The market sell-off slammed NASDAQ small-capitalization stocks hardest, but not everyone ducked for cover. Money manager Audrey Jones stood firm: "We stepped up buying of our favorite small-caps even as the crowd bailed out," says Jones, who co-manages the $600 million small-cap and micro-cap portfolios at Morgan Grenfell Asset Management, a unit of Deutsche Bank's Morgan Grenfell Capital Management.
Jones's chief buys during the deep slump: Atlantic Southeast Airlines (ASAI), homebuilder D.R. Horton (DHI), hardwood-floor maker Triangle Pacific (TRIP), and USFreightways (USFC). The market's pullback, says Jones, makes these stocks even more undervalued, given their sturdy fundamentals and upbeat earnings outlook.
Morgan Grenfell's small stocks, she notes, have outscored the Russell 2000 Small-Cap Index by quite a wide margin this year--through July 16.
Atlantic Southeast is "a play on the Olympic Games," says Jones. This regional carrier, with scheduled service to 61 cities in 13 states from hubs in Atlanta and Dallas-Fort Worth, has been around since 1979 and benefits from its ties with Delta Air Lines, which owns 25% of Atlantic. Its commuter service links up with Delta's long-haul flights. Jones sees Atlantic making $2 a share in 1996 and $2.25 in 1997, up from $1.55 last year.
D.R. Horton, a builder of single-family houses, was hurt by the rise in interest rates this year. But Jones expects it to do better in the second half, when she thinks rates will fall. She figures Horton will make 90 cents in 1996 and $1.10 in 1997, vs. 1995's 74 cents.
With 40% of the U.S. hardwood-floor market, Triangle Pacific has been on a roll: Its stock has risen from 15 in February to 19 on July 16. The outlook remains upbeat: While 47% of houses built in Japan and 20% in Europe have hardwood floors, only 2% in the U.S. are so equipped. "So Triangle has much more room to grow," says Jones. She sees earnings of $1.65 in 1996 and $2 in 1997, up from 1995's $1.49.
USFreightways (formerly TNT Freightways) has been on the skids because of high fuel costs, stiff competition, and bad weather. It operates trucks on regional routes for shipments of less than 10,000 pounds. But Jones expects the stock to snap back as business picks up in the steady economy.
The carnage in small stocks, she believes, is over and forecasts that her picks will continue to outpace the pack.