Slothower's 6-Pack of Ideas

10/29/2004 12:00 am EST


Dennis Slothower

Chairman and CIO, Alpine Capital Management

"It is times like these that I hum the Kenny Rodgers song that says, ‘You gotta know when to hold ’em, know when to fold ’em,'" says Dennis Slothower . " Now is the time to walk away from the table." Despite his caution, he still offers some favorite long-term stocks.

"The really good poker players know that there are some hands you are dealt that aren’t worth betting on. Betting when the odds are in your favor and minimizing your bet when the odds are against you is what money management is all about. It is very important to have a defense when the odds are stacked against you. I have found that trading is simply a game of probabilities. If the probabilities are in your favor and you have a well-thought-out plan, you will make money. If the market is going in your direction, the odds increase heavily in your favor. Very few stocks can fight against a falling market. At this time, the tide is not going our way. Meanwhile, despite my near-term cautiousness, here are five stocks that could double in a year, as well as our latest stock of the month:

"InKine Pharmaceutical (INKP NASDAQ) is a specialty pharmaceutical company focused on developing and commercializing pharmaceutical products to diagnose and treat gastrointestinal disorders. For the six months ended June 30, 2004, revenues rose 67% to $9.9 million. Net income totaled $1 million, versus a loss of $3.3 million. Revenues reflect increased market awareness and acceptance of Visicol.

"Input/Output (IO NYSE) is a provider of seismic acquisition imaging technology for exploration, production, and reservoir monitoring in land and marine, as well as shallow water and marsh environments. For the six months ended June 30, 2004, revenues rose 30% to $98.6 million. Net income totaled $3.6 million, versus a loss of $19 million. Results reflect higher sales from the Land Imaging and the Marine Imaging Systems segments, the GXT acquisition, the $7 million contribution from newly acquired Concept Systems, and an improved operating margin.

"Leadis Technology (LDIS NASDAQ) designs, develops, and markets mixed-signal semiconductors that enable and enhance the features and capabilities of small-panel displays. The company’s core products are color display drivers with integrated controllers, which are critical components of displays used in mobile consumer electronics devices. For the six months ended June 30, 2004, revenues rose from $22 million to $76.1 million. Net income rose from $1.7 million to $10.9 million. Revenues reflect higher sales of mobile handset models that use the company’s display drivers. Earnings also reflect improved manufacturing yields and the spread of fixed costs over a larger revenue base.

"Randgold Resources Ltd. (GOLD NASDAQ) is engaged in the exploration and development of gold deposits in sub-Saharan Africa. The company actively manages both its portfolio of exploration and development properties, as well as risk exposure to any particular geographical area. For the six months ended June 30, 2004, revenues decreased 55% to $28 million. Revenues reflect a decrease in gold sales.

"Crompton Corp. (CK NYSE) produces polymer additives (plastic additives, rubber additives, urethane additives, and petroleum additives), polymers, and polymer processing equipment. Its specialty products unit consists of crop protection and other refined products. For the six months ended June 30, 2004, net sales increased 19% to $1.27 billion. Net income from continuing operations before an accounting change totaled $62 million versus a loss of $26.1 million. Revenues reflect increased sales of polymer products and crop protection products.

"Meanwhile, our latest stock of the month is Mueller Industries (MLI NYSE). With a market cap of $1.5 billion and a history dating back to 1917, Mueller is really too large to be a stealth stock. But I will bet that most investors have never heard of it, and that’s just the way I like it. Mueller is one of the leading manufacturers of copper tube and fittings; brass and copper alloy rods, bars, and shapes; as well as refrigeration valves and fittings. Exciting stuff, don’t you think? The growth of the housing industry over the past several years has benefited MLI tremendously; from the lows of last year, MLI stock has more than doubled. Just a short time ago, the Board of Directors authorized a one-time payment for each share of stock of $6.50 in cash, as well as $8.50 in principal amount of 6% subordinated debentures due 2014. MLI also carries little to no debt and is currently working on a gross profit margin of 18.3%. Also, MLI is selling for less than 1.8 times its book value and has recently seen an increase in return on equity (ROE). This is the measure I use to judge how well management is doing with the assets they have to work with. Over the past few years the ROE was in the single digits. This year it should jump to 24%, which is a very high return given the industry that MLI is in. According to my numbers, this is a stock that should be selling in the high $60s to low $70s over the next three to five years. It is currently trading in the low-to-mid $40s, so MLI has a large upside potential."

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