Ideas For A New Millennium

Question: What’s the 21st century going to mean for investors?

Answer: The same thing the last 100 years have meant.

Forget about robots and flying saucers. Investors will need solid companies with promising growth prospects.

To help with that process, The Times has come up with 21 small-capitalization stocks whose futures look bright. Using a computer screening program from Market Guide, we mined for companies that have superior sales and earnings records for the last few years as well as rosy prospects.

To start, we screened for companies whose earnings are projected to grow more than 25% annually in the next three to five years. Of the 8,557 companies in the database, 953 met that criterion. We began with this criterion because no matter how well a company has done in the past, it’s the future that counts to investors.

We wanted companies that have shown stability, so we required that earnings per share be positive for at least four years. That pared the number to 335. To focus on what would appear likely to be the best stocks, we required that return on equity over the last five years average better than 15%.

Next, we searched for stocks in which institutional investors hold fewer than half the shares. Ideally, individual investors want a stock to have some institutional ownership. That assures that daily volume will be large enough for small investors to find buyers when they want out. But excessive institutional ownership can be undesirable. Small investors want to hop into a stock ahead of mutual funds and pension funds, because buying pressure from the big players can really power a stock higher. Our list includes several names that are well-known on Wall Street, yet four of our stocks have less than 20% institutional ownership and five others have more than 20% but less than 30%.

To round out our search, we required a few other things: We wanted three-year annual sales growth rates to top 25% to make sure the good earnings were coming from demand for the companies’ products, not just cost-cutting. To assure financial stability, we required that candidates have low debt.

We figured that smaller companies will have better long-term growth prospects, so we demanded market caps of less than $1 billion. Finally, we wanted to see evidence of sustainable growth. To see that, we used a Market Guide calculation that assesses a company’s return on equity and the portion of earnings being plowed back into the business.

And voila--21 companies for the 21st century.

Of course, stock performance, especially for an entire century, isn’t something that can be predicted, let alone guaranteed. Rather, our list is intended as a starting point for you to do your own research. But we hope that at least a few of these stocks will pan out--and that you’ll be partying like it’s 1999 for at least several years.

Advanced Energy Industries

Advanced Energy (ticker symbol: AEIS) is a specialty technology company that makes sophisticated power conversion and control equipment.

About two-thirds of the Fort Collins, Colo.-based company’s sales are to semiconductor equipment makers that incorporate Advanced Energy products into larger systems sold to chip makers, said Sue Billat, an analyst at BancAmerica Robertson Stephens.

“It is a well-managed company; it has a core competence in a technical area and a good track record in broadening its product line,” Billat said.

Downside: The stock often gets hit whenever worries about the chip industry crop up. On the bright side, Advanced Energy has had some success widening its customer base, and its products now are used in businesses as diverse as painting car bumpers and producing compact discs, she said.

Anchor Gaming

The Las Vegas-based company, which operates casinos and designs slot machines, has a promising future, said Todd Jordan, an analyst at Raymond James & Associates. Anchor (SLOT), unlike its competitors, he said, doesn’t sell its machines to casinos. Instead, it leases them at no charge but collects a portion of the revenue each one generates. Because the company has produced some of the more popular games around--including Wheel of Gold, Clear Winner and Totem Pole--it’s in an enviable position, he said.

“They have the best games out there and a strong pipeline of [new] games,” Jordan said.

The stock got hit last year when the company said it would fall short of analyst earnings estimates shortly after it completed a secondary offering in which the chief executive and his family were heavy sellers, Jordan said. That caused some investors to worry that top management, foreseeing deep problems, was trying to cash out. Though the company came in 6 cents shy of projections for its fiscal second quarter, the profit was solid enough to allay most concerns, Jordan said.

APAC TeleServices

If you’ve ever dialed an 800 phone number to buy a product, you may have dealt with APAC TeleServices (APAC).

The Deerfield, Ill.-based company staffs phone centers for large companies. The tele-services industry has two sides, both of which APAC handles: It receives calls for large companies such as United Parcel Service, providing help-line support and order processing. It also does telemarketing for customers such as AT&T;, for which it peddles everything from long-distance service to insurance.

APAC is a big player in a fragmented, though increasingly competitive, industry. Companies spend about $90 billion annually on handling incoming and outgoing calls, said Ken Winston, an analyst at Needham & Co. Less than 10% of that is outsourced to companies like APAC.

