America’s stock market has lost a fifth of its value since mid-March, and shares in other countries haven’t done much better.
But on Wednesday, July 17, while the Dow Jones industrial average was falling 283 points, 87 stocks on the three major U.S. exchanges were hitting their highest prices in the past 52 weeks. In other words, even in a bear market, some companies perform well — often, spectacularly well.
Imagine that at the start of the year you owned these five stocks: Jos. A. Bank Clothiers Inc., a retail chain that sells moderately priced men’s suits; Signature Eyewear Inc., which makes designer (Eddie Bauer, Laura Ashley) eyeglass frames; Culp Inc., upholstery fabrics; Marine Products Corp., fiberglass motorboats; and Friendly Ice Cream Corp., restaurants and frozen desserts. By last Wednesday, the five had each risen an average of 171 percent. They would make up for a lot of losers in the rest of your portfolio.
What do this year’s big winners have in common? Not much. Most of them are smaller firms, but, then again, most public companies are small. Many are retailers (in fact, the average retail stock is up 11 percent in 2002), but practically every sector includes sensational performers. Out of the 6,866 stocks tracked by Morningstar Inc., the research firm that provided the data I used for this column, the second-best gainer this year is a go-go high-tech stock, Firstwave Technologies Inc., which Yahoo Financial describes as “a Web-based customer relationship management (CRM) software company that provides Internet-based (eCRM) solutions.” Wow! Sounds like 1999 again. Firstwave has risen 1,018 percent in six months.
Some of the mega-winners are household names (TRW Inc., Haggar Corp., Rawlings Sporting Goods Co.). Others you probably have never heard of (Paul-Son Gaming Corp., Clean Harbors Inc., Nexen Inc.). Many have bounced back from terrible years in 2001; others are finally getting the recognition they deserve. Of course, stocks of precious-metals companies (Hecla Mining Co. and Bema Gold Corp. have quadrupled) are booming as the dollar has dropped and apocalyptic fears have intensified. But what are we to make of Daiei Inc., which owns a majority stake in 7,700 convenience stores in Japan and has risen 252 percent this year? Or Vitran Corp., a Canadian freight company, up 120 percent?
While some of the 2002 success stories remain mysteries, there are some clear lessons to draw. Here are categories where winners breed:
• Restaurants. Running restaurants is an excruciatingly difficult business, where good management often counts more than good food. Still, restaurants can thrive even in tough times, and technology has helped trim costs and boost productivity. It’s also a sector where small investors can play financial analysts; you don’t need a lot of technical expertise to find a great restaurant chain. Just nose around in malls and off highways — but be sure to check the profit-and-loss statements as well as the menus.
Among the top restaurant performers this year, in addition to Friendly’s, are four that have doubled in value or more: Morgan’s Foods Inc., a small Ohio-based company that owns about 100 franchise outlets, mainly in the KFC chain; Back Yard Burgers Inc., a tiny chain whose gimmick is hamburgers with a charcoal-grilled flavor; Rubio’s Restaurants Inc., Mexican food; and Total Entertainment Restaurant Corp., with a string of sports pubs.
In its most recent ranking, the Value Line Investment Survey places the restaurant industry second out of 98 sectors (first, by the way, is home building). Value Line analyzed 29 restaurant stocks last month and gave six of them a rating of “1” (tops; that is, among the 100 most timely stocks) and 15 a rating of 2 (above average). I can’t remember Value Line displaying more enthusiasm over a single industry in recent years.
The research firm gives highest marks to Bob Evans Farms Inc.; CBRL Group Inc., which owns 453 Cracker Barrel Old Country Store restaurants; Landry’s Restaurants Inc., a Houston-based seafood chain; Lone Star Steakhouse & Saloon Inc.; O’Charley’s Inc., a small chain in the Southeast and Midwest; and Ryan’s Family Steak Houses Inc.
Ryan’s is an exceptional business, with 314 company-owned and 23 franchised cafeteria-style steakhouses, mainly in the South and Midwest. Cash flow (that is, the profit a company can really put in the bank) has increased every year since the mid-1980s. Earnings in the last quarter rose 26 percent. Earnings have increased at an average of 12 percent annually for the past 10 years, and Value Line expects the rate to accelerate. But Ryan’s stock trades at a price-to-earnings (P/E) ratio of just 12.
