After Rocky Quarter, Pickers Bet on Consumers
Just in time for Halloween, the
third-quarter stock-picking session was decidedly scary.
The six stocks selected by Southeastern analysts and money managers for The
Wall Street Journal fell 16% on average.
Of course, the entire Street was buffeted by fears of a slowing economy. By
comparison, the Standard & Poor's 500 stock-index fell 6%. Still, the latest
period was quite a comedown from a second quarter in which the pickers
collectively managed a return of 21%.
It's been a tough year for the stock pickers: They have produced negative
returns in two of the three quarters, including an average loss of 16% in the
The latest quarter's winning pick came from the retail sector. Cato, a
Charlotte women's clothing chain, surged 21% to $14.094. The stock was picked
by John Diffendal and Eliot Laurence at Nashville investment firm J.C.
With a dicey fourth quarter ahead, nine analysts and money managers bravely
stepped forward to make their choices, which are heavily weighted toward the
consumer sector. (Note: All prices and price/earnings ratios are as of
Monday's market closing.)
Here's a look:
President, Jolley Asset Management
Rocky Mount, N.C.
The textile industry these days isn't an attention grabber, and that could be
hurting shares of Ruddick, which trades at $15.875.
But Mr. Jolley says it's a mistake to focus solely on Ruddick's textile
business. The Charlotte company does own American & Efird, a thread-maker,
which contributes 14% of Ruddick's annual revenue.
"The textile industry is in such a funk that nobody wants to look at anything
that is textile related," Mr. Jolley says.
But the real story, Mr. Jolley says, is Ruddick's other asset: 143 Harris
Teeter grocery stores known for their upscale offerings such as hundreds of
wine selections. Harris Teeter contributes about 86% of Ruddick's annual sales
Mr. Jolley , who owns 20,475 Ruddick shares, says Harris Teeter itself is
worth $22 to $26 if the grocery chain is sold or spun off to shareholders.
Aside from that hidden value, Mr. Jolley says Ruddick, which trades at 15
times earnings expectations of $1.06 for 1999, is the perfect way to play a
"People will continue to buy groceries," Mr. Jolley says.
His price target for the stock: $22 to $24 in the next 12 months.
Director of equity research, Regions Funds, Birmingham, Ala.
Can Coca-Cola fall much lower?
The Atlanta beverage giant this year has fallen 29% to the $47 range, hurt by
a contaminated-bottle scare in Belgium and a slowdown in the Asian economy.
And the company already has guided analysts lower in their expectations for
the third quarter. Coca-Cola, which is trading at 37 times 1999 earnings
expectations, is expected to report third-quarter earnings-per-share of 32
But Messrs. Savage and Phebus say that the
events in Belgium were an anomaly, and that the Asian economy, especially in
Japan, is improving.
"I have a feeling the worst is behind them," Mr. Phebus says. "They had a lot
happen to them outside their control."
Regions Funds owns about 7.9 million shares of the stock.
"It's cheap, and it is something we are buying," says Mr. Phebus, who sees the
stock hitting $65 in the next 12 to 18 months.
Mr. Phebus also sees domestic unit-case volume, expected to increase 2% to 3%
in the third quarter, as fully recovering to around 4% growth by the first
half of next year. On the international side, sales in Japan, may be seeing a
"You're seeing a recovery going on," Mr. Phebus says.
President, StockCar Stocks Index Fund, Charlotte, N.C.
In just a year, Daytona Beach-based International Speedway has doubled to $52.
And the operator of 10 super-speedway auto-racing tracks currently trades at
43 times earnings estimates of $1.20 a share for 2000, compared with its peer
group, which has a multiple of 26.
So is this engine too hot to touch?
Not in Mr. Allen's view. The portfolio manager, who owns 5,600 shares of the
stock in his index fund, sees the stock surging even higher, thanks to a new
television deal that the National Association for Stock Car Auto Racing is
"The big winner for the speedway stocks in the fourth quarter could be the
announcement of a new Nascar-negotiated television package," Mr. Allen says.
With its acquisition earlier this year of Detroit-based Penske Motorsports,
International Speedway owns 10 major Nascar tracks, giving it the pole
position to claim revenue from the TV pact.
Analyst, Wachovia Securities, Charlotte, N.C.
Piedmont Natural Gas, the second-largest natural-gas distributor in the
Southeast, is trading at $31.25, down 13% from early in 1999 when takeover
speculation drove the stock higher.
But speculation has subsided, and Mr. Lucas says that now is the right time to
purchase shares. He recently upgraded the stock to a "buy" from "neutral,"
citing the depressed share price.
It looks inexpensive compared with its peers. The Charlotte company, whose
pipelines run through Nashville and the Interstate-85 corridor in the
Carolinas, trades at 16 times 1999 earnings expectations of $1.88 a share,
compared with a peer multiple of 18.
