Every investor dreams of finding a low-priced, little-known stock that turns into a bonanza. Steve Newby of Koonce Securities in Rockville knows that feeling. Last week, Newby hit the jackpot with Essef Corp. of Mentor, Ohio. Newby, his family and his clients rang up a profit of $1.358 million.
Newby, a 40-year-old finder of undiscovered stocks, recently wrote about his experience with Essef Corp. in Strategic Investment, a Washington newsletter. He also discussed his "big hit" in an interview.
Newby recalled that he first heard about Essef Corp. from a client in early 1985. It was quoted at $12 bid in the "pink sheets," a compilation of over-the-counter stocks not carried on the Nasdaq electronic system. Newby wrote to Essef, which makes plastic products, and asked for its annual report. He liked what he saw in the report and tried to buy some shares.
"It was obvious that the stock, trading incredibly at less than three times earnings and one-half of book value, was a steal. But from whom? There was no offer price. No stock for sale. Usually by raising the bid a few dollars, stock becomes available. First, I jumped the bid to $15, then $18, then $21. I hadn't bought a single share," Newby wrote.
Because company insiders at Essef owned almost all of the 373,000 shares outstanding, Newby said, he wrote to 22 officers offering $24 a share for any stock they would sell. Finally, one officer replied and Newby bought 1,629 shares.
Newby continued to buy in small amounts and, in January 1986, he went to the company's annual meeting in Mentor, a few miles outside of Cleveland. He discovered, joyfully, that he was the only stockbroker in attendance.
The president's report on the company's operations made it clear that Essef's business was strong. And when Newby asked about a public offering, he was told the company was thinking about splitting its stock and selling additional shares in the coming year.
The company was then earning $6 a share, Newby noted, and if a public offering came at a normal price of 12 to 15 times earnings, the stock would be priced at $72 to $90 a share -- or perhaps even higher. At that point, the stock was still trading at under $30.
"As the plane left Cleveland, I knew I'd struck gold. And not a single other broker to worry about," said Newby.
In the months afterwards, he bought every share of Essef he could find. By the time the company made its move, Newby's family and clients owned 14,000 shares, which became 140,000 shares after a 10-for-1 split.
The company completed its offering a week ago, selling 1.5 million shares at $13 a share.
Newby figures that he paid an average of $33 a share for the 14,000 shares, or a total of $462,000. At the $13 offering price, his 140,000 shares were worth $1.82 million -- for a paper profit of $1.358 million.
"I'm estatic," said Newby. "I'm ecstatic because I feel the stock can double from here."
Newby is an old hand at discovering little-known stocks. A University of Maryland graduate, Newby worked at Wheat, First Securities and later at Shearson Lehman Brothers and finally found his way to Koonce Securities, where he could indulge his fascination with out-of-the-way stocks.
Newby studies stocks few investors ever heard of, searches the "pink sheets" for possible candidates, reads annual reports by the ton and goes to as many annual meetings as he can. He advises clients to do the same.
Right now, Newby especially likes Metallurgical Industries Inc. (MTALA-$12) and Optelecom Inc. (OPTC-$2.38). Both firms can be considered turnaround situations.
Optelecom, located in Gaithersburg, provides fiber optic products and laser systems for the government and commercial customers. It had sales of $3.3 million in 1986 but showed a loss of $121,000. Its first-quarter figures showed a small profit. Optelecom shares once sold as high as $11 a share but investors have grown tired of waiting for the company to get its big contract, Newby said. However, Newby is optimistic about the company's prospects.
Metallurgical Industries of Tinton Falls, N.J. saw its fortunes decline in the 1980s when economic storms hit customers in mining, agricultural implements and drilling. Newby's enthusiasm for the company is based on its development of a new metal strengthening process called Metbond, which he believes could substantially improve the company's revenue and profit picture. The firm's A shares, selling at $3.75 in January, have moved up rapidly since then.
The man mentioned most often to succeed Gordon S. Macklin as president of the National Association of Securities Dealers is Joseph R. Hardiman, who was elected last fall as the 1987 chairman of the NASD board of governors. Hardiman is the chief operating officer of Alex. Brown & Sons, a major Baltimore brokerage firm.
Macklin is leaving NASD after 17 years to become a top official of Hambrecht & Quist, a San Francisco brokerage company.
The NASD will name its new Rockville operations center in honor of Macklin on Wednesday and the election of the new NASD president will take place on Thursday.
Harold N. Goldsmith, president of Eastern Savings Association in Timonium, Md., and chairman of Merry-Go-Round Enterprises of Towson, Md., a retail clothing chain, has bought 126,000 shares of Columbia First Federal Savings & Loan Association of Washington. The cost to Goldsmith: $1.9 million.
Goldsmith told bank regulators that he had bought the shares for "capital appreciation." His shares represent 5.1 percent of Columbia's 2.5 million outstanding shares. Big blocks of Columbia First stock already are held by the Fidelity and Legg Mason mutual funds and by developer Sidney Brown, who has 156,000 shares, or about 6.4 percent of the stock.
The big blocks account for about 30 percent of Columbia First's stock, said Chuck McElroy, the thrift's investor relations officer. Officers and depositors also hold a significant amount of stock that is not traded very actively.
The United Savings Bank, headquartered in Vienna, recently attracted the interest of real estate developer Albert Abramson of North Bethesda. Abramson and a group of investors bought 111,150 shares of United Savings, which represented 9.9 percent of the thrift's shares. Chris Burch, United's chief financial officer, said he viewed the Abramson group as "passive investors."
United Savings, which has assets of $440 million and 11 offices in Northern Virginia might seem like an acquisition target but Burch said the board was "adamant on its independent posture."
United has 1.1 million shares outstanding but about 40 percent of that is now held by Abramson and several other major investors, including officers and management.
Allied Capital Corp. of Washington, a venture capital firm with $125 million of investments, is planning to open a new fund called Allied Technology Partnership. David Gladstone, president of Allied Capital, said the fund probably would raise between $5 million and $15 million to put into high-tech companies. Allied's other investment funds have generally stayed away from the more esoteric high-tech companies and from very early-stage development financing.
T. Rowe Price Associates will soon open a Foreign Discovery Fund, which will specialize to investments in small growth companies overseas. But unlike most Rowe Price funds, which are open-end funds, this one will be a closed-end fund. The difference is that with open-end funds, the investor buys his shares from the fund and sells them back to the fund. The shares in a closed-end fund trade like shares of stock on an exchange. Managers of closed-end funds do not have to worry about having to sell their holdings to meet a wave of redemptions from worried investors.
The Foreign Discovery Fund, considered a high-risk fund, hopes to spread its investments over 100 companies in at least 10 foreign countries. The fund plans to raise $75 million by selling 7.5 million shares at $10 each. Closed-end funds, after their initial offering, tend to sell at prices that are below their net asset value.