OfficeMax (#48) went public at the end of last year, and it was a successful initial public offering. We like it because it's a simple business, office-supply superstores, and it's recession proof. For obvious reasons, superstores are growing like crazy right now. They can guarantee low prices to their customers by ordering in huge volume, and they don't have to build lots of stores; instead, they have to find good real estate. Superstores have been doing excellent business over the last 5 to 10 years and have been some of the best stocks. This company is on a January fiscal year-end with estimated fiscal 1996 earnings per share of 95¢ and a five-year growth rate of 30%. Running its numbers through our magical foolish machine, I come up with a target price in the high forties.
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Jack Laporte
President
T. Rowe Price New Horizons Fund
T. Rowe Price Associates
Baltimore
Assets: Manages $1.7 billion, with a focus on small-company growth stocks
Performance: An annualized return of 13.25% over the last five years
Top Inc. 100 Picks: Boston Chicken, Lone Star Steakhouse & Saloon, Outback Steakhouse, PetSmart, Wellfleet Communications (Bay Networks)
As a growth investor I look for emerging companies early in their life cycle, companies I'd like to own as they grow larger and become more widely known. I tend to have a much lower stock turnover than the average small-company mutual-fund investor. [Laporte's portfolio turnover averages 40% to 45% a year.] I try to find good companies and stick with them.
Boston Chicken (#35) is an aggressively run restaurant company trying to exploit the take-home-meal market. Led by an outstanding management team, the company is quickly expanding its number of units. Also, it's in the process of evolving and expanding its menu beyond chicken, which will broaden the appeal of the restaurant and make it attractive for both lunch and dinner. It's one of the fastest-growing restaurants out there.
So are Lone Star Steakhouse & Saloon (#18) and Outback Steakhouse (#61). They're both growing earnings at more than 40% a year. Their average units do around $3 million annually, and they employ two of the best management teams in the industry. Currently, Lone Star Steakhouse & Saloon is looking for another small restaurant chain that it can roll out over the next five years in addition to its existing business, while last year Outback settled on an Italian-restaurant concept, which it will expand along with its core business.
Wellfleet Communications (Bay Networks) (#24), a company that makes products that connect networks, is riding the strong PC-shipment wave and taking advantage of the increasing desire of PC users to communicate with one another. The result of a merger between SynOptics Communications and Wellfleet Communications, Bay Networks operates in an exciting sector of the technology market and is positioned to take advantage of that technology growth.
David Ryan
Portfolio Manager
New USA Mutual Fund
New USA Research & Management
Los Angeles
Assets: Manages $175 million, with a focus on growth stocks
Performance: An annualized return of 3.14% since the fund's inception, on April 4, 1992
Top Inc. 100 Picks: Boston Chicken, Lone Star Steakhouse & Saloon, PeopleSoft, PetSmart, Steris
We're looking for the stocks with the strongest acceleration in earnings combined with consistent earnings growth of more than 20% to 25% annually. Also, we like to see quarterly earnings coming in at that rate or higher, because that's where you get a consistent growth stock that will continue to grow.
PeopleSoft (#59) has 1995 estimates that show earnings increasing by 42% and then by another 37% in 1996. And PetSmart (#94) has had earnings increases of more than 100% for three out of the last four quarters, compared with corresponding quarters of the prior year. Even though it's trading at a real high multiple, its earnings are going to increase 90% in 1995 and 112% in 1996. One hundred and forty-six superstores are up and running, and PetSmart just acquired superstore retailer Petstuff, which had around $77 million in revenues.
Once we've gotten the fundamental story and checked the earnings, we also want to make sure that recognition of those earnings is being reflected in the marketplace. We want to see a strong stock in terms of price action. How well is that stock performing, versus all the other stocks in the market? We want it to be in the upper quartile in terms of price performance over the last 12 months.
Boston Chicken (#35) is a company I'd keep my eye on. You're talking about a high multiple on this stock, and it will have earnings growth in 1995 of 44% and in 1996 of 36%. Boston Chicken has about 250 franchise restaurants and is rapidly expanding. It's a situation in which the company is well known and very hyped, and the stock has been going sideways while the earnings are really ramping up, bringing the valuation of the company down. The quality of the restaurants is good, they're neat and clean, and these things are springing up all over the country.
Steris (#86) also looks good. It's had consistent earnings growth of about 73% over the last three years. It has great estimates for 1995 and 1996. Also, it just came out with a new product called EcoCycle, designed to remove biohazardous hospital waste. I would probably recommend Steris because it's had a nice run-up, but it's probably going to have to put in some time for another couple of months.
