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Champions of the Downtrodden

Internet stocks seem to be getting all the attention these days. But there are people who specialize in looking for investments at the bottom of the pile.

May 25, 1999|THOMAS S. MULLIGAN | TIMES STAFF WRITER

While Internet stocks supply the fizz at the top of the market, some investors are plumbing the financial backwaters for the neglected, the misunderstood, the just plain ugly.

Specialists in overlooked investments shared their ideas in a panel titled "Investing Off the Beaten Track" at The Times' third annual Investment Strategies Conference over the weekend at the Los Angeles Convention Center.

"Define what traditional investors are looking at and we're looking at everything else," said Richard Kane, chief executive of Kane Anderson Investment Management, a private money manager.

Plains Resources Inc. (ticker symbol: PLX; Monday close: $17.81) of Houston, one of Kane's top holdings, is "a convergence of all things unpopular," he said. It's a small-capitalization stock when big-caps are popular, and it's in the downtrodden oil and gas exploration business.

But poor returns have driven investors out of the industry just as it may be poised for a rebound, Kane said.

Kane also likes Glacier Water Services Inc. (HOO, $20.25) of Carlsbad, Calif., whose stock has faltered in the last year but which has a unusual way of delivering water--through coin-operated machines at stores and shopping centers rather than in bottles.

The long bull market has lulled many investors into a state of "price unconsciousness," said Martin Whitman, veteran manager of the Third Avenue Value Fund, who said his goal is to pay no more than 50 cents on the dollar for what he thinks assets would fetch in a buyout.

Whitman likes the semiconductor and electronic-components industry, for example, but refuses to pay Intel Corp. (INTC, $55.94) prices. Whitman's out-of-favor picks include switch- and circuit-maker C.P. Clare Corp. (CPCL, $3.50), processing-equipment maker FSI International Inc. (FSII, $8) and Speedfam-IPEC Inc. (SFAM, $13.88), which makes devices involved in fabricating semiconductors.

All three firms have shown strong earnings growth in the past, but for various reasons their stocks have been clobbered in the last year.

Steve Romick, manager of the UAM-FPA Crescent Fund, looks for value in "busted" convertible bonds. These are corporate bonds that can be exchanged for stock when the stock reaches a certain target price, but they are considered busted because the stock is trading far below the target.

Romick doesn't worry that he might never be able to convert the bonds into stock; he buys them for the high yields that go along with the low price.

An example is the convertible bonds of Centertrust Retail Properties Inc. (CTA, $7.50), a Manhattan Beach real estate investment trust.

Asked about the prospects of Japan's depressed financial-services companies, Whitman had a typically tart reply.

"Japan sucks," he declared, adding that he wouldn't buy equities anywhere in the rest of Asia, either. Whitman's major exception is the stocks of some large, non-life insurance companies in Japan, which he called "the only capital-rich companies in a woefully undercapitalized economy."

Romick was very high on a San Francisco-based freight-forwarding firm called Fritz Cos. (FRTZ, $10.75), a stock that dropped to $6.06 from a 1996 high of over $30 because of some bad acquisitions and other problems. But he said that as a major provider of the services and know-how to help exporters move their products around the world, it has tremendous growth prospects if Asia's trade strengthens.

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