SmartMoney.com
Late to the Party
Monday June 2, 4:30 pm ET
By Jack Hough
The Rationale
They say it's lonely at the top, but among the companies that make up the Standard & Poor's 500, it's an absolute ghost town at the bottom. With a three-month gain of 15.8% for the index, 144 of its stocks are within 5% of their 52-week highs, with just one lonely real estate trust, Apartment Investment & Management Co. (NYSE:AIV - News), within 5% of its low.
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That tells you two things. First, if you happen to own shares of AIV, run, don't walk, for the next flight to Vegas, and pick up a few lottery tickets at the airport. You've just experienced 1-in-500 bad luck, and you're due for a break.
Second, the numbers show that the rebound in shares has been broad, making the task of bottom fishing harder. An independent breed of investors, bottom fishers shun popular stocks in favor of those that have taken beatings. Successful bottom fishers look carefully at fundamentals to determine whether the abuse heaped on a particular stock has been more or less than deserved.
After all, poorly managed companies that lack competitive advantages belong on the bottom — but once in a while a good company gets dragged down unfairly on a slight earnings miss or overblown bad press. Investors who can find these undeservedly snubbed names stand to profit handsomely.
The Recipe
Bottom lovers, take heart: There are still some cheapies out there. To prove it, we mined through our database of more than 8,300 companies.
We used our stock screening tool to search for issues within 5% of their 52-week lows. We found just 79. Next, we selected only those companies with positive earnings growth projected for 2003, and debt/capitalization ratios no greater than 0.6. Finally, we required annual sales of at least $100 million. We were left with seven names.
The Results
Hmm. Morning surf massage or sea foam spray? With those plus five other choices, Water Pik's (NYSE:PIK - News) Misting Massage showerhead will have you clean, relaxed and 30 minutes late for work.
Based in Newport Beach, Calif., Water Pik produced a lathery $281 million in 2002 sales, but the profit nozzle has apparently been set on evening trickle, producing just $5.5 million. Its personal health-care division, which makes shower products, high-tech toothbrushes and water filters, contributed 44% of sales and 39% of profits, while the remaining 56% of sales and 61% of profits came from the pool products and heating systems divisions.
A look at the stock's chart shows shares chopped in half over the past 52 weeks, which seems appropriate considering 2002 profits were barely half of 2001's $10.1 million on roughly equal sales.
But the 2002 result included a $5 million charge for the discontinuation of the company's Aquia home sanitizer. "While the product was well received by trade buyers when initially introduced in September 2001, the promotional investment in consumer education necessary to create this new market ... has proven to be significantly greater than the Company originally anticipated," conceded management in its year-end report.
First-quarter results, reported April 16, weren't much better, with a year-over-year sales decline of 2.8% to $55.4 million thanks to a sleepy economy, and a net loss of $1.8 million, or 15 cents per share, compared with a year-prior loss of $0.3 million, or 2 cents per share.
But there's reason to believe Water Pik's dried-up income statement is poised for a geyser. About $1.2 million of the loss last quarter came from research and development, and management says market acceptance of two new products, the Laars Pennant commercial boiler and the Jandy Stealth pool pump, has been stronger than anticipated. Analysts say that new products should be a major catalyst for earnings growth through the rest of 2003.
Management says it can deliver "mid-single-digits earnings growth" in 2003, which, given earnings from continuing operations of 85 cents last year, is consistent with Reuters Research's consensus earnings estimate of 91 cents. And the company has said all along that the growth will come almost entirely from the second half of the year.
At just 7.2 times the 2003 estimate, compared with a 2003 P/E of 10.1 for the household appliance group, this stock already looks like one cheap Pik. But consider that the company's three-year earnings growth is estimated at 14% annually, compared with just 8.6% for the group. That gives the stock a price/earnings growth, or PEG, ratio of just 0.5, far below peers' 1.17 or the Standard & Poor's 500's 1.55. That seems a bargain.
Our full list below should be considered a starting point for further research. |
