Portfolio: stocks under suspicion

Kiplinger's Personal Finance Magazine, August, 1998

Jerry Sullivan and Bill Lippman, managers of Franklin Value (800-342-5236), pick cheap stocks that are under a cloud. "The question for us," Lippman says, "is whether the cloud is a tornado that wilt destroy these companies or a nice, white, fleecy cloud that wilt drift away and let the sun shine in."

DIMON

(DMN, New York Stock Exchange, recent price $13). The cloud over DIMON is a little smoky: The company buys, processes and sells tobacco to cigarette makers around the world. Though the company is not subject to the kinds of litigation that have bedeviled U.S. cigarette makers, the attendant controversy, as well as Asia's economic problems, is worrying investors. But the stock is extraordinarily cheap (even by tobacco standards) at seven times consensus earnings estimates of $1.79 per share for the year ending June 1999. Moreover, it yields a generous 5.3%. "We think the dividend is safe," says Lippman. But the risk remains that future legislation may curtail smoking and trim tobacco sales.

MMI COMPANIES

(MMI, NYSE, $21). MMI underwrites medical malpractice insurance and provides consulting services to health care providers. Packaging insurance and consulting services helps ensure a steady flow of business, says Lippman. "This is a good-quality insurance company, but pricing has gotten very competitive in medical malpractice," he says. The stock sells at less than 12 times estimated 1998 profits of $1.80 per share and right around the company's book value (assets minus liabilities). Many insurance companies sell at twice book value, and "it's not a stretch" to imagine MMI selling at 1.5 times book down the road, says Sullivan.

MYERS INDUSTRIES

(MYE, American Stock Exchange, $23). This is the closest thing to a growth stock, albeit a rather prosaic one, among the pair's picks. Myers is a leading maker of reusable polymer and metal containers and a distributor of tools and equipment used for repairing tires. The company has reported earnings growth in 22 of the past 26 years and is practically debt-free. Sullivan thinks the company's long-term-growth rate is probably about 13%, so he sees the stock as cheap at less than 16 times estimated earnings of $1.50 per share. "This stock may not be bargain basement, but it sure isn't silly," he adds.

ROWAN COMPANIES

(RDC, NYSE, $21). One of the world's biggest contract offshore drillers for oil and gas, Rowan's stock has taken a beating as oil prices have weakened. The stock, which hit a 52-week high of $44, now sells at just nine times projected 1998 profits of $2.44 per share. "Right now the market seems to be saying that oil prices will stay down forever," says Sullivan. "We think that sooner or later the price of oil will get back to about $20 per barrel" from about $14 in late June.