One negative is that AT&T; and UPS made up 60% of APAC’s business at the end of 1996, he said. When there were problems with each last year--AT&T; cut back its business and UPS demanded its contract be renegotiated--APAC suffered, he said.

APAC has had some success signing up new customers--including AT&T; rival MCI--but must further expand its revenue base, Winston said.

Coherent Communications Systems

The next time you have an overseas cellular phone call and the person on the other end of the line sounds as if he or she is in the next room, you just might have Coherent Communications (CCSC) to thank.

Coherent Communications specializes in what’s known as echo-cancellation technology, which eliminates the static on phone calls. That business is expected to grow as new digital phone systems overtake analog ones.

The Leesburg, Va.-based company, which notches three-quarters of its sales abroad, has two groups of buyers: phone companies and telecom equipment makers that package Coherent’s products with their own.

“They’re one of the building blocks of the next information infrastructure,” said Greg Mesniaeff, an analyst at Robinson-Humphrey.

Computer Management Sciences

As with a lot of other computer-consulting companies, Computer Management’s (CMSX) biggest problem isn’t finding clients that want to hire the company. Rather, it’s getting enough trained employees to handle all its business.

To solve that problem, the Jacksonville, Fla.-based company, which has branches throughout the East Coast, has a program in which it places liberal-arts majors in a two-month training program before putting them to work, said David Keil, an analyst at Robinson-Humphrey.

Computer Management, whose clients include American Express and Blue Cross/Blue Shield, sports an operating profit margin--19%--that’s among the best in the industry, Keil said.

CTC Communications

The Waltham, Mass., company is benefiting from the continuing deregulation of the phone industry. It buys local and long-distance phone and data line capacities for the Internet and resells them to small and mid-size businesses.

Its advantage comes in part from its focus on smaller companies. Whereas big phone companies emphasize Fortune 500 customers, CTC (CPTL) caters to smaller players that nonetheless have sizable telecom needs. Also noteworthy is that management owns 30% to 40% of the stock, said Steven Kornfeld, an analyst at L.H. Friend.

Cybex Computer Products

When investors think about the computer-networking field, they immediately focus on a company such as Cisco Systems, the industry leader. Maybe someday they’ll also think of Cybex (CBXC), which makes switches for the huge computers known as servers.

Its products allow dozens of servers to be controlled by a single keyboard and monitor, rather than requiring setups for each server. Its fortunes are tied to the market for servers, which is growing strongly.

Huntsville, Ala.-based Cybex just bought a competitor that gives it about 60% of the European market, said Robert Montague, an analyst at Morgan Keegan & Co. It has no Asian exposure.

“It’s a little niche that’s not well-followed,” he said.

ESS Technology

ESS (ESST) makes multimedia chips for personal computers and electronic devices, a business whose long-term prospects are strong but whose immediate outlook is iffy, said Charles Boucher, an analyst at UBS Securities.

Its core business has been in the PC audio chips that control sound quality for CD-ROMs and video games. It’s also developed processor chips that are at the heart of video CD players, a precursor to much-hyped digital videodiscs, and DVDs themselves.

The problem is that pricing in audio chips has become competitive at the same time that the roll-out of DVDs has slowed, Boucher said. That’s put pressure on profits.

“The new markets that are going to be able to drive higher [profit] margins are turning out not to be developing as quickly” as anticipated, Boucher said.

ESS is based in Fremont, Calif.

Ha-Lo Industries

Ha-Lo Industries (HMK) is a big player in a fragmented industry. It’s one of thousands of companies that make advertising products for companies that sell things such as coffee mugs and T-shirts.

The market is growing 10% a year, and Ha-Lo is expanding its focus to become more of a full-range marketing company, said Jeffrey Nelson, an analyst at GS2 Securities.

The chief executive of the Niles, Ill.-based company “has taken it from basically selling things out of the back of his truck to a $500-million company in ‘98,” Nelson said.

Ha-Lo also is expected to grow by buying out rivals. “With 14,000 companies there’s a lot of room for consolidation,” Nelson said.

ICU Medical

A better name for this San Clemente-based company might be IV Medical, since its main products are intravenous tube connectors used in hospitals.

