For Tedd M. Alexander, III, president of the Baltimore-based Credo Capital Management L.L.C., analyzing a company’s fundamental financial position is crucial to successful investing. Alexander has built his company on an investment philosophy that emphasizes analytical research. Before investing, his firm tracks the revenues and earnings growth of each company and the growth characteristics of the industry in which each company operates. Examining the financial opportunities available to a company’s management also plays a role in stock selection.
“Our investment philosophy incorporates the unemotional, systematic interrogation of fundamental expectations in an effort to mitigate risk,” Alexander says.
Alexander opened Credo Capital Management in April 2004, soon after
leaving his job as a portfolio manager at Brown Capital Management Inc. (No. 4 on the BE ASSET MANAGERS list with $5.28 billion in assets under management). Credo provides money management services to public and corporate pension funds, foundations, and endowments.Its financial analysis is driven by a proprietary software application called ABACUS. Each week the software is programmed to peruse 1,350 mid-cap stocks, identifying some 150, according to a predetermined scoring range, that are likely to outperform.
Alexander says 2006 has better potential than last year. He projects that mid-cap investors could see a 9% total return if real GDP growth hits the 3% to 3.5% range and inflation hovers around 2.0 %, barring any unforeseen shocks to the economy.
One stock Alexander says shows promise for this year is Synopsys Inc. (NASDAQ: SNPS). Synopsys provides electronic design automation software (EDA) to the global electronics market. “Synopsys’ new product introductions should improve its competitive position and address customer preferences for end-to-end design solutions.”
A financial industry stock Alexander likes is the asset management firm Legg Mason Inc. (NYSE: LM). He believes the company is set to yield significant returns. “Legg Mason’s management has demonstrated a keen ability to buy or build valuable assets in the money management industry, and preserve performance by allowing its investment professionals to remain fairly autonomous,” he says. “We expect the company to continue this growth path.”
Celgene Corp. (NASDAQ: CELG), a company that develops and markets cancer treatments and drugs for inflammatory diseases, will benefit from the success of its cancer drug Revlimid.
“Revlimid is the main catalyst for Celgene’s potential to grow revenues above $1 billion by 2008, from nearly $550 million in 2005,” Alexander says.
Although oil prices eased at the end of 2005, Alexander likes Smith International Inc. (NYSE: SII), which manufactures and distributes products and services to the oil and gas industry. “The company’s largest division, M-I SWACO, is highly leveraged to deepwater drilling in the Gulf of Mexico and should benefit as activity levels resume in the region from depressed levels caused by last year’s coastal storms.”
Finally, Alexander is putting money in Tractor Supply Co. (NASDAQ: TSCO), a firm that operates specialty retail farm and ranch supply stores. Alexander expects the company’s revenues to grow due to planned expansion.
“We expect square footage growth, primarily in the western half of the United States but also among its main cluster of stores in the North East and Midwest, to drive 20%-plus long-term earnings growth,” says Alexander.
Tedd M. Alexander III’s Stock Picks
| Company (Exchange: Symbol) | Price* | 12- to 18- Month Price Target | P/E on Projected 2006 Earnings | Est. 3-Yr. Annual EPS Growth Rate | Why Stock Will Outperform |
| Synopsys Inc. (NASDAQ: SNPS) | $20.53 | $31.00 | 40.8 | 31% | Product demand is increasing due to advancements in technology. |
| Legg Mason Inc. (NYSE: LM) | $119.74 | $144.00 | 28.0 | 22% | Company will continue to buy or build valuable assets in the money management industry. |
| Celgene Corp. (NASDAQ: CELG) | $58.74 | $92.00 | 95.3 | 50% | Cancer drug Revlimid is the main catalyst for company’s potential revenue growth. |
| Smith International Inc. (NYSE: SII) | $37.47 | $48.00 | 24.5 | 18% | Deepwater oil drilling activities will resume post-hurricane season. |
| Tractor Supply Corp. (NASDAQ: TSCO) | $54.70 | $71.00 | 30.2 | 22% | The company’s store expansion will drive earnings and sales. |
*As of Dec. 21, 2005