This Portfolio Packs Pizza and Wine
By Robert Barker
Not so long ago, stock-pickers specializing in cheap little companies -- my favorite kind -- couldn't buy their way into the spotlight. Today, guys like Wendell Perkins keep popping up on the financial-TV news shows, in magazines, newspapers, and on the Net.
The reason, natch, is performance. Perkins' JohnsonFamily Small Cap Value Fund, now $80 million in assets, is up 2% so far this year, while the Russell 2000 index of small-company stocks has lost 3.3%. Over the three years ended May 31, the fund had returned an annual average of 16.9%, while the Russell returned not quite 5%.
What's he buying now? And selling? As Perkins visited Florida recently on a promotional tour, I caught up with him via his cell phone. Here are edited excerpts of our talk:
Q: I saw you on CNBC this morning. A:
Q: I saw you on CNBC this morning.
A:Oh, you did?
Q: Those guys grilled you on SonicWall (SNWL
Q: Those guys grilled you on SonicWall (SNWL ).
A:As they should have.
Q: What's the story there? A:
Q: What's the story there?
A:SonicWall is an Internet-security provider, and we started buying it at about $6 a share.
Q: It's now around $4.50. What do you think it's worth? A:
Q: It's now around $4.50. What do you think it's worth?
A:The company has a lot of cash on the balance sheet, about $250 million.
Q: How much cash per share? A:
Q: How much cash per share?
A:I don't know offhand, but it's only a $300 million-market-cap company, so the bulk of it is cash. It has no debt, and it will make money next year. It will make money most likely this year. So, from our estimates, if you just look at valuing the business, it's probably worth at least $4 a share. Plus you have all the cash.
Q: What other stocks do you like right now? A:
Q: What other stocks do you like right now?
A:A company that we own that we find very attractive is Papa John's International (PZZA ), the pizza place. It trades at about a 30% discount to its direct peers. The company is probably going to generate 15% to 16% earnings-per-share growth into 2003 -- very consistent cash-flow generator. Lots of free cash flow, which they've been using to pay down debt, strengthen the balance sheet, repurchase shares. We think it's a really great long-term holding. It trades at only a 13 [price-earnings ratio] on trailing earnings.
Q: What else? A:
Q: What else?
A:Topps (TOPP ).
Q: The baseball-card company. What's good about it? A:
Q: The baseball-card company. What's good about it?
A:It's cheap, and it also trades at about 13 times its earnings on a trailing basis. This company has no debt. It's about a $10 stock, with $3 a share in cash. So it has a very strong balance sheet. Its growth engine is really the entertainment-card part of their business, not the sports card, which is more of a cash cow.
Q: What's an entertainment card? A:
Q: What's an entertainment card?
A:Right now, Topps has an exclusive [right to make trading and collecting cards from] Spider-Man, the movie that just came out, to Harry Potter, to the new Star Wars film.
Q: These are all exclusives? A:
Q: These are all exclusives?
Q: How do you think small-cap value stocks will fare against small-cap growth companies? A:
Q: How do you think small-cap value stocks will fare against small-cap growth companies?
A:Where small-cap value is going to get into trouble over the next number of months is on the cyclical-stocks side. They're seeing the top of their performance right now, which is why we've really been diversifying elsewhere.
Q: Which cyclicals have you been lightening up on? A:
Q: Which cyclicals have you been lightening up on?
A:We were holders of Ryland (RYL ), the homebuilder. No longer. We've sold out our stock position there. We felt that the valuation had become far too rich. Centex Construction Products (CXP ), another company that has earnings and revenue tied to the housing market. We have sold out there. We have also selectively pared down our weightings in some of the industrials and chemicals.
Q: What have you been buying in health care? A:
Q: What have you been buying in health care?
A:A little company that's called Theragenics (TGX ). The risk with this one is that it...makes [only] one product, which is a radiation device, an implantable radiation seed that's used to treat prostate cancer.
Q: And the stock? A:
Q: And the stock?
A:It trades at about 13 time earnings, 10 times cash flow. The company has no debt and about $60 million of cash on the balance sheet. It's about $170 million market cap. It's one of these that could perform very well. What it really needs is a second product in order to get the Street excited.
Q: Another name? A:
Q: Another name?
A:Robert Mondavi (MOND ), the winemaker. About 25% of revenue is tied to the travel and entertainment industry. So as travel and entertainment start to recover, it should start to see some better leverage.
Q: Plus, I imagine you enjoy the research on that one. A:
Q: Plus, I imagine you enjoy the research on that one.
A:You know, their brands are O.K. They're certainly not a high-end maker, but, sure, they make decent wine.
Q: If a family member of yours wanted to get into the fund, what would you warn him about? A:
Q: If a family member of yours wanted to get into the fund, what would you warn him about?
A:I think that the biggest concern that I would have about our fund is that we will not perform particularly well in a strong market. The fund is positioned much more conservatively.
Q: Do you have any stocks that you wish you hadn't bought? A:
Q: Do you have any stocks that you wish you hadn't bought?
A:We have an investment in Spartan Stores (SPTN ), which is a grocery-store chain and distributor headquartered in Michigan. And when we bought the stock, we knew there were risks. They're facing tremendous price competition from Wal-Mart (WMT ), which we knew was a problem, but the stock was already what we thought exceptionally cheap.
Unfortunately, it has gotten a lot cheaper. So, they're really having a hard time competing with Wal-Mart, much more so than we expected.
Q: Knowing that, why don't you just dump it? A:
Q: Knowing that, why don't you just dump it?
A:We've been slowly selling it. We have a concern long-term about the company, and most likely we will not own it within three or four weeks.
Barker covers personal finance in his Barker Portfolio column for BusinessWeek. His barker.online column appears every Friday, only on BusinessWeek Online
Edited by Patricia O'Connell