An IV consists of three main parts, said Lyle Schonberger, an analyst at Olde Discount. They are the IV bag with the medication, a tube and needle that attach to a patient’s arm and a connector that pieces together the bag and the tube. ICU Medical (ICUI) makes the connectors.

In the past, the connectors themselves used needles to link the two parts. But the company’s Clave connector does the job without them. One reason that’s important is that those needles often pricked health-care workers and, in a worst-case scenario, infected them with HIV or other viruses. The Clave connector makes up about 70% of sales, Schonberger said.

The company also has a product that’s designed to prevent a patient’s blood from flowing back into the catheter when the connectors are removed, Schonberger said.

Knight Transportation

Knight (KNGT) is a regional trucker whose hauling distances average less than 500 miles, said Jeffrey Medford, analyst at William Blair & Co.

The Phoenix company is known for keeping costs low and making sure its vehicles are on the road making money for the company. Its annual revenue per truck is $150,000, Medford said. The industry average is $115,000 to $120,000. Its operating profit per truck is $26,000, compared with an industry benchmark of $10,000, he said.

Knight management has “a strict discipline of things they need to do to do well in the trucking business,” Medford said. “They had to run a low-cost business and have high utilization of assets.”

Knight operates primarily in California and Arizona but is branching out to Indianapolis and Houston, Medford said.

Palm Harbor Homes

Dallas-based Palm Harbor (PHHM) makes high-end units, known as manufactured or factory-built homes, that bear little resemblance to the mobile homes of the past. They’re often built to the specifications of the customer; some models have two stories and a few even have Victorian architectural styling, said Brent Bracelin, an analyst at the Red Chip Review newsletter.

One-third of all homes sold last year in the U.S. were factory-built.

Palm Harbor’s units can sell for more than $55,000, compared with an industry average of less than $30,000, he said. The company is now aggressively opening superstores in which customers can check out floor plans.

Prospects also are strong, Bracelin said, because the prices of traditional homes are rising, knocking some middle-class buyers out of that market and pushing them toward manufactured homes.

Pre-Paid Legal Services

Think of Pre-Paid Legal Services (PPD) as an HMO of the legal field.

Pre-Paid sells legal policies that give consumers access to lawyers for routine consulting work such as that involving buying a home or setting up a will.

Monthly premiums typically run about $17, said David Yuschak, an analyst at Hoak Breedlove Wesneski.

The knock on Pre-Paid has been that it uses a multilevel marketing strategy in which policyholders get a cut of any new business they bring in, Yuschak said. But in recent months, Ada, Okla.-based Pre-Paid has also signed deals that will have two companies--CNA, a Chicago-based insurer, and Primerica Financial Services, a financial planning firm and unit of giant Travelers Group--market Pre-Paid’s plans through their broker networks.

Republic Group

As the residential housing market goes, so goes Republic Group (RGC).

About 80% of second-quarter operating income come from the sale of gypsum, or wallboard, primarily for use in home construction. Thanks to a strong economy and low interest rates, the housing market has been vibrant lately. And that bodes well for Republic, said Yuschak of Hoak Breedlove.

Republic also has been helped by the fact that two big competitors went through bankruptcy reorganization in the 1980s, Yuschak said. That kept the gypsum supply low, leading to strong demand now. Republic is based in Hutchinson, Kan.

Robotic Vision Systems

Robotic Vision (ROBV) makes technology that acts sort of like an advanced camera. Its systems produce computer images that can be used to inspect products.

A big part of its business is in so-called lead-scanning machines that inspect semiconductors to make sure they are constructed properly, said William Cook, an analyst at ABN AMRO in Chicago. The Hauppage, N.Y.-based company also has a bar-coding business.

“The company is really well-positioned for some extraordinary growth in the next couple of years,” said analyst Matt Desmond of Red Chip Review.

SCB Computer Technology

SCB (SCBI) is a computer-consulting and -staffing company with a large presence in the Southeast--it’s based in Memphis, Tenn.--but it has also branched into areas such as Phoenix and New York, analysts say. Its specialty is providing tech consulting to state and local governments, said Montague of Morgan Keegan.

It advises companies on buying and managing computer systems. It also works on the potentially lucrative year 2000 computer glitch problem, said Keil of Robinson-Humphrey.

