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Bulls Ayes

By Frank Maley

Here's how our stock pickers hope to beef up their portfolios in '05.

About 29% of Americans regularly get their news from the Internet, according to The Pew Research Center in Washington, D.C. Thatís up from 23% in 2000. Count Bobby Edgerton among the other 71%. In fact, he still doesnít use a computer. One of his employees at Raleigh-based Capital Investment Counsel handles his e-mail. Likewise, he isnít one to blindly follow financial fads. When good companies go bad in the eyes of investors and their stock prices drop, heís more likely to buy. ìBad news is good news for a guy like me.î

He liked Charlotte-based Duke Energy in late 2003, when it suffered from heavy debt, was well on its way to losing $1 billion for the year and was trading at about $17 a share. Duke rebounded, and ó along with Charlotte-based snack maker Lance, another depressed stock in 2003 ó it helped him win Business North Carolinaís annual stock-picking competition. Each member of the panel ó all of them professional investors ó picks three North Carolina stocks he thinks will produce the biggest average total return over a set 52-week period. Edgerton managed a 31.7% return for the period that ended Oct. 15.

All but one of last yearís panelists managed positive returns despite a sluggish market for stocks. The Dow Jones industrial average gained just 2.2% during the period. The S&P 500 did little better, returning 6.6%.

Edgerton picked Duke again this year, banking on its turnaround under CEO Paul Anderson and its $1.10 annual dividend. Another pick, Greensboro-based semiconductor maker RF Micro Devices pays no dividend but closed Oct. 15 at just $6.67, leaving plenty of room for improvement. His third pick seems to run counter to his bargain-hunting instincts. Greensboro-based Jefferson-Pilot is the priciest of all the panelistsí picks at $48.37 on Oct. 15, but the insurance companyís price-earnings ratio of about 13, one of the lowest in the state, made it seem cheaper. ìBusiness is good and steady but maybe not up to Wall Streetís expectations,î Edgerton says.

Duke and RF Micro were popular picks this year, also finding favor with Frank Black of Charlotte-based Southeast Investments and Doug Smith of Charlotte-based First Charter Investment Services. Several panelists are optimistic about the prospect of increased corporate earnings in 2004 and the buildup of cash reserves. In November, Barronís reported that the cash balance of companies on the S&P 500 was $590 billion, up from $261 billion five years earlier. Many companies are coming off years of fiscal belt-tightening, and some might have been delaying spending until after the presidential election. ìCorporations have a lot of flexibility to buy shares, to do mergers and acquisitions and to increase dividends,î says Frank Jolley of Rocky Mount-based Jolley Asset Management.

Thatís the bullish part of his outlook for 2005. Jolley worries that some of the economic stimuli present in the past two years ó lowered interest rates, tax cuts in 2003 and defense spending caused by conflict in Iraq ó will have less impact now. Government spending could be curbed, too. Unless conditions change, the Congressional Budget Office expects the nationís budget deficit to hit $2.3 trillion by 2014. Presidents often impose necessary but politically unpopular fiscal discipline in the first year of a new term, Jolley says. ìI think earnings will be OK. I donít think theyíre going to be fantastic.î

 

3 2005 Stock Picks

Frank H. Black
CEO
Southeast Investments N.A. Inc., Charlotte

3 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, cable-television modems and global-positioning systems. The trend to wireless Internet connections bodes well for RF Micro.

3 Duke Energy Corp.
Duke strayed from its roots under its former CEO. After its stock fell from around $47 to $12, the new CEO has the company on track to return to its utility roots. With the economic recovery resulting in more demand for electricity, I look for price appreciation with a good yield.

3 Closure Medical Corp.
Closure Medical makes wound-closure and wound-care devices. The companyís leading product, Dermabond adhesive, is an alternative to stitches and staples. The companyís stock is well off its 52-week high of $39.59, and it has been cyclical since going public.

