park Sterling is one of the few banks that has the capital to grow in this difficult economic environment.
Peoples Bancorp of North Carolina Inc.
Another one of my picks from last year, Peoples is a 98-year-old institution with a conservative approach to banking. While this is not a growth story, Peoples continues to trade well below my estimate of its value and well below the tangible book value. Peoples should weather this storm, and at around $5 per share investors are getting a well-run company at a great price.
Most of us are familiar with Lowe’s, the Mooresville-based home-improvement retailer. It has been hurt by the recent economic downturn, but the company has the scale and efficiency to weather the difficulties. Consumers are still spending money on home improvement and maintenance, and Lowe’s stores are starting to see renewed sales growth.