SLEEPING GIANTS

DARK HORSE and underdog stocks roam Wall Street leaving adventurous men foolish and poor men bankrupt; but in the hands of a lucky man they sometimes shed their coats of questionable color and become champions. The surer bets, the gilt-edged stocks (like all other good things in life that look good and pay dividends) rarely come without steep prices. The better shape a stock is in, the more its purchase will cost.

When you make a cheap bet by putting your money on a dark horse, you may well lose much of your investment, but you never know when a heretofore loser will turn the corner and head for home several lengths ahead of its competitors. Today’s losers, the cheap “schlock stocks” on the market, may- just may -be the AT&Ts and IBMs of tomorrow. And whether the stock is a prestigious buy or a long shot, the risk is there. With the latter, the loss would be less painful -and oh the joy of owning an ugly duckling-turned-Texas Instruments.

Dallas is full of pedigreed stocks: Texas Instruments, Texas Oil & Gas, Halliburton and Diamond Shamrock -to name but a few class outfits. However, some of the lesser-known down-and-outers around town are possibly the better buys. When you buy these generic breeds you don’t pay for the pedigree, and in forsaking the hotshot papers you risk less money and earn more assets per dollar.

The more excited the public gets about a stock, the more money people are willing to pay for it in excess of the book value. Book value is determined by dividing the net worth of a corporation by its number of shares. Standard & Poor’s or some of the other financial reporting services will compute the value of a corporation’s shares for you, but you can easily do it yourself.

When a company falls on hard times and the investing public’s interest begins to cool, the prices tend to tumble. Sometimes they fall so far and so fast that they end up below the company’s book value. When the whole world turns against you and everyone wants to dump your stock, it doesn’t matter that the company still has value in hard assets. From time to time, little known stocks come into such disfavor that they sell at prices that are fractions of their real value or book value.

Buying a listed stock for less than book value is equivalent to buying a dollar bill with something less than 100 pennies. If you pay half the book value of a stock, your purchase is like buying a dollar bill with a 50-cent piece: It’s a pretty safe buy. If the company goes broke and is liquidated, the buyer may feel reasonably sure of getting his money back as well as a profit. But if business improves, the stock may soon sell for much more than book value – plus an impressive profit.

Low-priced stocks aren’t always obscure issues. Take Dallas’ American Airlines, a biggie on the New York Stock Exchange. In the 1974 bear market, its shares went down to about $4. Within a year or so they were back up to $16 -a 400 percent increase. A year ago, AA was down again, this time to $8, only to get well fast and pass the $20 mark in less than 12 months – a 150 percent gain for some alert basement shoppers. Not all the investors were psychic; they simply understood the share’s book values.

In 1974 when AA stock nose-dived to $4, book value per share was more than $18. Last year, when the market price was down in the $8 range, the book value was closer to $35 a share.



“I SLEEP BETTER with these bargain basement stocks,” an old-timer in the stock market once told me. “I don’t give a hang what happens to the company, so I don’t worry.”

But most market players are too sophisticated to handle these down-and-out stocks, which may explain why most stock market investors lose more often than they win. We’re a brand name-conscious society; American investors tend to buy pop stocks and well-known, highiy hyped issues.

Don’t count on your friendly stockbroker to tell you about sleepers. Low-priced issues don’t fit into his game plan, which hinges on earning more commissions this year than last. The typical broker may not have heard of these local, low-priced schlocks; even if he has, he would most likely consider it unprofessional to suggest that you invest your hard-earned money in something obscure.

Buying low means investing in low-priced issues for less than their book value. (Usually they will cost less than $10 per share.) The logic is basic: It’s relatively easy for a $5 stock to double in value overnight, but it’s next to impossible for a $50 stock to sell for $100 in the short term. If your $2 stock goes to $10, you have a 500 percent gain. But about the best you can hope for, even in a strong bull market, is that your $20 shares climb to $30-a 50 percent increase. It’s the way things happen in the real world- if indeed Wall Street is the real world.

During our search among the Dallas throwaway stocks, we found six interest-ing asset plays. Some appear to have better prospects than others, but all have two things in common: The current price is depressed-probably about as low as it can get -and all are selling at a price well below the published book value. In most cases, real book values are higher than the reported (published) figures. Corporations carry their assets at cost, minus depreciation. With today’s double-digit inflation, odds are that assets are really worth more than what was paid for them. The point is this: If any of these outfits goes down the tube, their liquidated values left for the stockholders will more than likely be a great deal more than today’s book price. The same rule applies if another party should merge with or attempt to take over one of these lackluster Dallas companies.

