Fundamental Gains

Discipline over emotion” is the creed at Baltimore-based Credo Capital Management L.L.C. Its analysis of a company’s fundamentals is supported by its own proprietary software called ABACUS, which is used to identify mid-cap stocks that exhibit an above-average potential for price appreciation. This investment approach proved auspicious for Credo’s president, Tedd M. Alexander III. The portfolio of five stocks he recommended to BLACK ENTERPRISE gained 21% during the 52-week period ending Dec. 21, 2006 (see “Rely on the Analysis,” March 2006). In contrast, the S&P 500 grew 12.3% during the same time period. “Our investment philosophy is based on identifying and exploiting mispriced growth opportunities, and 2006 was a good environment for stock pickers,” says Alexander.

Celgene (NASDAQ: CELG), a Summit, N.J.-based biotech company that develops cancer treatments and drugs for inflammatory diseases, was a stellar performer. Investors were rewarded with a 2-for-1 stock split in February, and shares doubled in value on a split-adjusted basis. Alexander says that growth opportunities for Revlimid, the company’s treatment for multiple myeloma, expanded and led investors to place an even higher valuation on earnings than he had anticipated. Alexander says that he maintains a favorable outlook for the company.

Legg Mason (NYSE: LM), the Baltimore-based investment management firm, proved to be a disappointment. After climbing some 70% in 2005, shares declined 20.1%. Alexander sold Legg Mason shares when the stock was trading between $125 and $135 per share due to market capitalization constraints in the firm’s investment process.

Smith International (NYSE: SII), a provider of oil and gas equipment and services, benefited from surging oil prices in the first half of 2006 and a resumption of oil field and drilling activity, par

ticularly in the Gulf of Mexico. But the stock climb was anything but a straight trajectory — shares of the Houston-based company vacillated between $36 and $46 per share. Alexander says that he’s increased his firm’s 12- to 18-month price target to $52 per share.

Synopsys (NASDAQ: SNPS), based in Mountain View, California, is a leading provider of semiconductor design software. Though shares appreciated by 30%, they did not reach Alexander’s original per-share target price of $31. Alexander remains bullish still and has increased his 12- to 18-month price target for SNPS to $34.

Tractor Supply (NASDAQ: TSCO), a specialty retailer of farm and ranch supplies, saw shares decline by 18%. Yet Alexander cites annual same-store sales growth in the low double digits and continued improvement in operating margins as possible foundations for earnings per share growth of 20%. He’s adjusted his price target from $71 to $60 per share.