"We think the valuation is attractive," Mr. Lucas says. He also likes the rate
at which the company's customers are increasing. Piedmont currently has
625,000 customers and is gaining new ones at a 5.6% annual clip, compared with
an industry national average of 1.6%.
While Mr. Lucas doesn't discount a purchase of the company down the road, the
stock, he says, is attractive "on pure fundamentals."
His price target: $37.
Analyst, SunTrust Equitable Securities, Nashville
CBRL Group, owner of the Cracker Barrel
restaurant chain famous for its road-side Southern fare, has seen its stock
stuck in red-eye gravy. It trades at $15.188, nearly a third off its 52-week
high of $28.313, which it hit about a year ago.
Central to the stock drop has been a loss in customer traffic, a result of
higher prices and long waits for service.
"Customers found that they were waiting too long to get too little," Mr.
Derrington says. But Mr. Derrington argues that the Lebanon, Tenn., company
finally is taking the right steps to fix the problems. It has reduced turnover
of experienced managers and it has cut menu prices, reversing a 4.5% increase
that went into effect in May 1998.
Citing those changes, Mr. Derrington last month upgraded the stock to "buy"
from "long-term attractive." He sees the stock, which trades at 12 times 2000
earnings estimates of $1.25, hitting $18 in the next 12 to 18 months.
Still, Mr. Derrington cautions that the fixes won't immediately impact
"We are in the early phase of the
turnaround," he says.
Research Director, J.C. Bradford & Co., Nashville
The beleaguered hospital chain Columbia/HCA may be worth a new look.
The Nashville company, of course, has been in the spotlight for the past three
years because of a continuing federal probe into the company's Medicare-filing
practices. Under former Chief Executive Richard Scott, Columbia/HCA' s stock
tumbled 43% in the past three years to its current range of $21.50.
Since Mr. Scott was forced to resign in July 1997, however, Chairman Thomas
Frist has sold off hospitals, improved relations with physicians and
instituted a one-million-share buyback. (Mr. Morgan points out that Mr. Frist
has bought 822,208 shares himself in the $22.44 range.)
Mr. Morgan cheers Mr. Frist's move to reduce the hospitals Columbia/HCA owns
to 200, down from the 350 peak it hit in 1995. Now, says Mr. Morgan, the
company can focus on markets where it is the dominant player, such as
Richmond, Va., Denver and Dallas.
To be sure, the federal probe lingers, but Mr. Morgan argues that that is
built into the stock price.
"Columbia/HCA is a solid proxy for a turnaround of the health-care sector,
especially the hospital sector," Mr. Morgan says. He sees the stock, currently
trading at 15 times 2000 earnings estimates, hitting $27 to $28 within 12 to
Director of Equity Research
Raymond James & Associates, St. Petersburg
Royal Caribbean might be a risky play should the economy sink. After all, not
many consumers are going to book a ritzy cruise if interest rates keep rising.
Mr. Henwood says fears of a slowing economy do cast a shadow over the $45.50
But he points out that the Miami-based cruise-line operator is cheap when
compared with industry leader Carnival Cruise Lines, which also is based in
Miami. At its current price, Royal Caribbean trades at 19 times 2000 earnings
expectations of $2.41, which would be a 18% increase from 1999 projections.
And the stock is trading at a 25% discount to Carnival, which trades at 24
times 2000 estimates.
Mr. Henwood also is a fan of Royal Caribbean's plans to boost capacity. The
company has ordered eight new ships through 2003.
"They are going to have the most dramatic growth in terms of capacity," says
Mr. Henwood, who sees the stock touching $60 within 12 months.
How the Third-Quarter Picks Did
Stock Picker (Firm) Stock (symbol) Close Change
John Diffendal/Eliot Laurence (J.C. Bradford)
Cato (CACOA) 14.094 +21%
Gary Tapp/Dan Wewer (Robinson-Humphrey)
Home Depot (HD) 68.625 +6
Gene Hensler/Theodore Parrish/
Walter Stackow (Henssler Equity Fund)
Equifax (EFX) 28.125 -21
Tim McIntosh (Strategic Investment Partners)
Windmere-Durable Holdings (WND) 12.063 -23
John White/Kay Norwood (Wachovia Securities)
Mohawk (MHK) 19.938 -34
Craig Weichmann (Morgan Keegan)
Saks (SKS) 15.188 -47
Average Percent Change of Picks:
-16% Loss in S&P 500-Stock Index: -6%
Stock Pickers' Fourth-Quarter Plays
Stock Picker Stock (Symbol) Close
James Savage / Michael Phebus
Coca-Cola (KO) 47.563
John Allen Intl. Speedway (ISCA) 52.00
Gregg Lucas Piedmont Natural Gas (PNY) 31.25
Robert Derrington CBRL Group (CBRL) 15.188
John Diffendal / Frank Morgan
Columbia/HCA (Col) 21.50
David Henwood Royal Carribbean (RCL) 45.50
Frank Jolley Ruddick (RDK) 15.875