Overtaking A Runaway Market

How do you beat the red-hot Dow's back-to-back record gains in 1995 and 1996? You may want to follow money manager Robert Feinstein, a partner at Friedman, Billings, Ramsey (FBR), an investment outfit in Arlington, Va. In most cases, Feinstein looks for still undervalued stocks, running the gamut from big-caps to mini-caps.

Friedman Billings' picks have far outscored the broad indexes both years. Its bets for 1995 gained a heady 75%, and last year they garnered a further 30%. The two large-caps on its 1997 list are Chase Manhattan (CMB) and Student Loan Marketing Assn. (SLM), better known as Sallie Mae.

Feinstein says that although Chase has been a highflier, the stock remains undervalued--trading at about 9.5 times its 1997 earnings estimate of $9.50 a share and selling at a 30% discount to its closest peer, Citicorp. "Chase is positioned to fully realize the $1.7 billion in cost savings from its recent merger [with Chemical Banking] and has targeted revenue growth of 5% to 7%," says analyst Carla D'Arista of Friedman Billings. Meanwhile, the company has authorized the repurchase of 29.5 million shares--7% of its stock.

Sallie Mae has run up from 66 in May, 1996, to 1081/4 on Jan. 22. But it's still headed for a "premium multiple" says D'Arista. She expects Sallie Mae to post earnings of $6.85 a share for 1996 and $7.40 for 1997, up from 1995's $5.19. Sallie Mae's price-earnings ratio is only about 13.

Another pick, Styling Technology (STYL) is a mini-cap trading at 107/8, with just 4.1 million shares outstanding. The company, a maker of hair, nail, tanning, and moisturizing products for beauty salons, has grown through acquisitions. Trading at 10 times estimated 1997 earnings, the stock is cheap, says analyst Wynn Charlebois.

Ugly Duckling (UGLY) has tripled in value, to 231/8, since it went public in June, 1996. Even so, FBR analyst John Bailey figures the stock, trading at about 22 times estimated 1997 earnings, does not yet fully reflect its current 40% earnings growth rate.

Based in Phoenix, Ugly Duckling operates in the sub-prime automobile-financing market. With $60 million in annual car loans for high-credit-risk borrowers and 63,000 independent dealers nationwide, "we expect continued growth for Ugly Duckling," says Bailey, who sees earnings of $1.38 to $1.75 a share next year.

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