A larger chain with a consistent history of profit increases is Brinker International Inc., with more than 1,000 restaurants in 47 states, including Chili’s, Romano’s and Maggiano’s. Growing faster than 15 percent annually, Brinker still has a P/E that’s modest at 20, even though the stock has tripled in five years. More adventurous investors might consider Cheesecake Factory Inc., whose earnings have declined in only one year (1996) since the company went public in 1992. Profits keep rising at a 20 percent rate, but the stock has fallen by about one-fourth since April.
My own favorite chain is Starbucks Corp. I bought the stock a while back after I noticed long lines of average Americans waiting to buy an expensive cup of coffee at a rest stop along an interstate highway. Latte for the masses! On Monday, Starbucks announced that its same-store sales rose 7 percent last year — quite an accomplishment during a recession, with inflation of about 2 percent. The stock is up about 15 percent this year, and it’s tripled since late 1998. Value Line projects earnings will grow at 22 percent annually for the next five years.
• Consumer staples. Twenty-nine of the 30 stocks that make up the Dow fell during Wednesday’s debacle. The one that didn’t was Procter & Gamble Co., which sells tried-and-true staples to consumers under powerful brand names such as Tide, Crest, Folger’s, Old Spice, Head & Shoulders, Pringle’s, Tampax and Pampers. P&G has paid dividends without interruption since it was incorporated in 1890 and has increased payouts for the past 47 years in a row. The only problem with P&G was it price. It always looked too expensive, but it just kept going up — until two years ago, when shares plummeted from $118 to $53 in a few months on worries about generic competitors and stagnating sales. After a change in management, P&G began to climb again. It’s up a little more than 10 percent since January, and among consumer-staples stocks it’s not alone. The 239 companies in the sector have risen 8 percent this year, according to Morningstar.
Big winners include Dreyer’s Grand Ice Cream Inc., which soared in June after Nestle SA, the Swiss food firm, announced it was buying a majority interest (I suspect we’ll see a lot more mergers ahead); Fresh Del Monte Produce Inc., worldwide seller of bananas, pineapples and other fruity stuff, at a P/E of just 12; Pepsi-Gemex SA, the Mexican bottler of Pepsi-Cola, 7Up and other soft drinks; and Riviana Foods, the No. 1 U.S. seller of rice (Mahatma, etc.) with a P/E of 16 despite a 51 percent gain this year.
One of the most rudimentary of all consumer staples — shoes — has had a banner year in the stock market. Phoenix Footwear Group, K-Swiss Inc., Kenneth Cole Productions Inc. and Brown Shoe Co. (Buster Brown, Dr. Scholl’s, Naturalizer) are all up at least 40 percent. The smaller firms seem to be outperforming the larger (Nike Inc. is slightly down for the year, Reebok International up a few cents). It’s not clear why shoe stocks have risen sharply — except that people always need the products, and the survivors seem to have found strong niches in a competitive market. The lesson here is never to count even the most boring stocks out. After all, Warren Buffett, the most successful investor of the 20th century and a connoisseur of the boring, bought a bunch of shoe companies a few years ago.
• Industrial cyclicals. A cyclical stock is one whose fortunes rise and fall with the economy. The classic example is an auto company. Cyclicals can’t produce the Beautiful Line, the consistently rising earnings that are so attractive to investors; as a result, cyclicals tend to be priced cheaply. Many of them languish and then soar. So far this year, reports Morningstar, the 996 industrials listed on the major exchanges have returned an average of 9.5 percent each. That’s impressive; it’s also an indicator that the economic recovery is for real.
Many industrials were so badly beaten up during the recession that even a rise of a few dollars (or a few cents!) in price produced huge percentage gains this year. An example is tiny CPI Aerostructures Inc., which makes parts for the aerospace industry; its stock has more than quadrupled this year, to about $7 a share. Raytech Corp., which makes heavy-duty industrial products, is up 183 percent in 2002 after hitting a low of $1.75. That’s awful cheap for a company that earned more than $4 a share in 1998, 1999 and 2000. Similarly, Tenneco Automotive Inc., which makes emission- and ride-control automotive products under familiar brand names such as Monroe, a few years ago was earning $3.44 a share and trading over $40. It began 2002 at two bucks a share and was $7.77 on Friday.
Finding the next Tenneco Automotive or the Back Yard Burgers or Procter & Gamble is a lot easier than finding the next Intel. These are companies in plodding, fairly simple businesses, with financial statements that aren’t tough to follow. Yes, in one way, these are tough times for investors. But, in another, they are the best times of all. Bargains abound, and stocks, even in a bear market, go up as well as down.
Made available through Tech Central Station – www.techcentralstation.com A version of this article first appeared in the Washington Post.