That's Unheard Of

While it usually feels better to buy the stocks that everyone is already talking about, that comfort often comes with a price. The best-known shares, such as Microsoft (MSFT) and Wal-Mart Stores (WMT), often trade at higher multiples than the broader market. Consider that the five largest companies in the Standard & Poor's 500 index (Microsoft, General Electric (GE), Exxon Mobil (XOM), Wal-Mart and Pfizer (PFE)) trade at an average 2003 P/E of 20.3, compared with 15.4 for S&P's Midcap 400 average.

But it's not just a matter of size. It's also about recognition. Most analysts decide which companies to cover by studying candidates' earnings results, stability and potential. The more a company meets performance expectations and increases its market capitalization, the more analysts are likely to join the group and initiate coverage. (After initial public offerings and secondary offerings, underwriting firms might initiate coverage of clients as a part of their banking deals. It's been SmartMoney.com's policy to disclose such relationships, which might present conflicts of interest.)

To find companies in the earliest stages of growth, investor's might want to consider stocks with less, rather than more, analyst coverage. Note, though, that while this tactic can uncover some sweet opportunities, it can also spit out some stinkers. The fewer analysts contributing to earnings projections, the less reliable those projections may be. Likewise, the less press attention a company garners, the less transparent its operations.

For these reasons, today's screen is intended only for the most adventurous stock pickers — although we'll be adding plenty of safeguard criteria (more on that in a moment). And, as always, we encourage readers to do plenty of homework before investing in any company.

We didn't venture into the vast unknown alone — we brought along the SmartMoney.com Stock Screener. We began with a database of 8,326 companies and looked at the 356 of them that are followed by at least two, but no more than four, analysts. Two is the minimum number needed to make an earnings consensus just that. And while you might not need to know who has a Buy and who has a Hold on a company, it's good to have at least a couple of investment firms looking through the books.

Next came valuation. We didn't want to use the plain old price/earnings ratio, since many smaller companies trade at higher multiples thanks to their faster earnings-growth rates. So we made sure price/earnings-growth, or PEG, ratios, were less than 1.0. The PEG ratio compares a company's current P/E ratio with its long-term growth rate. Stocks with PEGs of less then 1.0 are generally thought to be bargains.

To select companies that are more likely to be well managed, we demanded returns on equity, or ROE, of more than 15%. This critical efficiency measure tells, among other things, how effectively a company is using its resources. To learn more about ROE, click here.

Our next step was to kick out debt-heavy companies by requiring debt-to-capitalization ratios of less than 0.4. Anything less than that is thought to be a good, safe number for a smaller company. We also made sure that annual sales were at least $100 million, and that candidates' average daily trading volume is more than 100,000 shares. These last two items are necessary for a stock to attract institutional interest, which is critical for long-term share-price appreciation.

After all of those steps, we were left with just 15 names.

Joseph A. Bank Clothiers
Hampstead, Md.-based Joseph A. Bank Clothiers (JOSB) sells conservative men's garb, both tailored and casual, through 160 stores in 30 states. It also receives orders via phone, its Web site and through other online sellers such as Amazon.com (AMZN). The company says business is growing like a lanky teen's inseam; current plans call for 50 new stores in 2003, and a total of 500 within five years. Locations, for now, are limited to the East Coast and Midwest, but management hopes to spark a California slacks rush with its first West Coast openings later this year.

A look at the income statement shows annual revenues growing modestly between 1999 and 2001, to $211 million from $193 million, and then jumping 15% to $243 million in 2002. Net profits during the same period have split the seams, growing to $6.5 million from $1.3 million in the 1999 to 2001 period, then to $10.9 million last year. Net margins (profits as a percentage of revenues) have also risen steadily for four years: to 2.4%, 3% and, finally, 4.4% in 2002 from 0.7%. That Joseph A. Bank has gained business at a time when so many retailers have lost it is impressive; that it has done so while restraining costs, even more so.

On Monday, the company raised its fiscal 2003 earnings guidance to $1.75 to $1.85 a share, far better than the Multex consensus estimate of $1.67 and the $1.55 the company earned last year. This, despite horrendous weather in the East and Midwest in February, and the very real possibility of war breaking out in Iraq.

So should investors try on some shares? Be warned: Joseph A. Bank has had a nice run already, sewing up a 202% gain in 2002. But if we assume the company will meet the low end of its forecast — $1.75 per share in 2003 — then the stock's forward P/E is 13.7, just a thread higher than apparel retailers' average P/E of 12.9. And Bank is expected to grow earnings at an annualized rate of 17.7%, according to the consensus of the three analysts who cover the company, compared with 14% for the group. That gives shares a forward PEG of 0.77, 16% cheaper than its peers' PEG of 0.92.

Monaco Coach
Value seekers might consider Monaco Coach (MNC), a Coburg, Ore.-based maker of recreational vehicles. That's right, we said the R word. Why would investors want to consider RVs when the combination of a weak economy and growing war frenzy has gas prices soaring, vacations cancelled and retirees holding off on leisure purchases? Perhaps because no one else is.

Monaco could benefit from the same trend we mentioned in reference to snowmobile and watercraft manufacturer Polaris (PII) on March 5. That is, statistically, Americans spend the most money on discretionary (read: fun) items at age 52. Baby boomers, the generation once described as a demographic "pig moving through a python," will reach age 52 over the next several years. So even if a lower percentage of those considering Monaco's vehicles end up buying during an extended economic slump, the pool of potential buyers could increase enough to counteract the drop.

And Monaco could be in for a smoother ride than its peers. It's already the largest seller of highfalutin RVs, the so-called Class A diesels, with a 33% market share. Analysts say the wealthiest buyers, who pay up to $1 million dollars for their diesel-powered palaces, are less susceptible to economic downturns than those who buy the $100,000 gas variety.

The main selling point for Monaco's stock, though, might be price. Shares trade at just 6.6 times projected 2003 earnings, even less than Winnebego's (WGO) 2003 P/E of 7.3. (Fleetwood Enterprises (FLE), the industry's other major player, will likely post a loss for 2003.) And since Monaco's long-term earnings projections call for 14.3% annual growth, a touch higher than Winnebego's 13%, its PEG ratio is only 0.46, compared with 0.56 for Winnebego. It would take a major upshift to catch the S&P 500's average PEG of 1.35.

For a full list of screen results, click here.