Jessica's Prudent Trio

10/15/2004 12:00 am EST


Jessica Chiaverini

Associate Editor, The Prudent Speculator

Jessica Chiaverini is co-manager at The Al Frank Fund and contributing editor to The Prudent Speculator. Here, she covers some tenets of her investment philosophy and highlights a trio of stock ideas that best represent her search for value and growth.

"I am always reluctant to give out individual stock picks, as our investment approach is based largely on having a highly diversified portfolio. That having been said, there are certain tenets in our philosophy, and there are certain companies that are very good examples of how we invest.

"One thing we look for is a very strong balance sheet. That means companies that have lots of cash and little or no debt. A great example of a company in this category is Integrated Device (IDTI NASDAQ). The company makes semiconductors that deal with wireless infrastructures, storage networks, and packet processing basically transferring data over the Internet. We like Integrated Devices for a variety of reasons. We think that they are going to continue to grow as their technologies are deployed in WiFi and broadband and the digital consumer market. They have strong corporate alliances with a lot of name brand, blue-chip technology companies like Broadcom and Intel and Texas Instruments. So we think that as the cycle turns, we’re going to see an uptick in their business again. But the real reason that we like this company is because they have no debt and they have close to $5.60 cents in cash per share on their balance sheet. We would be a buyer of Integrated Device up to $13.20.

"We also look at cyclical companies those that are especially economically sensitive. We would point to CSX Corp. (CSX NYSE), the railroad company. They have rail lines in 23 states that make up about 80% of their revenues. They are also engaged in intermodal transportation, which basically combines trucks with rail. Overall, the railroads in general have become much more efficient in the last couple of years. There has been strong growth in intermodal shipping, they have computerized a lot of their railroads, and you have fewer diesel-hungry engines. We have also seen strong growth in shipment volumes. There is strong demand being driven by improvement in industrialized economies all over the world. We’ve had strong growth in China. And the weaker dollar has actually boosted exports, which get carried to the seaports by the railroad companies. So they have been working for years to get their cost structure in shape and we are finally seeing improvements over the last year to year and a half. So despite higher fuel prices, and some problems with staffing issues, we still think CSX is a very attractive company. It’s trading at book value with a 1.2% yield and we think the stock could be worth close to $72 in 3 to 5 years. We would be buying CSX up to $36.

"Along the lines of a dividend theme, we like a company called Traffix (TRFX NASDAQ). The company is in the online database marketing business. It’s very small, with a market cap that is less than $100 million. They offer such services as online programs, they cull campaign statistics for other Web sites, and they also own their own Web sites, including a Lotto site, and an online dating site. The company, operationally and financially, has done very well. They’ve seen their revenues up 23% in the last quarter. They earned $0.04 a share in the last quarter versus a loss in the previous year. This is a small, profitable company. In 21 of the last 22 quarters, it’s been profitable. It’s got a great balance sheet, with $3 a share in cash. But the dominant reason we are attracted to it, is that the stock has a 5% dividend yield. The company believes that they have more than enough capital to continue funding their growth and to reward shareholders via a dividend. You mitigate your downside risk when you invest in companies with lots of cash. So Traffix would be an excellent stock if bought as part of a broadly diversified portfolio. We would continue to buy the stock up to $6.50 per share."

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