January 11, 2005  Email this  Print this
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Five Small-Caps for Every Investor
by Steven Goldberg  There are precious few good small-cap value funds still open to new investors. That's largely a reflection of just how picked over that once-obscure corner of the market is nowadays. Lawrence Creatura runs one of the few worthy of your money. Creatura, 39, has been lead manager of Constellation Clover Small Cap Value (TCSVX) since 1996. Over the last five years, the fund has returned an annualized 14%.
Assets are still relatively small at $590 million, and annual expenses are reasonable at 1.27%
What I like most about Creatura is how well he explains his stock picks. Once he's finished, it's all I can do to keep from going out and buying all of them.
Conservative plays
Take Cumulus Media (CMLS). This chain of radio stations, which Creatura calls "a miniature Clear Channel Communications," should earn 56 cents a share this year, according to the consensus of brokerage analysts surveyed by Thomson First Call.
That gives the stock a P/E of 25. Exclude goodwill the company is forced to write off because of acquisitions, and the P/E hovers just above 20. That's still not screamingly cheap except that analysts are expecting continued double-digit earnings growth.
Creatura thinks this old-time radio chain, rather than the hyper-inflated satellite radio firms, represents great value. "They operate in local oligopolies. They're generating lots of free cash, and they're using it to buy back stock." The company sells at 1.2 times book value.
Another Creatura pick is even more conservative: RPM International (RPM). "This is one of those companies that's emerging from the terrible insult of being an old-economy company. Everybody hated it."
Regular readers will recall I wrote about RPM just last week as a favorite of Elliott Schlang, who runs LJR Great Lakes Review, a research boutique. Selling at 14 times fiscal 2005 earnings of $1.35, RPM has a steady earnings growth rate in the low teens. It's paying down debt and cleaning up its balance sheet.
Its brands, such as Rust-Oleum, are household names that command premium prices. The only negative: the possibility of asbestos litigation.
For the contrarian in you
Another Creatura favorite is a typically contrarian pick: Felcor Lodging Trust (FCH). It's a hotel REIT. Hotels are the one real estate sector that is still out of favor. Felcor owns 145 hotels, including Embassy Suites.
As demand continues to pick up, Creatura sees Felcor gaining momentum. Analysts expect Felcor to earn $1.34 a share in 2005; he thinks it'll do a little better. Even if it doesn't, it's selling at just 10 times earnings. The negative: There's no dividend yet.
Another contrarian play is Sharper Image (SHRP), the high-end specialty retailer with 177 stores. The company is doing badly; earnings fell in 2004. Analysts expect earnings to rebound this year to $1.57, giving the stock a P/E of 11.
As Creatura sees it, the company is solidly profitable. It has no long-term debt and almost $2 a share in cash. It trades at a just 0.4 sales. "Historically, this is trough valuation," he says. "It doesn't get much cheaper than this. Specialty retailers live another day and sort their issues out. I think Sharper Image will do that."
Toying with risk
Finally, Creatura offers one for the risk taker in you. In other words, it's a good story, but don't put the children's college money here.
The stock is Leapfrog (LF). If you're a parent, you may know their educational toys. The toy most people have seen is an educational pad. It's a frame that you set a notebook in, and it talks about what you're pointing at with a pen. So, it might tell you what state on a map you're pointing at, or what color of the rainbow.
After hitting $45 in 2003, Leapfrog has plunged to its current $13. The company had product delivery problems, and has acquired competition. "But they're not standing still, and they have some pretty hush, hush new products," Creatura says.
Meanwhile, revenues are still pretty good, earnings will grow this year and the company has no debt and almost $2 a share in cash. Analysts estimate it will earn 71 cents this year giving it a P/E of 18. Creatura thinks Leapfrog is just beginning its bounce back.
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