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  • Michael Gioja is guiding information technology advances at Paychex Inc.

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  • Area exporters starting 2014 with a sense of momentum.

For stock pickers, the RBJ 75 offer prospects

By THOMAS ADAMS
RBJ 75
Rochester Business Journal
July 29, 2011

Local analysts say Home Properties Inc., FSB Community Bankshares Inc., Constellation Brands Inc. and Paychex Inc. are among the most attractive stocks for those who want to invest in public companies of the RBJ 75.
 
Home Properties, the owner and operator of apartment complexes nationwide, is seventh on the Rochester Business Journal's list of homegrown public companies, ranked by net income. It earned $26.3 million last year.
 
"Home Properties has been a traditional stock for income investors, but its high appreciation since the (recent recession's) bottom-the stock has nearly tripled-might give rise to caution," said Christopher Carosa, president of Mendon-based Bullfinch Funds Inc. and manager of the Greater Western New York Series portfolio of companies.
 
"On the other hand, if you think home buying is a thing of the past and people will more likely rent from here on out, this is the stock to buy."
 
George Conboy, president of Brighton Securities Corp., includes Home Properties as one of two steady if unexciting local stock investments.
 
"They have treated their shareholders well over the years," Conboy said. "They're very knowledgeable within their niche. They have high-quality management (and) a high-quality portfolio of properties.
 
"Investors would have little to be worried about in a company like Home Properties and could expect reasonable returns."
 
Dennis Lohouse, a principal at Forte Capital LLC in Brighton, thinks Home Properties is attractive even though it is not a good time to buy into real estate investment trusts because they have been bid up.
 
FSB Community Bankshares, the holding company for Fairport Savings Bank, is the second steady if unexciting company on Conboy's list. It ranks 13th on the RBJ 75 list of 25 public companies with 2010 net income of $200,000.
 
"We know a lot about Home Properties; they have a long track record," he said. "They're very reliable. FSB is almost exactly the opposite. Although they've been in business a long time, investors know them but little."
 
FSB, founded in 1888, went public in 2007 with the sale of 47 percent of its stock. It trades on the Over the Counter Bulletin Board. The other 53 percent of shares remains with FSB.
 
FSB has a market cap of $14 million and sales of $10 million, Conboy said. Over the last 60 days, only about 400 shares have changed hands.
 
In the 12 months ended Dec. 31, FSB's return to shareholders was minus 23.6 percent, ranking near the bottom of the RBJ 75 stocks.
 
"As investors get to know it," Conboy added, "they may find it a rewarding company to own, but it will not offer excitement and there will not be big near-term gains. This is for the patient investor."
 
Investors looking for straight-ahead growth should focus on Monro Muffler Brake Inc.; it ranks sixth on the RBJ list with 2010 net income of $33.2 million.
 
"Management has a plan, and they're following the plan," Conboy said. "Those guys know what they're doing. They've been making acquisitions that complement their core business."
 
Monro Muffler would be challenged with an increase in drivers who decide to ditch their used cars and buy new, Conboy noted, but he does not see that happening.
 
"Now we lament that you can't get into a new car for less than $20,000, even for the base model unless you want the very cheapest thing. If you're spending $20,000 or $30,000 for the average car, you expect them to be better. They last a lot longer. A longer-lasting fleet benefits a company like Monro."
 
Carosa likes the look of Paychex, the national payroll processing firm based in Penfield.
 
"It does pay a high dividend, and although the stock price has appreciated around 50 percent since the bottom, it is still hampered by the economic cycle," he said.
 
Paychex, whose customer base is dominated by small businesses, continues to be affected by the high jobless rate, Carosa said.
 
"If you think unemployment will be going down anytime soon, you might be interested in this stock," he says. "Plus, you get the luxury of a 4 percent dividend while you wait.
 
"But be careful. The most important thing about Paychex is the price you buy it at. Over time, Paychex will grow with the national economy. Although some folks question the continued viability of our national economy, long term we continue to believe America is the place to be."
 
Lohouse has some near-term concerns about Paychex.
 
"I wouldn't buy it here because I think we've got some time to go-maybe a year or two down the road," Lohouse said.
 
"They've got three things going against them. Employment trends are negative. New business starts are also weak. (And) the short-term interest rate picture does not benefit them because they make money from the float," the money that passes through Paychex on its way from employers to employees' banks or tax authorities.
 
Carosa thinks Paychex and Constellation Brands are blue-chip investments among local stocks, Paychex because of its ties to the general economy and Constellation Brands because the beverage industry is a favorite during recessionary times.
 
"Constellation Brands has been struggling through its recent acquisition binge," he said. "However, things may be looking brighter as the company has been on a recent binge to reduce its debt. It still has a way to go there, but it's headed in the right direction."
 
Carosa advises caution about investing in what he calls "home run" stocks.
 
"They have a chance to explode in value as they're relatively small and any slightly increased interest in their products or their stock can cause the stock price to pop up," he said. "On the flip side, any slightly decreased interest can cause the stock price to crash."
 
IEC Electronics Corp., VirtualScopics Inc. and Ultralife Corp. are examples, Carosa said.
 
"These stocks are only for those who have the stomach for risk," he said. "On the other hand, as a smaller part in a larger portfolio, they're not that bad."
 
Carosa lists Graham Corp., a Batavia-based designer and maker of vacuum and heat transfer equipment for petroleum refining, as a special situation stock. With net income of $6.9 million, it ranks ninth on the RBJ 75 list of public companies.
 
"Graham is linked with oil," he said. "As the price of oil rises, there is greater interest in exploration and processing to increase industry capacity.
 
"Graham is positioned very well to benefit from these trends. Here's the downside: The price of oil is dependent on the world economy, which might be sicker than the U.S. economy."
 
Conboy picks Xerox Corp. and Transcat Inc. as targets for aggressive investors.
 
"The Xerox story is the one we know pretty well," he said. "It is not a safe, straight-ahead growth story. They have faced some headwinds in their equipment business. At the same time, they have been transforming themselves more and more toward a service model.
 
"The jury is out on whether it will result in big gains for shareholders. If they can successfully transition Xerox to a greater service model, it'll work out all right for investors."
 
Xerox ranks first on the RBJ 75 list of public companies. It reported net income of $637 million in 2010.
 
"Xerox is in another transition, from manufacturing to service," Lohouse said. "That, to me, makes it a more interesting company going forward."
 
Transcat ranks 11th with net income of $1.5 million.
 
"It doesn't get a lot of press, but they have transformed themselves to a successful distributorship," Conboy said of Transcat. "Revenues and earnings have risen steadily. They seem to have their mojo.
 
"The only concern for investors is the stock does seem to be fairly priced. Investors are expecting more good results and have bid the stock up to where you can call it a well-run company and a growing company. You just can't call the stock a screaming bargain. But they're a good bet for the aggressive investor."

7/29/11 (c) 2011 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or e-mail service@rbj.net.


 


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