By Gene Marcial
Small is terrific, argue value investors, who have been doing very well, indeed, in today's miserable market. In the value world, small-capitalization stocks have handily outscored their mid-cap and big-cap brethren, observes John Maloney, who runs M&R Capital Management, which primarily invests in value stocks. But Maloney figures that the mid-cap group harbors some of the most attractive bets among value stocks.
Two of Maloney's top choices: Big Board-listed Fidelity National Financial (FNF ), the nation's largest provider of home title insurance, and Chesapeake Energy (CHK ), an independent gas producer based in Oklahoma that also trades on the Big Board. Both are among the several mid-cap value stocks that "are trading at huge discounts to the price of their underlying assets," says Maloney. "I am a buyer whenever I can purchase something for less than its inherent worth," he adds.
So-called value stocks trade at prices that are well below their intrinsic worth, according to value pros like Maloney, based on, among other factors, their price-to-earnings, price-to-book-value, and price-to-the-sum-of-the-parts ratios.
With a 30% share of the title-insurance business in the U.S., Fidelity National is the sector's largest pure play. Each time real estate is bought or sold, a title search must be conducted to ensure that no liens against the property are outstanding. Unlike property-and-casualty insurers, reported claims against title-insurance companies are negligible. As a result, title insurers like Fidelity National usually post very strong earnings.
With the unrelenting economic slump, Maloney acknowledges that the housing mortgage market will likely decline next year, but he thinks Fidelity National, with its proven ability to control costs, will be able to effectively weather any slowdown in 2002. In the meantime, he's confident that mortgage refinancing, another substantial source of business for title insurers, will continue to boom because of the signficant drop in interest rates.
Maloney sees Fidelity National earning $3.25 a share this year, up from last year's $3.05. The stock is currently trading at around $26.50. Maloney's 12-month price target is 35.
Chesapeake, like other gas producers, is now out of favor on the Street because of worry over the economic slowdwn, which analysts expect will reduce demand for natural gas, says Maloney. But he credits management for moving quickly to cut capital-spending plans in light of reduced demand and for locking in attractive prices by hedging in the futures market. Maloney says over 80% of the company's estimated gas production in 2001 is hedged at an average price of $4.31 per 1,000 cubic feet (mcf). Spot wellhead gas prices are now about $2.90 per mcf, adds Maloney.
Currently selling for about $6.20, Chesapeake trades at an attractive two times projected cash flow of $2.83 a share, figures Maloney, whose 12-month price target for the stock is 12 a share.
In all, says the M&R Capital CEO, these are among the very down-to-earth but attractive value plays where the underlying risk is minimal. In today's treacherous market, minimal or low risk is a highly valued quality.
Marcial is BusinessWeek's Inside Wall Street columnist