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Small-Cap Trio: Food, Film, and Flights
10/18/2013 10:00 am EST
Small-cap expert Tom Bishop discusses the strategy used in his BI Research newsletter and highlights three stocks: an emerging markets food play, a TV and film studio, and a discount airline.
Steve Halpern: We're here today with Tom Bishop, a leading expert on small-cap stocks and editor of BI Research. How are you doing today, Tom?
Tom Bishop: I'm good.
Steve Halpern: You've been publishing for over 30 years and are often ranked among the top performing financial newsletters. Before we look at the specifics of your strategy, could you tell us a little about your focus on small-cap stocks in general and what the attraction of the small-cap arena is?
Tom Bishop: Well, I like small-caps because they're earlier in the growth cycle, and thus, the better ones have rapid earnings growth, and all things being equal, they should also be seeing more rapid growth in the stock price, as long as their PE stays the same.
In a lot of cases, if they keep growing, their PE gets even richer, and within this realm, I especially like stocks with a hook, special situations, some reason to expect that rapid growth.
Steve Halpern: So, you're looking for some type of catalyst that could spur the company on.
Tom Bishop: Yeah, some, I guess it's most popularly called special situations, yeah, but a catalyst that could lead to that growth.
Steve Halpern: Now, the foundation of your strategy is something you call the BI ranking system. Now, I know this is a proprietary system and you don't share the details, but I was hoping you could explain some of the factors that you consider within the BI rank.
Tom Bishop: Okay. Well, in general, I think the thing that the index, or the ranking system, is most heavily weighted towards is various earnings factors.
For example, I'm interested in the growth and earnings per share for the next two quarters, the next year, and the growth rate over the next three to five years. I'm a PEG guy, which is PE as compared with long-term growth rate.
I like stocks that are trading at less than one, or not much above it, and I'm also fond of stocks that have beaten earnings estimates for the last couple of quarters, are seeing rising earnings estimates, and I also like to have some company.
I look at the Zack's rating on the stock, the value line rating on the stock, and lately I've been a fan of the Investors Business Daily composite rating. If you can get a lot of that stuff lining up with you, that adds more support in the ranking system, and I look at things like its financial rank and even its take-over prospects.
Steve Halpern: One of your recent recommendations is a company that, really, was probably unknown to most investors. It's called Amira Nature Foods (ANFI) , which is a maker of premium rice. Can you tell us briefly about that?
Tom Bishop: Amira Foods is really right in my wheelhouse, the trading's in the low teens and they're growing at 25 to 30% a year, and they have been and expect to continue to.
And what they're involved in is the sale of basmati rice, which is a premium long grained rice grown, only in certain regions of the Indian subcontinent, which is primarily in the foothills of the Himalayas.
And basically it's somewhat of an emerging markets story, in that, as the middle class grows in countries like India, but throughout southeast Asia, and other countries, their ability to buy this better rice.
And step number one is to try it, it's excellent rice, and I think you can get it at Trader Joe's, even some Costco's, and if you can't find the original basmati rice, try Texmati rice.
But anyway, they're growing at 25% to 30% a year. They're in 40 countries and they want to be in 70 countries soon, and of course, within each country they're growing.
They doubled capacity in 2010. They're doubling again now, based on their IPO. They went public through a traditional IPO. Their auditors are Grant Thornton, and they're just a really good company with good growth prospects.
Steve Halpern: You've been bullish on LionsGate Entertainment (LGF) and the stock's been a terrific performer while you've held it in your portfolio. Could you tell us a little about your outlook for that?
Tom Bishop: Yeah, LionsGate is perhaps the purest and largest movie and television producer and distributor in the stock market today, and its films have won 17 Academy Awards and 21 primetime Emmys on the television side.
They have about 26 shows airing on 19 networks, some of them include Nashville and Orange is the New Black. On the movie side though, which is what really stokes investors, the company recently profited from the Twilight series of films and more recently The Hunger Games.
Currently of most interest to investors is the pending November 22 release of the second of the four Hunger Games films called Catching Fire, and the film stars Jennifer Lawrence who has since won an Oscar for best actress so she has even more draw now than in the first film.
The first one did $400 million at the box office domestically and a lot more overseas. Investors are anxiously awaiting this second one.
The company has found a niche in book series, especially geared to young adults that have done very well in print, thus have a built-in following, and in that vein also coming up in early November is Ender's Game with Harrison Ford.
And, in March is Divergent-which is the first of a three-film series, so investors are keenly focused on LionsGate and the upcoming films.
Steve Halpern: Now finally, you are bullish on a company called Spirit Airlines (SAVE), which I'm familiar with from Florida. It's a discount airline and the stock has risen more than 50% since you recommended it. Are you still bullish on the shares?
Tom Bishop: I am. The stock continues to be one of our highest-rated stocks, as far as our BI ranking system goes. In fact, it recently was trading at 33 to 34, and it reported some strong traffic and load factors for the month of September, and the stock shot up from 33, 34, up to 40 in about two days.
So, I figured I better re-rank it, and the BI rank actually went up, because it also looks at things like relative strength and rising estimates, which have been the case for Spirit throughout the year.
They're a discount airline that basically charges bare bones price for the ticket and then it's sort of al a cart for whatever else you want besides that.
And basically, the people that fly the airline are often people who couldn't afford to fly otherwise, but are attracted by the low fares and don't mind giving up some of the creature comforts just to save a lot on the ticket and be able to fly, period. They're rapidly growing.
Steve Halpern: You said you still would recommend it as a purchase at current levels?
Tom Bishop: Yes. I still have a buy on the stock for people that want to get in.
Steve Halpern: Well, we really appreciate you taking the time and sharing your insights. Thanks for joining us.
Tom Bishop: Okay, thank you.
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