Small Caps Gain Affection

Once unwanted, John Rogers' picks were wooed by investors

In this topsy-turvy stock market, investors are warming up to small-cap plays, and that’s a cozy proposition for fund managers who specialize in such sectors. Enter John W. Rogers Jr., chairman and CEO of Ariel Capital Management, a small-capitalization value firm in Chicago. He is also the portfolio manager for the Ariel Fund, which has $220 million in assets. As last year’s Private Screener, Rogers chose market leaders in niche fields or those with exclusive deals with firms in other industries, figuring such alliances would bode well.

To calculate the total return for Rogers’ portfolio, first we assessed the entire portfolio up until the time when Central Newspapers, one of his picks, was sold. The portfolio gained a total return of 21.37% as of August 4 (the last day of trading for Central). Next, we tracked the remaining four picks on a 52-week basis; the portfolio jumped 16.80% as of September 22 (see charts for individual stocks’ performances).

International Game Technology (NYSE: IGT) hit “big, no whammies,” with an average total return of 80.33%. Rogers expects the Reno, Nevada-based slot machine manufacturer to continue to hit the jackpot. He says, “Strong replacement demand, as well as new gaming jurisdictions [such as the] California Indian gaming reservations, should provide for continued solid earnings growth.” Despite substantial growth, International Game’s revenues slipped 2% to $688.2 million for the nine months ending July 1. Analysts surmise that the decrease was due to lower unit volume.

Central Newspapers (no ticker since August 4 sale) the Phoenix-based newspaper chain, had a chokehold on the Phoenix and Indianapolis markets last year. While the going was good, Central decided to sell its holdings. Once news about the deal surfaced, Central’s stock skyrocketed 42.22%. The stock traded at $31.50 on June 7, around the time of the announcement; it closed on August 4 at $64. Gannett Inc., the newspaper powerhouse, bought all of Central’s outstanding shares for an approximate cash purchase price of $2.6 billion.

Stock of Herman Miller (Nasdaq: MLHR), the Zeeland, Michigan-based furniture manufacturer, jumped 30.96% since recommendation. Rogers says this upswing will continue, since “strong industry demand for office furniture, along with record backlog levels, should propel future operating results.”

Specialty Equipment Co. Inc. (NYSE: SEC) had a 7.22% total return. In a tough year for the maker of hot and cold food service equipment, net revenue fell 1% to $266 million and net income fell 6% to $21.2 million in the six months ending July 31. Rogers remains optimistic about the Aurora, Illinois, company’s ability to add to its leading position in various categories through new opportunities and new store openings.

The big upset is Hasbro Inc. (NYSE: HAS). The Pawtucket, Rhode Island, toy maker has been tossed around like a cheap rag doll. A slowdown in sales from Star Wars and Pokémon figures caused the company to experience a devastating loss of 51.29% since it was recommended a year ago. “Although stock performance has been disappointing,” Roger says, “cost savings opportunities should boost earnings momentum in 2001.”

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