Running with the Bull

We’re going to charge more for subscriptions if things continue this way. Thirty dollars doesn’t seem like fair compensation for the outsized profits our Hot Stocks panel has produced the past two years, when their returns have crushed the S&P 500’s. Bobby Edgerton’s selections for 2013, for example, posted a 45.2% total average return, and he didn’t even win. “I thought I had blown everybody away,” Capital Investment Cos.’ chief investment officer says. “But, hey, I’ll take 45% and let these guys shoot at that all day long.”

Every year, we ask professional stock pickers to choose three companies from Business North Carolina’s Top 75, the magazine’s annual ranking of the largest public companies headquartered in the state (“Bigger spenders,” August 2013). The panelist with the largest average total return — including splits and dividends — over 12 months wins. Last year’s premier picker was Larry Carroll. The president of Charlotte-based Carroll Financial Associates Inc. enjoyed Krispy Kreme Doughnuts Inc. on his way to the title, the Winston-Salem-based company’s share price nearly tripling during the 12 months that ended Nov. 25.

Edgerton admits his return, nearly 20 percentage points higher than the S&P 500 during the same period, was due to “a little bit of luck, little bit of skill.” Fortune favored Harris Teeter Supermarkets Inc., which spiked after Cincinnati-based The Kroger Co. announced it would acquire the Matthews-based grocer in a transaction that valued its stock at 35% more than its starting price. Skill selected Durham-based Cree Inc. — Edgerton liked its financials — and brought home a nearly 75% return. “To me, the most important thing I look at is a company’s balance sheet. … If they have a bunch of cash and little debt, I’m never going to hurt anybody too bad.” All five panelists produced returns of greater than 20% last year. Will such prosperity endure 2014? “Boy, that’s a tough call,” Edgerton admits.

When we asked Frank Jolley, president of Jolley Asset Management LLC, to participate this year, he responded with the question on everybody’s mind: “Before I do my picks, will you please tell me whether the Fed will print money for another 12 months?” With the U.S. unemployment rate at its lowest point since 2008, many feel it’s time to taper the Federal Reserve’s purchasing of $85 billion of bonds each month. Such a move would surely put a crimp in our panel’s picks. “Who knows how much they’re going to stop lowering interest rates and stop buying bonds and mortgage-backed securities?” Edgerton wonders. “Who knows that? I’d almost have to flip a coin.” We appreciate the candor, Bobby, even if it puts a damper on our new subscription plan.

BOBBY EDGERTON, president, Capital Investment Cousel Inc., Raleigh

PICKS:

Quintiles Transnational Holdings Inc.The monitoring of clinical trials is a tricky business, but the Durham-based company, which went public last year, covers all the bases — study start up, project management, clinical and data monitoring, and analytics. Debt of $2 billion is a bit high for me, but $600 million of cash makes for a decent balance sheet.

Red Hat Inc.
If I could, I’d pick this stock three times. The Raleigh-based company, which develops and licenses open-source software, has cash of $1.3 billion and no debt. Android, Amazon, Salesforce.com and Netflix run on open-source operating systems, so it has enormous growth potential at a reasonable valuation. I like CEO Jim Whitehurst and Chief Financial Officer Charles Peters, and I love Red Hat.

RF Micro Devices Inc.
This company, which is based in Greensboro and makes radio-frequency chips for mobile phones, has twice as much cash as debt. A quality component supplier for smartphones is a sweet-spot business, and all three of its divisions have strong sales. The transition from 3G to 4G is still in its early stages. As it continues to swell, sales should reach $1 billion this year.

FRANK JOLLEY, president, Jolley Asset Management LLC, Rocky Mount

PICKS:

Bank of America Corp.  The bank’s continued earnings recovery under CEO Brian Moynihan, who has led the financial institution since 2009, should allow for above-average dividend increases over the next several years. Plus, 
its stock appears undervalued. In late November, it was approximately 12 times this year’s estimated earnings and only 76% of book value.

Speedway Motorsports Inc. Though attendance at NASCAR races hasn’t returned to pre-recession levels, a new eight-year TV contract should boost the revenue of Concord-based Speedway Motorsports, which owns and operates eight U.S. racetracks, over the next few years. The stock offers total-return potential as the company pays a good dividend and shares are about 50% below what they were trading at in 2007.  

Nucor Corp. Charlotte-based Nucor is a low-cost producer of steel and steel products that has an excellent balance sheet. Earnings are expected to accelerate 
to $3.07 per share in 2014, when CEO John Ferriola will take over as executive chairman of the board. That’s more than double last year’s estimate. It also has a good yield, giving investors excellent total-return potential. 

CRAIG LEWIS, chief investment officer, Franklin Street Partners, Chapel Hill

PICKS:

Furiex Pharmaceuticals Inc.  The lead drug in the Morrisville-based drugmaker’s pipeline is eluxadoline, which will be used to treat irritable-bowel syndrome, an underserved market that offers no unrestricted approved products. It recently raised cash, most likely enough to get the drug through Food and Drug Administration approval and into a favorable partnership agreement.

PowerSecure International Inc. All three of its businesses — energy efficiency, utility infrastructure and distributed generation — are growing nicely, but we’re most encouraged by distributed generation, which provides electricity backup systems for institutional, government and commercial customers. Increasingly, businesses such as hospitals and grocery stores are lining up for the Wake Forest-based company’s proprietary, turnkey systems.  

The Fresh Market Inc. The Greensboro-based grocery chain reported a disappointing quarter in November, creating a great buying opportunity. They operate 136 stores with the potential to grow to 500, and while they have experienced growing pains in some new markets — Houston in particular — store economics remain solid and should drive annualized earnings-per-share gains of 20% over the next three to five years. 

DON OLMSTEAD, managing director, Novare Capital Management LLC, Charlotte

PICKS:

Bank of America Corp. As it moves past legacy mortgage issues, the Charlotte-based bank is positioned to benefit from 
a growing economy, improving credit quality and a rebounding housing market. Its focus on cost reduction and buybacks should boost earnings per share, and the stock’s valuation, trading below its historical average, is attractive.

Quintiles Transnational Holdings Inc. The largest contract research organization in the world, Quintiles is positioned well for growth as biopharmaceutical manufacturers continue to outsource a greater portion of their clinical trials and research and development. In addition, the company has key advantages — including scale, higher margins and a more diverse customer base — over its peers.

Red Hat Inc. As a provider of open-source software products, the Raleigh-based company is exposed to several growth trends in the coming years, including cloud computing. Companies are shifting to open-source software because it’s cheaper and offers greater flexibility. Red Hat is also expanding its offerings, creating new revenue streams from its existing customer base.