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To Soon To Bury Small Fry

The Evening Bulletin
By: Dan Dorfman, The New York Sun

July 10, 2006

Smaller stocks have run rings around their larger counterparts for six consecutive years, but an increasing number of pros say the glory days are over for the small fry. Many predict they will now play second fiddle to the biggies.

One dogged tracker of small stocks doesn't believe this theory. Upside, a seven-year-old investment newsletter out of Hammond, Ind., that focuses on smaller stocks and boasts an enviable record, feels that if you pick right, there are still plenty of big gains to be derived from small stocks, the editor, Richard Moroney, says.

Given his track record, Mr. Moroney is one fellow worth listening to. Since its May 1999 inception, his newsletter's buy list has gained 383.3 percent, excluding dividends and transaction costs, Mr. Moroney says. Over the same period, the Russell 2000 Index gained 59.3 percent, while the S&P 500 fell 3.9 percent.
Here's a brief look at some of the newsletter's 10 midyear capital gains small- and mid-cap favorites.These are not penny stocks, but ones ranging in a price between $20 and $50. All are thought to have solid growth prospects. Included is the newsletter's projected upside for the stocks - with a couple pegged at more than 100 percent - based on current year earnings estimates and historical price/earnings multiples.

Eagle Materials ($45.17), the nation's fifth largest wallboard producer and the 12th biggest cement producer. Eagle posted record sales and profits in its fiscal 2006. Wallboard revenue jumped 37 percent, while cement revenue surged 35 percent. Despite a slowdown in residential construction, wallboard pricing remains strong and supply is tight, with the industry's capacity utilization above 95 percent. Cement demand remains at record levels and relatively low inventories suggest pricing should remain favorable. For fiscal 2007, the company expects pershare earnings between $4.40 and $4.70, up from $3.02 in fiscal 2006. If earnings meet expectations and the P/E ratio returns to its three- to five-year average, the stock would trade between $74 and $79.
Helix Energy Solutions ($41.29), a leading player in offshore energy services, has bright near-term growth prospects. The company supports offshore drilling activities and pipeline construction, mainly in the Gulf of Mexico. Earnings are pegged at $3.19, up from $2.06 in 2005. The company, which has an implied price range between $77 and $86 based on its trailing three and five year multiples, trades at just 10 times its estimated yearahead earnings in contrast to its five-year P/E average of 18.
Komag ($46.25), a leading supplier of disks used for data storage that is benefiting from increased demand for storage capacity, has posted seven consecutive quarters of sales and income growth. Consensus estimates project the June quarter's earnings will rise 28 percent, and the entire year's per-share profits are expected to climb 34 percent, to $4.70, from 2005's $3.52. The stock's upside, based on trailing three to five year multiples, is pegged between $50 and $58.
Men's Wearhouse ($32.30), a well-publicized retailer of men's brand name and private label clothing, should benefit from steady store expansion and niche acquisitions. Canada represents 12 percent of revenue. Management figures the July quarter's profit will be up 15 percent, while the January 2007 fiscal year should show earnings of between $2.33 and $2.40 a share, compared with $2.04 in fiscal 2006. Assuming profits meet expectations and the P/E ratio returns to its three- or five-year average, the newsletter sees an upside between $43 and $45.
Unit Corp. ($56.72) is a provider of contract land-drilling services and conducts exploration of oil and natural gas properties. Contract drilling rates have soared because of high demand and tight capacity, and of Unit's 112 rigs, 111 are under contract.The company's exploration and production arm is drilling new wells at a high success rate, and management forecasts 2006 production growth between 18 percent and 20 percent. Trading at about eight times its estimated year-ahead earnings of $6.83 a share, versus its five-year forward PE of 13 and its group average of 14, the stock appears duly cheap, Mr. Moroney says. Consensus estimates project per-share profit growth of 46 percent this year and 10 percent next year. Its trailing three- and five-year multiples, if resumed, imply soaring upside for the stock, a range between $134 and $138.

Rounding out the newsletter's 10 midyear favorites are Greenbrier Cos. ($32.64), Intervest Bancshares ($41.48), PW Eagle ($29.21), Lamson & Sessions ($28.72), and United PanAm Financial ($29.99).

The New York Sun

Please note that the discussion of the investments and investment strategy of Horizon Investment Services, LLC (including Horizon’s research and investment process) represent the investments and investment strategy of Mr. Moroney and Horizon at the date of the article, and are subject to change without notice. Horizon cannot assure that the type of stocks mentioned in the article will outperform any other investment strategy in the future, nor can it guarantee that such stocks will present the best or an attractive risk-adjusted investment in the future. References to an individual security should not be construed as a recommendation to buy or sell that security. In addition, the securities noted in this article are but several of the many successful, as well as unsuccessful, investments by Horizon and do not represent all of the securities that Horizon has purchased, sold or recommended to clients. Horizon cannot guarantee the accuracy or completeness of any statements or numerical data in the article. Past performance is no indication of future results.