Stock Opportunities

Finding Treasure in the Wreckage

Enough about all the down stocks; here's where the gold lies

By Deb Cochran

Feeling a little seasick lately? Like your stock portfolio is sinking and you may have to bail out, but you keep hoping for a rescue? Such sentiment is common, given how much the stock market has tanked in recent weeks. There haven’t been many rescues to speak of, but local investors and money managers have found some treasures in the wreckage, and they remain optimistic about the future of many of their holdings. One such under-valued, potentially hot stock is that of Plymouth, Minn.-based eBenX (Ticker: EBNX). “Here’s a dot-com company with a strong management team, a growing list of blue chip clients in an under-penetrated market, revenue growth of 50 percent per year and a [recent stock price that is cheap] at five times next year’s revenues,” says investor Craig Bentdahl, president of Excel Bank in Edina, Minn. A provider of B2B e-commerce solutions for the procurement of group health insurance, eBenX went public in December 1999. It still has about $110 million in cash and is reporting quarterly losses of just over $1 million. Meanwhile its revenues continue to surge: for the quarter ending March 31 revenue increased 67 percent to $5.58 million. That said, it’s recent stock price of around $12 a share is a fraction of the $79 a share it was trading at in February. Bentdahl is betting it will bounce back to at least $25 a share. Eden Prairie-based Intranet Solutions Inc. (Ticker: INRS) is the favorite of Mark Hoonsbeen, principal of Edina-based Alla Investment Management. Intranet Solutions provides electronic management and organization to thousands of unstructured documents for its Fortune 500 clients. The company’s revenues are growing at more than 80 percent compared with year earlier levels. Management anticipates topping $22 million in annual revenue for its year ending in March (numbers were not reported by press time). And this Internet-related company is extra special: it’s nicely profitable, a rarity among Internet-related stocks. Another potentially golden Internet-related opportunity is Net Perceptions Inc. (Ticker: NETP), says Rick Brimacomb, a professional investor at Minneapolis-based Sherpa Partners, which helps arrange financing for early-stage technology companies. Net Perceptions provides real-time technology software applications that enable an E-commerce site to track customer preferences. “This company’s product can add value to virtually any web site,” Brimacomb says. And given its recent trading price of about $20 a share, he considers it a steal. “First quarter revenues were up 400 percent; it has plenty of cash to grow the business and it is broadening its product line.” The cash comes from a $112 million follow-on stock offering the Eden Prairie, Minn.-based company completed just before the stock market plunge in mid-April. Other investors say now is the best time in years to buy into the long-neglected, non-Internet small-cap stock arena. Between mid-1996 and late last year, stocks with less than $1 billion in market cap experienced their most bearish period - where prices dropped and stayed down - in nearly 30 years. Such stocks, especially in the Upper Midwest, dropped to their low points a year or two ago and began rebounding earlier this year. “Many technology stocks still haven’t made bottom,” says Richard W. Perkins, money manager and principal of Wayzata, Minn.-based Perkins Capital Management. “The group I think is at or near bottom, and where I think the numbers look decent, is restaurants,” he says. Perkins studies stock charts diligently and makes his move when the opportunity is right. The findings of his most recent research point toward Eden Prairie, Minn.-based Famous Dave’s of America (Ticker: DAVE), and Minneapolis-based Buca, Inc. (Ticker: BUCA). Perkins may be onto something with Famous Dave’s. The company’s stock was in the dumps through 1999 as new management re-focused its mission. After nearly six months of lifelessness, its stock began moving north at a steady pace earlier this year. In March it reached its highest price since May 1999. And in recent weeks it has shown considerable strength. Perkin’s non-restaurant favorites include Chaska, Minn.-based Lifecore Biomedical Inc. (Ticker: LCBM) because it’s “out of the woods;” and Brooklyn Park, Minn.-based Wilson’s The Leather Experts (Ticker: WLSN), because its net income increased 82 percent to $33.1 million in its year ending Jan. 29. Like Perkins, individual investor Bob Fink of Mendota Heights, Minn., likes to find opportunities in industries that are out of favor with most investors. One recent find is XOX Corp. (Ticker: XOXC), a Bloomington, Minn.