 

Bobby Edgerton
President
Capital Investment Counsel Inc., Raleigh

3 RF Micro Devices Inc.
A good balance sheet with more than $300 million in cash makes this company a good bet. RF Micro had peak earnings of $50 million in 2000. Polaris, its new transceiver product, should see robust demand. This company has the ability to do $1 billion in revenue and cash flow close to $100 million.

3 Jefferson-Pilot Corp.
Strong finances and a low price-earnings ratio make this company a good buy. A huge position in Bank of America doesnít hurt. JPís combination of universal life, basic life insurance and new product introductions should serve it well. Jefferson-Pilot Communications continues to perform well. The dividend increase is pushing 150% since 1994 for a yield of 3.2%.

3 Duke Energy Corp.
CEO Paul Anderson will continue to unload Dukeís baggage and maintain the 6% dividend. Consensus earnings per share estimates are around $1.30 this year, which includes a land sale. The ìspark spreadî ó the difference between the price of electricity and the price of fuel used to generate electricity ó remains tough on Duke due to the increase in natural-gas prices, but that should abate and liquidity should improve as asset sales continue. Maintaining the dividend remains a huge issue for Duke, but I think it will be kept.

 

Frank G. Jolley
President
Jolley Asset Management LLC, Rocky Mount

3 Progress Energy Inc.
Raleigh-based Progress Energy provides electricity to parts of North Carolina, South Carolina and Florida. Its stock has suffered in 2004, largely due to disputes with the Internal Revenue Service over synthetic-fuel credits and hurricane-related losses in Florida. But the stock is already discounting much of the bad news. It trades at about 12 times 2005 projected earnings and yields over 5%

3 Jefferson-Pilot Corp.
Jefferson-Pilot is a mid-size life insurance company that also owns and operates radio and television properties and produces sports programming. The stock is trading at just under 12 times 2005 consensus earnings estimates of $4.16. It has paid dividends every year since 1913 and is yielding about 3%. Continued consolidation in the financial-services industry could serve as a catalyst for the stock in the coming year. A spinoff or sale of the communications/broadcast properties would also be viewed favorably by the investment community.

3 Goodrich Corp.
Charlotte-based Goodrich is a worldwide supplier of aerospace components, systems and services to the commercial and military markets. Earnings in 2005 are expected to rise approximately 25% to $1.76 per share. The stock yields just under 2.7%. Goodrich has seen its prospects improve during the past year, but the stock still remains down more than 45% from its all-time high of $56 in 1998. Goodrich is an attractive total-return vehicle, with improving earnings prospects.

 

Alexander B. Miles
Senior portfolio manager
WealthTrust Advisors Inc., Charlotte

3 Bank of America Corp.
BofA continues to provide steady price appreciation bolstered by a reliable income stream. At 11 times 2005 earnings estimates, the stock has been trading at a 10% discount to its peer-group multiple of 12.2 times, and BofA is poised for double-digit earnings growth in 2005. The equity markets should reward improvements from the FleetBoston merger as the company shifts cost savings to high-growth businesses. Recent disappointing earnings, resulting from challenging capital-markets and mortgage-banking environments this summer, provide a reasonable entry point for buying this well-diversified bank with one of the highest dividend yields ó 4% ó in its sector.

3 Lance Inc.
The Charlotte-based snack maker and distributor is in the midst of a turnaround as the company refines its delivery routes and eliminates unprofitable vending machines. Lanceís private-label business continues to grow as a primary beneficiary of the companyís relationship with Wal-Mart. Although there are margin and revenue risks associated with higher commodity prices and Lanceís dependence on one major customer for nonbranded sales, the firm should see additional growth in its Lance and Cape Cod brands, while also generating positive cash flow and continuing to pay down debt. Lanceís outsized 4% dividend yield remains secure.

3 TriPath Imaging Inc.
TriPath Imaging, which has its headquarters in Burlington, develops solutions leading to the early detection and clinical manage-ment of cancer, including detection, diagnosis, staging and treatment. All the firmís revenue is generated through its cervical-cancer-screening products, which maintain a 10% to 15% share of the domestic Pap smear market. TriPath supplies the three largest commercial diagnostic-lab-operating companies in the country. For investors willing to assume more speculative risk, TriPath offers compelling upside growth poten- tial as current and future revenue-gen- erating products navigate the U.S. Food and Drug Administrationís regulatory approval process.

