Winning Performers Capitalize on Pee-Wee Power
This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.
Shares of smaller companies, which have run rings around their larger counterparts for eight years, have suddenly developed warts.
Reflecting escalating credit concerns, slowing economic growth, and a shrinking number of small company acquisitions, smaller stocks, not unexpectedly, have borne the brunt of the recent wave of selling pressure. In fact, over the past couple of months, speedy and wicked declines of 10% to 25% in value for these small companies have become a common occurrence.
Still, as has been proved time and again on Wall Street, latching on to unloved stocks during periods of abandonment, provided you pick right, is part of what achieving a winning market performance is all about. That is what one well-regarded investment adviser who has a knack for picking winning stocks, Richard Moroney, thinks is in store for a selective small fry that he believes should soon be sizzling again.
During the recent decline, many brokerages have been pushing a flight to quality — bigger and more liquid names that can cope more effectively with periods of financial stress. That, in turn, has led many nervous investors to unload smaller stocks and practically ignore the brokerage recommendations of such companies.
Interestingly, even some pros who make a living pitching the small fry tend to favor bigger, rather than smaller, stocks at this juncture. Include among them Mr. Moroney, who says he would favor the large company (as reflected in the S&P 500) over the small company (as mirrored in the Russell 2000 index) for the balance of the year.
Nonetheless, Mr. Moroney, editor of Upside — an outperforming investment newsletter in Hammond, Ind., that tracks smaller stocks — argues that certain peewees merit solid investor attention, especially those attractively valued growers with superior fundamentals, strong earnings growth prospects, and share price momentum.
Upside’s views clearly warrant serious consideration, what with its buy list having gained 449.9% since its May 1999 inception, according to Mr. Moroney. That showing represents roughly sixfold the 78.8% rise of the Russell 2000 Index and nearly 30-fold the 13.2% increase in the S&P 500 in the same period.
Three of Upside’s newest buy recommendations, each of which Mr. Moroney believes could appreciate 15% to 20% over the next 12 months, are:
• PetMed. Express ($14.94), a leading nationwide pet pharmacy that sells medications and products for dogs, cats, and horses directly to consumers. The newsletter says solid fundamentals and positive trends bode well for growth. America’s dog and cat population is estimated at about 163 million, and the country’s overall pet spending rose 5.8% last year to $38 billion. Last year, PetMed attracted roughly 14 million visitors to its Web site, with online sales generating roughly 62% of the $162.3 million volume. Per-share earnings of $0.73 a share are projected for the March 2008 fiscal year, up more than 20% from $0.60 in fiscal 2007.
• Jos.. A.. Bank. Clothiers ($29.52), a leading national retailer of men’s tailored and casual clothing with about 385 stores. The company boasts improved earnings and cash flow, rock solid finances, and a fast growing store base. The retailer has posted six consecutive years of record earnings. The stock has retreated recently, reflecting general weakness in the market, concerns of weak consumer spending, and soft sales in June. But Upside believes the company, based on solid operating momentum, is capable of exceeding nearterm profit estimates.
• W-H. Energy. Services ($62.82), a diversified oil field service company with operations in North America and foreign markets. In its most recent June quarter, the company displayed lots of energy, handily beating Wall Street estimates with a 36% per-share earnings gain on a 29% revenue increase. Results were aided by a 28% hike in North American sales, an improved performance in the drilling business, and a favorable product mix resulting in higher margins. Considering the company’s earnings momentum and favorable industry outlook, its stock, which is showing bullish price-share action, is thought by the newsletter to be cheap at about 13 times the current year’s profit estimate of $4.90 a share.
So there you have a stockpicker’s view on how to capitalize on pee-wee power, and importantly it comes from someone who frequently shines in doing just that.