-based producer of software used in geometric computing. He estimates the company could earn 80 cents per share or more this year on stock that was recently trading at around $3 a share. “This company has one of the best technologies I’ve come across, with all kinds of applications in the fuel and medical industry. Oil and gas prices have gone through the roof, so they have budgets to buy these types of products,” he says, adding, “the company has a murky past, but a new management team was brought in two years ago and turned the company around.” Medical product companies such as 3M Co. (Ticker: MMM). spin-off Guidant Corp. (Ticker: EGT), based in Indianapolis, Ind., are finding favor with Jack Eaton, strategist with the Portfolio Strategy Group at US Bancorp Piper Jaffray Inc. In the three months ending March 31, net income before accounting changes more than doubled to $118.8 million, up from $51.6 million. Revenues increased 6 percent to $630.7 million. “We’re also starting to see some rebound in banking and financial stocks…it’s one area that’s reasonably-priced right now,” says Eaton. “Tech stocks have pulled back recently, but overall have been up 50 percent to 80 percent since October [1999].” There do remain some technology stocks that investors should own, Eaton adds. The key is to continue holding a balanced portfolio of stocks. One issue he opposite end of high-tech stocks is Dura Automotive Systems Inc. (Ticker: DRRA), a Minneapolis, Minn.-based company that makes mechanical assemblies and parts used in the automotive industry. It’s a favorite of Jeff Verdoorn, a private investor who runs Holland Capital Group LLC in Minneapolis. Sales more than doubled and net income before one-time charges increased 65 percent to $16.5 million in the quarter ending March 31, compared with year earlier figures. Yet Dura’s stock hit a 52-week low in March and in recent weeks traded around $13 a share, roughly one-third the price at which it was trading nine months ago. “The auto parts segment has bottomed out. Dura is a heck of a stock with revenues and income up substantially; the company is experiencing 20 percent-plus growth,” Verdoorn says. “The stock is selling under five times earnings, and at a book value of $24 a share, it’s trading at nearly one-half of its book value.” Another treasure, according to Verdoorn, is US Bancorp (Ticker: USB). “It’s a super regional bank that has good prospects. I don’t see a down side. It had bad news at the end of last year, but it’s moving forward from here,” he says. The entire financial sector continues to be good hunting ground for opportunities. Most investors figure rising interest rates will hurt bank earnings, though that’s not necessarily true anymore. “There is a lot of money going to technologies creating valuation that is going to be difficult for those companies to sustain long-term,” says Mike Seamon, a Minneapolis investor. “The Old World economy companies are grossly undervalued. Those brand names have value and companies can and do make transitions into the new economy. I tend to be satisfied with 30 percent returns.” One such company with brand value is Minneapolis-based ReliaStar Financial Corp. (Ticker: RLR). Seamon bought into its stock earlier this year and thus far, has doubled his investment. “I bought ReliaStar before the May 1 merger [announcement] with ING Group of the Netherlands,” he says. ReliaStar’s stock surged 43 percent and rose $7 per share to $51 after the merger was announced. Seamon also invests in smaller companies with unique technologies such as Eden Prairie, Minn.-based Ancor (Ticker: ANCR), which hit a 52-week low last May at a price of $7.75 per share, rallied to $94.12 in December and recently was trading at about $33.00. He also is investing in 3M, which is ahead of analysts’ estimates for the year. Lastly, a couple of investors mentioned ADC Telecommunications Inc. (Ticker: ADCT) as a great investment. “It has consistently beat analysts' expectations and it's solid as a rocket,” says investor John Pohlad of Minneapolis-based Sahara Investments. Minnetonka-based ADC makes equipment and software used in telecommunications systems and has done well serving the fast-growing high bandwidth arena. ADC’s stock in mid-May was trading near its 52-week high of $65.25 per share - indicating there may not be as much promise ahead for this stock as some of the others mentioned above. Yet analysts anticipate the company’s earnings per share will grow by 53 percent this year on continued revenue gain.

Copyright 1999 Profits Journal Inc.