Four of these six sleepers report that more than 50 percent of their shares are in the hands of the general public. Two (Braewood Development and Burgess Industries) have 70 percent or more in outsiders’ portfolios. A potential corporate raider would be likely to follow an asset-rich company, with the majority of its shares widely distributed.

There are no guarantees that any of the following distressed Dallas stocks will become tomorrow’s IBM. If you worry that you may not be lucky enough to select tomorrow’s superstar, you could buy 100 shares of each. In doing so you would risk $2,625 in the bargain, plus brokerage costs, of course. But if only one proved to be a big winner, you could well afford to throw away the 100 shares you bought in the other five.

Braewood Development is traded over the counter. This outfit owns land and is involved in residential construction. Braewood has been clobbered by high interest rates and low housing demand. Not too long ago its stock was selling at $5; in 1979 it earned 81 cents per share. In 1980 earnings were down to 32 cents. Braewood shows a book value of $3.06, but we suspect the land is worth a lot more than what Braewood paid for it. Seventy percent of the stock is in the hands of outsiders, and the stock is down to $2. Braewood may look good to a major home builder shopping for a bargain. Remember those Conoco stockholders.

Burgess Industries, a stock traded on the American Stock Exchange, is a Dallas institution that dates back to the Twenties. Burgess distributes mufflers, industrial belts and transmission devices. It suffered losses in 1978 and 1979, but in 1980 was in the black, earning 5 cents per share. This old-line company is trying to pull itself out of “a disappointing and frustrating year,” quoting its most recent annual report. Burgess is beefing up its sales efforts, and management hopes to get $48 million yearly in sales to produce bigger profits. With 80 percent of the stock under outside control, this looks like a buyer’s opportunity at $2.25 a share. That’s less than half what the stock sold for last year. Book value is shown to be $4.63, but with about $4 million in hard assets (land, building, machinery), odds are the real values are much higher.

C S Group (formerly known as Sue Ann) is an interesting cellar dweller. Traded at the American Stock Exchange, C S Group makes women’s apparel. (C S stands for Center Stage, its line of dresses and sportswear.) The stock is at a new low of $1.75, due to recent losses. In 1980, C S Group paid 12 cents in cash dividends; the year before that the dividend was 24 cents. C S Group reports a book value of $3.16, and the stock is almost evenly split between insiders and outsiders. Women’s fashion is a highly volatile business, which means the stock could explode. One thing is for sure: It can’t go down much more.

Dixico Inc. is another old Dallas industry. It’s traded at the American Stock Exchange; in years past it was known as the Dixie Waxpaper Co. Today the company makes snack-food packages. Only one-third of the shares are in outsiders’ hands, which could be a disadvantage for the speculative investor. For the last two years Dixico has operated in the black and has paid cash dividends (7 cents in 1980, 30 cents in 79). Like Burgess, Dixico management is trying to cope with high interest rates and falling margins. The company is trying harder, which means the $4 per share price may soon be back to the $6 levels of the past year or higher. Dixico has a conservative book value of $7.02.

Miller Brothers Industries (over the counter) is currently moderately successful. Of the six issues detailed, its stock enjoys the highest current price ($7.25). Nevertheless it’s a bargain-basement price when considering that the book value is over $17. This is an old company (founded in 1911) that manufactures men’s hats and slacks. Sales volume is evenly split between the two products, so if sales drop off in headware, slack sales may be able to make up the difference. Sales volume is up nicely from the $33 million in 1980 and the $26 million in 1979. Earnings in 1980 were 72 cents per share, which means, at today’s prices, the stock has a price/earnings ratio of about 10. Miller hasn’t paid dividends to stockholders since 1978. Outsiders trade 65 percent of the shares.

Tentex Industries (OTC) is involved with home-building products. The company manufactures prefabricated fireplaces and face brick used in home construction. Only 40 percent of OTC’s shares belong to outsiders. The book value is $6.05, or twice as much as the current market price of $3 per share. Tentex earned 96 cents per share in 1979, but lost 50 cents per share in 1980. So far 1981 looks like a replay of last year. If Tentex can get back to earning close to $1 per share, as it did in 1979, the stock should move nicely and you’d profit.

If any of these issues interests you, it’s easy to get more information. Thesestocks are all publicly traded; a phone callto each company is all that’s necessary toget up-to-date financial statements. Andit’s always a good rule to investigate beforeyou invest -even when you are considering throwaway stocks.