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Small Caps Redux?


BusinessWeek Investor -- Inside Wall Street

Small-Caps Redux?

So far this year, the small-caps are down 5.6%--less than the Dow or Nasdaq. Are they finally coming back? "Accelerating buyout activity in the small-cap value sector is sending that signal," says money manager Timothy Dalton, who has a portfolio of potential small-cap takeover targets.

In the past 18 months, notes Dalton, CEO of New York's Dalton, Greiner, Hartman & Maher, 22 stocks in DGHM's "buyout portfolio" were taken over, including Hussman International, acquired by Ingersoll-Rand at 120% of the market price, and Shared Medical Systems, bought by Siemens at an 85% premium. The buyouts reflect the values embedded in many small-caps, says Dalton. "The deals are signs of an impending comeback," he adds.

Among stocks in DGHM's buyout portfolio are Arctic Cat (ACAT), which makes snowmobiles and watercraft; Artesyn Technologies (ATSN), a major supplier of power converters to the communications industry; Buffets (BOCB), the largest U.S. buffet-cafeteria chain; and NCI Building Systems (NCS), a producer of prefab metal warehouses.

Steve Bruno, a tech analyst at DGHM, says all these companies have similar attributes: They sell at ridiculously low valuations--based on their free cash flows, strong balance sheets, sturdy sales and earnings growth, and "strong management" that owns large equity stakes.

Bruno figures that Arctic, trading at 11, will earn $1.07 a share in 2000 and $1.25 in 2001. Artesyn, now at 20, will earn $1.30 a share in 2000 and $1.65 in 2001, he figures. Buffets, selling at 11, should make $1.16 this year and $1.33 next. He sees NCI, trading at 17, earning $2.85 in 2000 and $3.25 in 2001. "These companies aren't likely to be around for long," says Bruno.By Gene G. MarcialReturn to top

TABLE

Selected Buyout Bait

52-WEEK PRICE EST. BUYOUT

STOCK HIGH-LOW MAY 31 PRICE

ARCTIC CAT 11 1/8-8 1/4 10 3/4 22

ARTESYN 27 3/16-15 22 50

BUFFETS 12 1/4-7 29/32 11 5/8 24

NCI BUILDING 25 3/8-14 1/2 17 1/16 27

DATA: DGHM, BW, BLOOMBERG FINANCIAL MARKETS

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