January 4, 2005  Email this  Print this
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Midwestern Values
by Steven Goldberg  Elliott Schlang sticks to his knitting -- and that's a good quality for a stock picker. Schlang has spent 40 years analyzing stocks. The small research firm he runs, LJR Great Lakes Review, covers only companies based in the Midwest -- those he and his analysts can easily keep tabs on from their Cleveland office.
He sells his research to big institutional clients-mutual funds, pension funds and the like -- but he focuses on small and midsize companies.
It's kind of ironic actually, because these are stocks that individual investors would have an easier time buying and selling. Size can work against large institutions that want to buy big blocks of small- or mid-size company shares. Buy orders create so much demand that share prices can climb; sell orders can be so large that the added supply may not be absorbed and share prices fall.
But Schlang's popularity among these 800-pound market gorillas also speaks volumes about his abilities as an analyst. After all, these institutions wouldn't pay top-dollar for his research or move on his advice, if they didn't value it.
Four Picks for '05
So who does Schlang like in the coming year?
Among his latest picks is Education Management Corporation (EDMC), a player in the growing for-profit education sector. This Pittsburgh, Pa.-based company has 67 facilities offering undergraduate programs in fields ranging from culinary arts to fashion to business and health sciences. Its operations are spread across 24 states and two Canadian provinces.
Revenues have grown every year since at least 1992, while earnings per share have increased every year since 1995. What's more, earnings rose an annualized 28% over the last five years. Profit margins are high, too, with return on equity in the mid-teens. Schlang estimates the firm will earn $1.29 per share this fiscal year, which makes its P/E about 25. But Schlang expects earnings to grow 20% annually over the next three to five years, giving it a PEG of 1.25.
The big operator of long-term care centers, Manor Care (HCR), will benefit from an aging population, the trend towards quicker discharges from hospitals and possible tort reform. Schlang also says a better-than-expected rise in medicaid reimbursement rates will help the company.
The Toledo, Ohio, company is recovering from a number of problems, including lower government reimbursement rates and patient liability claims.
Earnings bottomed at 82 cents in 2000, and should reach $2.13 this year. That gives the stock a P/E of 16. Schlang expects the company's earnings to rise 14% annually over the next three to five years.
Homebuilder M/I Homes (MHO) "appears neglected with only one other research firm providing coverage," Schlang says.
Earnings have risen in each of the last eight years, and are up a sizzling annualized 24% over the last five years. While that growth rate isn't sustainable, the Columbus, Ohio, company should earn $6.90 this year, giving it a P/E of 7.
Relative to other homebuilders, M/I trades near the bottom on P/E, book value, and sales, despite having higher profit margins and less debt than most of its competitors.
RPM International (RPM) of Medina, Ohio, is a nice, conservatively run company. It makes a variety of specialty coatings for boats, houses and industry. Rust-Oleum is probably its best-known brand name.
RPM's earnings should increase about 11% annually, Schlang says, plus it pays a 3.3% yield. Yet the P/E is just 13 based on Schlang's fiscal 2005 earnings estimate of $1.35. To boost profits, the company has closed some facilities, cut the work force by 10% and sold off some non-core products. The one risk: possible asbestos liability.
Thor Industries (THO) is one of the nation's leading recreational vehicle makers. The Jackson Center, Ohio, company has a 24% market share in this consolidating industry.
The RV industry gets a bad rap because people think it's terribly dependent on the price of gasoline. Not so. Research shows that most RV owners don't drive very far. Rather, they tend to drive their RVs to a nearby campsite and stay put.
Thor's return on equity, an indicator of profitability, is a phenomenal 24%. Schlang says earnings should reach $2.55 in fiscal 2006. The stock sells at 16 times his earnings estimate for the next 12 months. Schlang thinks the company will increase earnings at about 15% annually in the coming three to five years.
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