 

Doug Smith
Assistant vice president-financial consultant
First Charter Investment Services, Charlotte

3 Duke Energy Corp.
Dukeís financial picture continues to improve. Managementís commitment to the dividend, which hovers around 4.5%, is key to investor success. Higher prices for natural gas used in the production of electricity may present a small hurdle for Duke in 2005. If prices decline and management continues to execute, Duke should have another good year. Its shares trade at attractive levels and should reward patient investors.

3 Cree Inc.
Creeís research and development is on the cutting edge in the semiconductor marketplace. Several key products should have record sales next year, and the company is very strong financially. If the overall market is to head higher in 2005, technology must play a big part in the advance. I believe that Creeís stock will provide above-average returns in 2005.

3 RF Micro Devices Inc.
RF Micro Devices manufactures radio-frequency integrated circuits used in wireless devices. The com-panyís products are used in cell phones and personal communication devices. While technology continued a mild recovery in 2004, RF Microís stock lagged the Nasdaq index. Analysts project higher cell-phone handset sales in 2005. The company and its stock should have an excellent year.

ï ï ï

Sweetening the deal

He still struggles with English, and he has a history of hitting the bottle pretty hard. But neither of those things prevented George W. Bush from becoming president, so why should they stop Jackson M. Kinney from making his debut in Business North Carolinaís annual stock-picking contest ó especially when, like the president, Jackson has the right family connections to help him land the job? His grandpa, David, is majority owner and editor in chief of the magazine; his dad, Ben, is publisher.

Photo by Maury FaggartLike his grandpa, Jackson finds ìnoî to be a crucial part of his vocabulary.

ìWant to wear a tie, Jackson?î

ìNo!î

ìWant to sit down, Jackson?î

ìNo!î

One word piqued his interest: candy. It lured him from one corner of BNC global headquarters to the other. Clad in casual-Friday duds ó blue denim shirt, tan pants and brown shoes with Velcro straps ó the 2-year-old crouched over a smorgasbord of sweets, some bearing the ticker symbols of North Carolinaís 75 largest public companies. He took his time, carefully inspecting several pieces before picking up three that carried ticker symbols. They were:

3 aaiPharma Inc.
This one could make or break the portfolio. It traded at just $1.79 on Oct. 15, so a small change in price could have a big impact on average total return. Its 52-week high was $31.85, so the stock is capable of big gains. But the Wilmington-based drug researcher needs to resolve a problem with turnover at the top. Four people held the title of CEO, at least on an interim basis, in 2004. Its chief operating officer left the company in February, a month after being appointed to the post, and was replaced by an interim COO. In November, the company named a new chief financial officer. Through three quarters of 2004, revenue was down 4% to $149 million, and the loss per share grew from 30 cents to $2.67.

3 First Charter Corp.
This stock was trading near its all-time high at about $26 in mid-October, so it might be wishful thinking to expect much price gain ó unless the Charlotte-based bank is sold, as some investors want. Even if thereís no sale, First Charter pays a 19-cent quarterly dividend and appears to be recovering from an awful year in 2003, when earnings per share fell 64%. Its EPS of $1.02 through the third quarter of 2004 was more than double what it was in 2003.

3 Progress Energy Inc.
Progressí closing price of $42.06 Oct. 15 was near the low end of its 52-week range, but the last time the stock hit $50 was more than two years ago. Total return will be aided by the Raleigh-based utilityís quarterly dividend of 57.5 cents a share. Revenue and net income hit $8.7 billion and $782 million, respectively, in 2003. But earnings for the first three quarters of 2004 were down 21% from the previous year.

With those three picks, Jackson unwittingly made his first decisions that affect this magazine. Itís possible heíll make many more. And if a BNC employee ever asks him for a raise, he already knows what to say.


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