SCB has also teamed with Baan, a big developer of database software with headquarters in the Silicon Valley and the Netherlands. SCB’s people are trained on Baan software, enabling them to secure contracts with companies whose systems use Baan software.

Schlotzsky’s

How far can tasty sourdough bread take you? Pretty far, if Schlotzsky’s, a fast-growing restaurant chain based in Austin, Texas, is any indication.

Schlotzsky’s (BUNZ), best known for its distinctive sourdough, has taken the idea of traditional fast-food dining one step further, said Michael Fineman, an analyst at Raymond James & Associates. Though they qualify as fast food, Schlotzsky’s sandwiches are made-to-order and have distinctive tastes, he said.

Schlotzsky’s has almost 700 franchised restaurants throughout the Southwest, Southeast and Midwest and has opened about 100 restaurants in each of the last three years, Fineman said.

Smart Modular Technologies

Smart Modular (SMOD) manufactures computer chip memory modules, which is not to be confused with making memory chips themselves. That’s important because prices of memory chips have been under pressure lately, in part because of oversupply from Asian producers.

Smart Modular buys chips and mounts them on circuit cards, which it then sells to computer makers and others for inclusion in their machines.

“People always freak out about memory prices, but it really has a very minimal impact on them,” said Jeffrey Lin, an analyst at NationsBanc Montgomery Securities.

Fremont, Calif.-based Smart Modular should keep doing well because demand for memory products continues to rise and lower memory prices could boost demand for its products, Lin said. Also, the cost of putting up a manufacturing line has risen steadily. That might discourage rivals.

ThrustMaster

Like many in the computer game industry, ThrustMaster, which makes joysticks for a range of games, is battling a fierce enemy.

Software giant Microsoft came out with its own line of joysticks a few years ago, putting pressure on ThrustMaster’s flight simulator joystick, which resembles a real airplane throttle. That forced ThrustMaster (TMSR) to branch out into driving games. It came up with Racing Wheel in 1994, which now accounts for more than 50% of the company’s sales, said John Girton, an analyst at Van Kasper & Co.

The management of Hillsboro, Ore.-based ThrustMaster has a strong financial background and a tight rein on costs, Girton said. It’s also coming out with a “force feedback” wheel that makes for a more lifelike driving experience, he said. For example, the wheel would reverberate much like the one in a real car traveling over rocky terrain.

Wackenhut Corrections

The nation’s rising prison population is a problem for society--but an opportunity for a company that manages private prisons.

Wackenhut Corrections (WHC) of Palm Beach Gardens, Fla., is the No. 2 private prison company in the U.S., with about a 25% share of the market, compared with 50% for industry leader Corrections Corp. of America (CXC), said Jeffrey Nelson, an analyst at GS2 Securities. Wackenhut is the leading company overseas.

Wackenhut trades at 33.4 times estimated 1998 earnings. But profit is expected to improve 48%, and the price-to-earnings ratio is down from a high of almost 170 in mid-1996. Only about 100,000 of the 1.6 million people in U.S. prisons are in privately run facilities, Nelson said.

Wireless Telecom

Wireless Telecom (WTT) provides testing equipment for the wireless telecommunications industry. Its products test the performance of satellite and cellular communications services and personal communications services and high-definition television, among other systems.

The Paramus, N.J.-based company has a scant following on Wall Street. That means individual investors can’t rely on the opinions of others--or purely on a stock screen--and must do a lot of homework when researching Wireless. The company’s stock price fell 39% last year.

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Panel discussions on advanced stock selection will be held at 4:30 p.m. Saturday and Sunday at The Times’ Investment Strategies Conference. A panel on picking small-cap stocks will be held at 10:45 a.m. Sunday. Times staff writer Walter Hamilton can be reached at walter.hamilton@latimes.com

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21 to Watch

To find long-term investment prospects, we screened Market Guide’s database using eight criteria to identify solid earnings records and good prospects. Criteria are described in more detail in the accompanying report.

