Derek Batts likes rooting for the underdog. The mid cap to large-cap value manager and president of Union Heritage Capital Management L.L.C. in Detroit. picks plays that trade at a discount to the market but have the earnings potential to outrun the market leaders. Batts trusts fundamental analysis that’s quantitatively based, focusing primarily on financial statements to pick stocks with an undiscovered talent for growth.
“We look for companies that have price-to-earnings multiples of maybe 70% to 75% of the market, but have a return on equity that is superior to the market, maybe 110% or 120% greater than the market,” says Batts, 42, who’s been with the 100% African American-owned firm for 10 years. In essence, he picks stocks that may be worth $1 but sell for 70 cents. Union Heritage currently manages $160 million for such institutional clients as the City of Atlanta General Retirement System and the State of Ohio Bureau of Workers’ Compensation.
Using quantitative analysis, Batts looks at performance indicators such as price-to-book ratio, price-to-earnings ratio, and dividend yields to pick his top stocks. Batts chose “safe plays” for this Private Screening, sticking to core value plays with growth potential.
Safeway Inc. (NYSE: SWY) is a food and drug chain that Batts regards as “a consumer staple. It’s experiencing margin growth and it’s growing its purchasing power through an acquisition strategy,” Batts says. Recently, Safeway acquired Randall’s Food Markets Inc. for $755 million and 12.7 million shares of common stock. Also, the company has a P/E multiple slightly lower than the market’s and a return on equity greater than 32%.
Heavyweight Mettler-Toledo International Inc. (NYSE: MTD) is the largest manufacturer of scales for use in laboratory, industrial, and food retail sectors. The Greifensee, Switzerland-based firm is a market leader with net sales of $1 billion for the 12 months ended December 1999, and it outperformed 90% of the 6,000 companies Batts tracks in his database.
Providian Financial (NYSE: PVN), the financial services supergiant based in San Francisco, is a “highly profitable company and has a niche in the marginal credit market and its experiencing margin growth in that market,” Batts says. With more than $23 billion in assets under management, the company ranks No. 6 among bank card issuers in the U.S.
Bristol-Myers Squibb (NYSE: BMY), a high-quality pharmaceutical company that is beginning to focus more on its core business, is another choice. In September, the company reported that it plans to sell two nonpharmaceutical divisions-the Clairol haircare unit and Zimmer, a medical device supplier-to boost sales, earnings, and earnings per share to create “megablockbuster” products.
Still a favorite among our Private Screeners, Cisco Systems Inc. (Nasdaq: CSCO) rounds out the list. The Internet network provider recently “experienced a multiple compression,” says Batts. In other words, Cisco’s stock has taken a hit, so now would be a good time to buy. Batts thinks Cisco will remain a viable stock because even with market competitors, “60% of the Internet traffic goes through Cisco Systems’ routers,” he says.