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Baby Bulls

The broad market indexes may be stuck in bear mode, but a pack of small, little-known stocks are charging ahead.

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Stop moaning about your losing stocks already. No one said you had to own deadbeats Intel and Cisco. Did anyone put a gun to your head to buy serial underperformers Lucent or Time Warner? What makes you think that Pfizer and Merck are coming back? Things go worse with Coke, trust me—another blue chip that stinks. S&P 500 index funds? Please.

All I ever hear about lately is how lousy the stock market is, and it’s true that all sorts of blue chips, and the major indexes, are down for the year (the S&P is off 1.5 percent, the Dow has fallen 3 percent, the nasdaq 6 percent). Yet every day I see small or little-known companies that are producing unbelievable results, returns that you are never going to get from those mature, hulking, behemoths of yesteryear. The new companies constantly hit 52-week highs, the business equivalent of first place in the baseball standings. They may not make the sexiest cocktail conversation, but they can make you rich, just like those other stocks used to. Still, most of us are stuck in a time warp, perpetually waiting for the big Sun Micro to move back into the black. We keep thinking that Nokia’s got to come back, like it’s our parents and we’re lost at the mall. Nonsense.

If you want stocks that will show you the love, you’ve got to step outside the S&P 500 and explore the world of the underfollowed, unknown stocks. The broader market might be in bear mode, but there’s a virtual Pamplona of lesser-known stocks out there with great earnings, terrific prospects, and years of good growth ahead of them. Here is a hand of five, two of which I hold, three of which I’m hoping to draw if only they’d cool off long enough for me to get in.

“If you want stocks that will show you the love, you’ve got to step outside the S&P 500.”

First, the two I own: Cabela’s and the Houston Exploration Company. Unless you’re a hunter or an angler, you probably don’t shop at Cabela’s. But this chain of nine super-mega outdoor stores may be the single hottest retailer in America. When a new Cabela’s opens (mostly in the kinds of places Paris and Nicole have been visiting), people camp out in the parking lots, sometimes for days in RVs, awaiting the ribbon-cutting. This weekend, the newest Cabela’s will be opening near Wheeling, West Virginia, and already the local papers are warning about ferocious traffic jams at the 175,000-square-foot monster. The company anticipates up to 250,000 visitors the first weekend—I am not kidding—and 6 million customers annually. Cabela’s has been in business, mostly as a catalogue company, since 1961, but it’s the new, gigantic retail locations that are powering its growth (the company does more than $1 billion in sales, and revenues are growing at 11 percent). Cabela’s just went public this year, in one of the worst IPO markets I’ve ever seen, and anything that can penetrate this IPO fog is a keeper. The stock opened at $20, went to $30, and has since pulled back to $27, where I have been buying it. Like the Wal-Mart of old, Cabela’s is still actually run by a family, not some investment-banker types or Federated and JCPenney émigrés, and the Cabelas are genuine sportsmen. Unlike Lowe’s and Home Depot, which already have stores everywhere, Cabela’s has plenty of territory yet to conquer, which could make it a growth story for years.

Remember the oil company J. R. Ewing owned, the one that wasn’t a major player but coined money because the big guys were slow to move on higher oil prices? Well, I’ve found the real Ewing Oil. Except it’s located in Houston, not Dallas, and it’s called the Houston Exploration Company. Because they set their drilling budgets years in advance, many of the big oil companies don’t make as much money as you think they would when oil goes sky-high. The nimbler Houston Exploration, meanwhile, can move fast to drill like mad and capitalize on the higher prices. In the time that oil has gone from $30 to $43, Exxon has gone from $40 to $46, while Houston Exploration has gone from $35 to $53. If you think, as I do, that oil and gas are going to stay high, this one’s a winner. That’s why this stock’s always hugging the 2004 new-high list (it’s currently trading at around $54, up from $36 on January 1).

Now for some oddball names that, if they would just take a break from the new-high list for a moment and sell off a bit, I’d snap up in an instant. First is ihop. Seriously. The good old International House of Pancakes. This company’s putting up unbelievable numbers, courtesy of a restructuring in which underperforming stores are being shuttered while good (and new) stores are being sold to eager franchisers. Previous management was too concerned about short-term earnings to close stores, but CEO Julia Stewart is tougher and better than that. If it weren’t for the charges associated with the closings, ihop would have earned 47 cents a share this quarter, a full 4 cents better than anyone was looking for, and the best earnings surprise of any restaurant company (last week, the stock was trading at $36, up from $33 a year ago). While McDonald’s, Burger King, and Wendy’s duke it out among a saturated hamburger base, ihop has fewer major competitors for the family-dining market, and its simple pancake strategy can produce years of new stores before the chain cannibalizes its base.

Remember superconductors, the Buck Rogers technology that would allow electricity to flow much longer distances (a concept we could have used during last year’s blackout)? Intermagnetics General Corporation, a profitable medical-technology company that’s been in business for some 30 years, has developed high-temperature superconducting, which is being rolled out—now—in New York State. These guys aren’t hype artists; the company’s bread and butter, medical equipment for MRIs, subsidizes the research for the superconductor work, and it’s loath to present itself as the savior of the grid, even though it might be. The synergy’s obvious: The company’s been making low-temperature superconducting magnets for MRIs for years. Now it’s simply applying the stuff to new uses. Intermagnetics earned 94 cents per share in the fiscal year that closed in May and expects to earn $1.55 to $1.65 this year. Its stock has more than doubled in the past year from $18 to $37.

Finally, there’s Pentair, a company that should be renamed Water Is Us, because then, at least, you might not be thrown off the scent of the commodity it dominates. Pentair makes filtration systems for industrial and residential use (for pools and spas, for instance); it’s one of many companies feasting over the de-merger efforts of Vivendi, snapping up some of the best water assets (Everpure, Plymouth Products) from that formerly overleveraged French water-and-entertainment conglomerate. Pentair also just sold its tools business to Black & Decker so it could become a pure water play, something that, when you pay more for a bottle of water than you do for a can of soda, makes a whole lot of sense. Pentair has spent most of the year on the new-high list, until the market, wrongly, thought that Black & Decker got the better end of the transaction. Pentair is now selling at around $31, but I expect the respite from the new-high list to be short-lived. Come to think of it, that could be the buying opportunity I’ve been waiting for.


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