Value Added
Ten Overlooked Stocks Worth a Look
By Steven Goldberg, Contributing Columnist, Kiplinger.com
April 30, 2002
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You don’t have to worry about Peter Sidoti’s research being tainted.
That’s because Sidoti, who heads Sidoti & Company, and the 31 analysts who work for him, don’t do any investment banking.
He formed the group because of “the lack of significant research efforts on companies that were not in the S&P 500 or generating investment banking fees.”
The firm focuses largely on stocks with market values (market price times shares outstanding) under $1.5 billion that are profitable and not heavily followed by other analysts.
Focused on fundamentals
Independence must count for something: According to Sidoti, the firm’s Focus List stocks have risen 130% since the list was started October 17, 2000.
During the same period, the 5,000 stocks in his small-cap universe gained 78% while the Russell 2000 returned just 10%. The index has suffered, Sidoti says, partly because of its heavy weighting in technology. “We avoided all that garbage.”
Sidoti, 44, who has been an analyst for 22 years, says there’s nothing terribly original in what his analysts look for. They hunt for stocks with low price-earnings multiples, 20%-plus annual earnings growth, high return on equity and good cash flow.
These are still easier to find among small stocks than large ones. Sidoti also notes that CEOs of smaller firms are a lot more accessible than those of larger firms, and that small businesses are usually easier to understand.
Unfortunately, individual investors aren’t the kind of clients Sidoti is courting. The firm sells its research to institutional investors, such as mutual funds. The lowest amount any client pays is $50,000 annually.
This year’s Focus List
Here are some of the stocks currently on Sidoti’s Focus List:
Copart (CPRT) provides insurance companies with services they can use to process and sell salvaged vehicles at auction. A 30% grower over the next five years, Sidoti says it sells at 24 times estimated 2002 earnings and has no debt.
Iron Mountain (IRM) is the largest provider of storage for the tons of data that must be retained by companies in law, banking, healthcare, accounting, insurance, as well as government. It stores both actual documents and computer files. Margins should improve as growth accelerates, Sidoti says.
Monterey Pasta Company (PSTA) makes a variety of pastas, sauces and soups, many of which are sold through warehouse clubs, especially Sam’s Club. Selling at 21 times 2002 estimated earnings, it’s expected to growth 25% annually.
On Assignment (ASGN) provides specialized professional and technical workers for long- and short-term assignments. A new CEO is cutting costs and increasing growth, Sidoti says.
Shuffle Master (SHFL) provides products and services to the gaming industry, ranging from card shufflers to slot machine concepts. With a 24% net profit margin, Sidoti says the firm should grow revenues and earnings 25% annually.
Sonic Automotive (SAH) is the second largest auto retailer in the U.S., operating 180 dealerships and 41 body shops in 15 states. A leading player in the consolidation of the auto business, Sonic’s parts business partly cushions it from economic cycles, Sidoti says.
Rounding out the ten are: ESS Technology (ESST), Inter-Tel (INTL), Serologicals (SERO) and Syncor International (SCOR).