Quarterly Update to Stock Picks for 2013

by JT McGee

The first quarter of 2013 is the kind of quarter that investors dream of…rising stock prices everywhere despite concerns over growth, the fiscal cliff, Europe, and a faltering financial system in Cyprus.

The first quarter has been very good to my four stock picks for 2013, although I expect further upside as long as the markets don’t take a complete and total nosedive.

Here’s an update to each individual pick:

Conrad Industries (CNRD) – Up 27.03% YTD

Conrad Industries released its annual report on March 28 (today), so investors have yet to catch on to the many favorable developments. CNRD reported $20.8 million of net income, or $3.46 of earnings per diluted share for the twelve calendar months of 2012. It also reported an increase in its backlog to $122 million.

Furthermore, cash continues to build at Conrad Industries, even after the company paid out a $2 special dividend to shareholders in December 2012. Cash now stands at $55 million. The company may also recover a total of $22.6 million (pre-tax) from the BP settlement fund from lost business as a result of the Deepwater horizon disaster. Conrad Industries has a $22 million expansion plan in place for 2012. Assuming best case with the Deepwater claim, and share repurchases of $13 million, Conrad should still have a strong cash position of $35 million. Capex spending should add incremental sales and reduce leasing costs.

Finally, Conrad Industries’ board of directors approved a $10 million expansion to its share repurchase program in February 2013. As of today, the company has $13 million to deploy repurchasing its own stock. I’m continuously impressed by management’s desire to help boost shareholder value with repurchases/special dividends. This company trades at PE multiple (less cash) of right around 4…yeah, four times earnings. I expect another special dividend or increase to the repurchase program as favorable tailwinds in the shipbuilding space play out.

I still believe this is the cheapest of my batch of stock picks, in part because of management’s capital allocation decisions that align with minority shareholders, its ability to generate cash earnings, and its hidden value in the BP settlement claims. I jokingly said that you could list this company on Craigslist and get a bid well in excess of the company’s current public market cap. I still believe that to be true.

American Capital Limited (ACAS) – Up 21.42% YTD

This complicated business development company is enjoying the tailwinds of higher valuations across Wall Street. The company exited several investments, made significant new equity investments, and (I’m waiting for the announcement) likely repurchased more than $100MM of its own shares in the latest quarter. American Capital repurchased 9 million shares ($128.3 million) in the fourth quarter of 2012. I expect that shareholders will get an announcement of a dividend or spin-off by the end of 2013 or 2014 to split the company’s debt portfolio from its equity portfolio to create more shareholder value.

One small concern is the company’s portfolio in Europe. European weakness could and should drag down its private equity and sub debt holdings, however, I believe the company’s very conservative accounting already prices in more European weakness than we’re likely to see. Because American Capital trades for less than its net asset value per share, it carries its European Capital holdings at the same discount. For shareholders, that means European Capital is double discounted as an asset.

S&P 500 Index (SPY) – Up 10% YTD

I had to have four stocks. This is the index fund (ETF) that tracks the S&P 500 index. It’s up…yeah, that’s all I have to say about the broad market.

Solitron Devices – Up 8.7% YTD

Nothing to report here that hasn’t already been said. Activist pressure is building as expected, and I am confident that shareholders will enjoy a beefy special dividend by the end of 2013, perhaps one so large as one-half of the company’s current market capitalization. I think Ancora Advisor’s push to unlock shareholder value will play out in 2013.

This is a sleeper until activist shareholders unlock the huge cashbox that is Solitron Devices.

Disclosure: I own CNRD, ACAS, and SODI. No position in SPY.

{ 2 comments… read them below or add one }

Greg March 30, 2013 at 12:02

Good job, JT.

I put some money in your picks in January. You made a good case for them; your past pick performance convinced me. Can you share when you plan on selling ACAS or CNRD? SODI was too small for me.

Reply

JT McGee April 1, 2013 at 09:12

Sorry, Greg, I didn’t see your comment until now. I’m getting eaten alive by spam.

Glad it worked out well, although I don’t recommend following me into positions. It’s great when it works out, but I don’t want to be accountable for potential losses. As always, be sure to do your own due diligence and know your own risk tolerance.

I see you’re subbed to comments. I’ll email you some of my research on ACAS and CNRD to the email you used to comment. Thanks for reading.

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