The Globe and Mail

  Here are two of our favourite stocks to help cure the summer doldrums, our contrarians say.


Saturday, July 29, 2000

Taking a swift perusal of our portfolio, it’s imminently clear that three sectors dominate, oil and gas, steel and retail. The oil and gas positions have already climbed, making them less attractive, although certainly not quite so far as is justified by the current energy prices. Steel stocks have taken a step backward, which places them in a somewhat dubious position, given that they should have profited handsomely during these booming times. The retail sector has remained maligned, but as the belief that established "bricks and mortar" have one foot in the grave recedes, some of these stocks should bask in a new-found glow.

Our top pick in this sector, Bombay Co. Inc. (BBA--NYSE) is one that we've been wrong about since our initial purchase at $4.50 (US) in 1998. So set were we in our conviction that this struggling company will become a star, that earlier this year, a second purchase was made at $3.63. Our "foresight" has not been rewarded. The company recently touched a nine-year low of $2.56 before rebounding slightly to the $2.80 level. This leaves a large gap between where it is now and our target price of $7.69.

Why are we so taken with this operator of furniture stores across Canada and the United States? On the statistical front, this firm is a standout. It’s selling at about two-thirds of book value, while revenue has increased about 10 percent a year since 1997 to last year’s $390 million. Operating and gross margins have been improving swiftly, and profit has started on the uptrend, although this quarter will be a loser because June sales skidded a disappointing 5 percent.

Skeptical because you've read that consumer confidence is fading? Well, under a worst case scenario, let’s say Bombay’s revenue turns south and the strong positive cash flow turns negative. Fortunately, the company has zero long-term debt, meaning that no bankers will be ringing their doorbell. Nothing against bankers, but we always like it when their pitchforks are held at bay.

Bombay is another firm that has been targeted by some as a bricks and mortar has-been. This is simply not the case. The company has launched its e-commerce venue and sales last year increased more than 300 percent. About 70 percent of these customers are new to Bombay and many are purchasing furniture and high margin accessory products. Sales of the latter have grown 47 percent in the past two years. Certainly insiders seem convinced that a turnaround is overdue: They've been purchasing scads of stock over the past year at prices ranging from $3.16 to $6.50.

Bombay reminds us of former Contra stalwart, InterTan Inc. (ITN--NYSE), home of RadioShack in Canada and Australia. After buying the stock in 1996 at $5.75, we appeared rather silly as it tanked to $3.50 in late 1998. Fortunately, the enterprise had a resounding resurgence, bounding up to our final sale price of $21.19 last year.

Another favourite is shoe manufacturer and retailer, Stride Rite Corp. (SRR--NYSE), purchased in December at $5.81 -- near where it’s still hovering -- with a target price of $14.69. This buy, which was just a tad above the 10-year low, is a far cry from the $15.87 it sold for in 1998, which is about half again what the stock price was five years before.

Stride Rite is another firm with a balance sheet that’s clean as a whistle. Like Bombay, the firm has no long-term debt and has positive cash flow and revenue that’s growing year after year, hitting $572 million in 1999. As a bonus, this firm pays a dividend of around 3 percent, always a pleasure to receive while waiting in anticipation of the stock price shooting upward.

A new helmsman is running Stride Rite. David Chamberlain arrived last year as chairman and chief executive officer, after a stint helping to turn around Genesco Inc. (GCO--NYSE), another firm in this field. With his assistance, near-bankrupt Genesco went from also-ran to player status and the stock price responded accordingly, moving up more than 500 percent since 1995. The job should be easier at Stride Rite, which hosts a bevy of brand names including Tommy Hilfiger Footwear, Sperry and Keds, and is already the leading marketer of children’s footwear in North America.

Psychologically, retail stocks remain on the hit list for the vast majority of investors. At some point -- and we never know when -- companies like Bombay and Stride Rite will return to favour. When that happens, the Contra Guys are poised to profit.