Four Value Stock Picks From Joe Battipaglia of Ryan Beck & Co.

 |  Includes: ARW, DLTR, HOTT, JBL
by: SA Editors

Forbes Investor Advisory Institute hosted a Financial Roundtable on March 22, 2007 with a number of leading investment professionals. From the Roundtable, hosted by Wally Forbes, here's an excerpt from Joe Battipaglia (pictured), Chief Investment Officer of Ryan Beck & Co., a Stifel Financial company:


WALLY FORBES: Joe, you're not too enthusiastic about the economic outlook. Are there some securities that you could opine on in that context?

JOE BATTIPAGLIA: Sure. In equity portfolios that we do manage we're currently 50% in cash. So that gives you a sense of the caution that we feel.

We want to buy companies that have high return on invested capital. We assume very low perpetuity rates for growth. We spend a lot of time scrubbing their operating margins to make sure they're sustainable and we come up with the values for these companies that we believe they should achieve. And if the discount to that value is high enough, we'll buy the stock. It's as simple as that. I guess you can call that value investing.

In that vein, there’s Arrow Electronics (NYSE:ARW). It's a components manufacturer whose products are distributed by original equipment manufacturers [OEMs] and others. We think the stock, which is in the high $30s, goes to the mid-$40s. It trades at eight times those EBITDA earnings.

Hot Topics (NASDAQ:HOTT) in the retail sector. It was a hot stock for quite some time, and came off substantially. They have turned the corner on their margins. Stock is now at approximately $11. It's on its way to $15. It serves the trendy teens. It's selling at 60% of its revenues. At its previous high it was selling at 2.3 times its revenues. The stock has been duly punished and now trades at about seven times cash flow.

Jabil Circuit (NYSE:JBL) is another outsource manufacturer, OEM, electronic communications, PCs, and also serves into the auto sector. Stock is in the mid-$20s, can go to the mid-$30s. It's trading at 50% of revenues and at 10 times cash flow.

And the last name I'll mention is a retailer in the dollar space, Dollar Tree (NASDAQ:DLTR). We've heard about Dollar General and the excitement there on the private buyout world. Here's a company in the mid-$30s trading at one times trailing revenues and eight times cash flow. We think it’s worth $43.

For us, these are the kinds of stocks that could weather the difficulties we foresee because the valuations are very attractive.

WALLY FORBES: There was one stock that you mentioned that serves the automotive industry, which is having such problems.

JOE BATTIPAGLIA: Yeah. That was Jabil Circuit. What you want to see in these kinds of companies is that they can take share from others even though there's a declining order rate. And so as you are on the margin with a change if you've got the stronger play, lower average cost, etc., you can weather that and then the other parts of the company that are growth-oriented and presumably could carry you through and maintain your cash flow.