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Proj. EPS No. of yrs. Ticker growth rate, positive symbol Company annualized EPS AEIS Advanced Energy Industries 27.5% 7 SLOT Anchor Gaming 25.2 8 APAC APAC TeleServices 30.0 7 CCSC Coherent Communications 31.3 6 CMSX Computer Management Sciences 29.0 6 CPTL CTC Communications 30.0 5 CBXC Cybex Computer Products 30.0 7 ESST ESS Technology 45.0 7 HMK Ha-Lo Industries 28.3 6 ICUI ICU Medical 30.0 8 KNGT Knight Transportation 26.9 7 PHHM Palm Harbor Homes 30.4 7 PPD Pre-Paid Legal Services 35.0 6 RGC Republic Group 26.0 6 ROBV Robotic Vision Systems 30.0 4 SCBI SCB Computer Technology 30.0 6 BUNZ Schlotzsky’s 32.5 4 SMOD Smart Modular Technologies 25.8 7 TMSR ThrustMaster 27.5 5 WHC Wackenhut Corrections 42.0 5 WTT Wireless Telecom Group 35.0 7

5-yr. return Ticker on equity, symbol annualized AEIS 137.4% SLOT 56.1 APAC 51.0 CCSC 31.0 CMSX 26.0 CPTL 28.6 CBXC 35.5 ESST 38.6 HMK 20.0 ICUI 18.2 KNGT 39.0 PHHM 30.7 PPD 22.2 RGC 21.9 ROBV 55.2 SCBI 30.4 BUNZ 51.4 SMOD 54.5 TMSR 38.9 WHC 17.9 WTT 33.2

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3-yr. sales Percentage Ticker growth rate, held by symbol Company annualized institutions AEIS Advanced Energy 46.3% 15.4% Industries SLOT Anchor Gaming 41.1 43.5 APAC APAC TeleServices 112.3 39.0 CCSC Coherent Communications 33.4 45.6 CMSX Computer Management 45.4 29.5 Sciences CPTL CTC Communications 39.2 10.0 CBXC Cybex Computer Products 39.2 29.9 ESST ESS Technology 146.0 27.9 HMK Ha-Lo Industries 46.9 48.0 ICUI ICU Medical 29.3 42.7 KNGT Knight Transportation 43.2 38.3 PHHM Palm Harbor Homes 34.4 18.6 PPD Pre-Paid Legal Services 43.0 45.3 RGC Republic Group 25.1 31.8 ROBV Robotic Vision Systems 42.1 29.0 SCBI SCB Computer Technology 38.9 26.6 BUNZ Schlotzsky’s 47.0 33.1 SMOD Smart Modular 70.7 44.2 Technologies TMSR ThrustMaster 55.4 10.1 WHC Wackenhut Corrections 32.8 30.7 WTT Wireless Telecom Group 64.8 32.3

Market Ticker capitalization, symbol in millions AEIS $272.9 SLOT 720.5 APAC 634.7 CCSC 422.5 CMSX 268.1 CPTL 105.2 CBXC 133.3 ESST 295.8 HMK 562.1 ICUI 108.7 KNGT 258.0 PHHM 530.8 PPD 681.1 RGC 211.2 ROBV 232.3 SCBI 188.2 BUNZ 123.4 SMOD 929.3 TMSR 58.0 WHC 533.1 WTT 100.4

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Annual Sustainable Ticker LT debt to growth, symbol Company total equity in percent AEIS Advanced Energy Industries 0.02 10.9% SLOT Anchor Gaming 0.02 26.1 APAC APAC TeleServices 0.01 28.1 CCSC Coherent Communications 0.00 35.9 CMSX Computer Management Sciences 0.00 18.1 CPTL CTC Communications 0.00 35.3 CBXC Cybex Computer Products 0.00 14.9 ESST ESS Technology 0.00 11.6 HMK Ha-Lo Industries 0.05 18.7 ICUI ICU Medical 0.00 10.5 KNGT Knight Transportation 0.00 19.7 PHHM Palm Harbor Homes 0.03 23.7 PPD Pre-Paid Legal Services 0.00 33.0 RGC Republic Group 0.00 20.0 ROBV Robotic Vision Systems 0.00 12.6 SCBI SCB Computer Technology 0.00 19.0 BUNZ Schlotzsky’s 0.10 11.2 SMOD Smart Modular Technologies 0.01 44.2 TMSR ThrustMaster 0.00 17.8 WHC Wackenhut Corrections 0.00 12.2 WTT Wireless Telecom Group 0.00 25.5

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Source: Market Guide