With the stock market up so high, are there any good buys left? Yes, say securities analysts at several regional brokerage houses.
Interestingly enough, the companies they recommend are fairly familiar to local stock watchers as solid, well-managed firms. And even though the stocks have had good moves in the past, the analysts believe they still are attractive investments at current prices.
The three stocks the analysts pinpointed are Giant Food Inc., Atlantic Research Corp. and Kay Jewelers Inc.
Eliot H. Benson, research director at Ferris & Co., Washington, thinks that Giant Food ("A" shares) of Landover, Md., is a buy at $25.75. Although the stock soared 86 percent in 1985, its price action since Jan. 1 has been "minuscule," to use Benson's word.
"Since the beginning of 1986, Giant has traded more like a midget in a narrow 2.5-point range, and is now a shade below its yearend price of $26.50," Benson said. "During this same time frame, the market, as measured by the Standard & Poor's 500 index, is up 11 percent."
Just why Giant stock has lagged the market is not clear. The stock had an exceptional run last year -- far ahead of other food-store chains.
As a result, Benson said, investors may have decided to focus on other food stocks -- which have been moving up along with the market during the last several months.
Despite the recent poor showing made by Giant's stock price, Benson said, the food chain "performed like a real giant" when it came to its finances.
Giant's earnings for fiscal 1986 (the year that ended Feb. 22) grew by 24 percent to $1.90 a share, compared with $1.53 a share for the previous year. Benson foresees another gain for fiscal 1987, with earnings moving up to $2.15 a share, which is an increase of 13 percent. Benson said he expects earnings to grow at a 12 percent rate during the next several years.
At $25.75, Giant stock is selling at 13.5 times its 1986 earnings and 12 times its estimated 1987 earnings. By comparison, the PE ratio for the Standard & Poor's 500 is about 15.5.
Giant's price earnings ratios, Benson said, also are considerably lower than the average PE of 17 recorded for nine regional supermarkets. The discount helps make Giant an attractive investment, he said.
Giant operates 137 supermarkets, including 92 in the metropolitan Washington area and 31 in the Baltimore area. Giant added five stores last year and has 11 under construction.
"Considering the company's growth, superior profit margins, leading competitive position and favorable prospects, we are again recommending purchase for capital gains potential," Benson said.
Michael L. Mead, research director at Scott & Stringfellow, Richmond, thinks that Atlantic Research Corp. of Alexandria, at $28.75, is still an attractive stock. "Relative to the market, it looks reasonably priced," Mead said. ARC's stock grew a modest 7.7 percent in 1984, generally a down year in the market, and then went up 15.6 percent in 1985, which was close to the average gain for the market.
In January, the stock dipped to the low $20s. Mead thinks there were several factors at work, including analyst worries about the possible impact of federal budget cuts on Atlantic Research. But ARC shares soon bounced back, and the stock is now up about 19 percent thus far in 1986.
Mead believes ARC's profits will continue to grow. From the $1.90 a share (adjusted) that ARC earned in 1985, earnings will increase to $2.30 in 1986 and $2.75 in 1987, Mead estimates. That would be an average increase of 20 percent a year.
At $28.75 a share, Atlantic Research is selling at 12.5 times its projected 1986 earnings and only 10.5 times 1987 estimated earnings. That puts ARC well below the current S&P 500 price earnings ratio of 15.5.
Moreover, in an era when new contract awards are being watched closely for clues to the health of Beltway companies, Atlantic Research recently announced that its newly acquired subsidiary, Systematics General, has won federal approval to operate a domestic communications satellite system for NASA. That contract will help expand the business horizons of Atlantic Research, a maker of solid propellant rockets for missile systems.
Charles T. Akre Jr., research director of Johnston, Lemon & Co., Washington, finds good value in Kay Jewelers of Alexandria, at $16.38, a stock that is up about 20 percent since the beginning of the year.
Kay Jewelers only recently has emerged as a company that is attracting investor attention. Last May, 20 percent of Kay Jewelers was spun off from its parent company, Kay Corp., which still owns the other 80 percent of the stock. Akre, in a recent report on the company, said, "We feel strongly that KJI is both overlooked and undervalued by the market."
The company recently announced a 5-for-4 stock split.
Akre estimates that the company's 1986 earnings, adjusted for the split, will grow to between $1.35 and $1.40 a share from $1.20 a share (or $1.12 a share on an inventory adjustment) the previous year. He thinks that 1987 should see another rise in profits to a level of between $1.65 and $1.70 a share.
That would give the company an average 21 percent increase in profits per share each year. Akre said he is looking for "20 percent net income growth in 1986 and 1987 on a 10 percent growth in revenue."
At the current price of $16.38, KJI stock is selling for 14.6 times the $1.12 earnings of 1985. At the estimated 1986 earnings of $1.35, the PE ratio drops to 12.1, and at the 1987 estimated earnings of $1.65, the PE ratio drops to 9.9.
Because the overall market PE is now at 15.5 and investors are likely to give Kay Jewelers a PE ratio of least 12, if not more, that could bring the price of the stock up to almost $20 a share in 1987.
The first quarter of 1986 is over, and here are the names of the winners and losers on the Washington Business stock list, along with their percentage of gain or loss.
The top 10 gainers were: 1. Washington Homes (107.1); 2. Rowe Furniture (72.5); 3. Circuit City Stores (68.3); 4. Noland Co. (65.2); 5. MBI Business Centers (59.4); 6. Second National Building & Loan (58.7); 7. Cerberonics (58.2); 8. Ryland Group (57.6); 9. Tultex Corp. (55.3); and 10. Universal Security Instruments (53.3).
The top 10 losers were: Monarch Avalon (-39.3); Sutron Corp. (-35.3); Energy Capital Development (-27.3); Stuart McGuire Co. (-22.2); Tesdata Systems (-20); Isomet (-17.2); Netword (-18.2); Pubco (-16.7); Martin Processing (-16.7); and Syscon (-11.1).
The losers' list offers two curiosities. The first is the appearance of Monarch Avalon, a Baltimore board-game manufacturer. Its stock soared last year after it released "Dr. Ruth's Game of Good Sex," named for Dr. Ruth Westheimer. During 1985, the stock rocketed from $3.25 to $21.50, and fell back to $10.50, for a gain of 223.1 percent. Since Jan. 1, the stock is down 39.3 percent.
Similarly, Martin Processing of Martinsville, Va., a company that dyes carpet yarn and produces plastic film, was the No. 1 gainer in 1985, up 342.4 percent from $14.75 to $65.25, after having gone as high as $83. The stock rose on talk about the possible sale of the company after the death of its founder, Julius Hermes. The stock is down to about $53, which some observers think is close to the per-share value of the company.
Montgomery County sold $50 million in general obligation bonds on schedule last week at an average of 6.0956 percent interest. The one-year bonds went at 5.8 percent and the 20-year bonds at 6.3 percent. The county's finance director, Max R. Bohnstedt, said the bonds sold at the lowest rate of interest he had heard of for a county or state issue.
Bohnstedt was especially pleased because, two weeks before the sale, it appeared that all municipal bonds might be in trouble. Talk on Capitol Hill that certain muncipal bonds, traditionally tax-exempt, might become taxable under certain circumstances caused the municipal bond market to collapse briefly.
The fears later subsided, the market settled down and the Montgomery issue, rated AAA, went off smoothly.