As stock prices kept crumbling through late June, Ende stayed busy putting some of that idle cash to work. In search of remaining values as the quarter ended, I began quizzing Ende and other experienced small-cap stockpickers. Here's a shopping list of five small companies that stand out:-- Cognex. Sales at this 21-year-old maker of "machine vision" gear--cameras that inspect manufacturing lines and guide robots--are off sharply amid the capital-spending crunch. Wall Street expects Cognex (CGNX
) to lose money for the full year, but Ende thinks it's closer to breakeven and sees earnings potential of about $1 a share. It lost 25 cents a share last year after making $1.49 in 2000. Meantime, Cognex has no long-term debt and wields more than $150 million in working capital.-- LogicVision. Having gone public last November at $9 a share, LogicVision (LGVN
) saw its shares surge above $15. Now they're near $5, and RS Smaller Company Growth Fund manager Bill Wolfenden is buying. The company sells "self-test" circuit designs that semiconductor makers can embed on chips. They use LogicVision's circuits instead of external test gear to ensure that the microprocessor works correctly. The company owes no long-term debt and holds $45 million, or $3 a share, in cash and government securities.-- Renal Care Group. An operator of dialysis centers in 26 states for patients with chronic kidney failure, this company's sales and earnings have been growing smartly. Last year, it posted a profit of $1.52 a share; FPA's Ende sees perhaps $1.75 this year. As with most any health-care stock, the potential for changes in government reimbursement policy poses a risk. And with the stock recently above $30, Renal Care (RCI
) remained on Ende's watch list. Where would he be a buyer? As the stock gets closer to $28 or so. At that, Renal Care would sell for little more than its rate of profit growth.-- Topps. Shares in this maker of trading cards and candy for kids--it's responsible for the lollipop known as Baby Bottle Pop, a cavity creator if there ever was one--go in and out of fashion. With the fading of the Pokemon craze, to which Topps (TOPP
) contributed candy and stickers, sales and earnings have been shrinking. In the fiscal year ended last March, Topps earned 64 cents a share, and the Street sees profits sinking to 56 cents this year. It earned 17 cents in its fiscal first quarter. Royce & Associates managing director Whitney George nonetheless sees the stock as a buy at $10 or less--and thinks it's fairly valued at $12 to $13. Topps is debt-free and holds cash of more than $2.50 a share.-- Verity. Yes, there may be value in an Internet stock. Verity (VRTY
) makes software for corporate intranets and Internet portals. Just as you would imagine, those sales have shrunk dramatically--down 35% in the fiscal year ended May 31. Yet Verity is profitable, having earned 4 cents a share in fiscal 2002, and the company sees revenue growing 15% to 20% in the year ahead. JohnsonFamily Small Cap Value Fund manager Wendell Perkins owns the stock, in part because he likes the company's balance sheet, which shows more than $4 a share in cash but no debt. Perkins also favors Verity's 22% market share, making it the leader in a highly fragmented industry.
Will all of these companies prosper? I can't say. But if you have cash to put to work in stocks, identifying financially strong companies like these and waiting for the sellers to offer a good price is a solid first step. By Robert Barker