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Guru Scott Black Prefers Small Caps in His Barron's Midyear Roundtable Stock Picks

July 25, 2014 | About:
Monica Wolfe

Monica Wolfe

130 followers
Every year Barron’s gets its Roundtable team together and they discuss stock picks and the status of the economy in general. Guru Scott Black (Trades, Portfolio) is another member of Barron’s Roundtable team, and the following stocks are his Midyear Roundtable stock picks and updates from January’s Roundtable picks. For this midyear’s roundtable, Black chose two small cap stocks as his picks despite the fact that he currently believes that “small- and mid-cap stocks, as an asset class, are overpriced.”

Scott Black (Trades, Portfolio) is the Chairman, President, CIO and CCO at Delphi Management. According to the fund’s website, Scott Black (Trades, Portfolio) and Delphi Management follow a conservative investment strategy that emphasizes the fundamental performance of underlying companies rather than making bets on the short-term market movements. Their investment strategy also states that they only invest in equity securities of US-listed companies and only takes long positions.

Super Micro Computer (SMCI)

Black’s first stock recommendation was in Super Micro Computer which was trading at $22.65 per share at the time of his Barron’s interview. When asked what he liked best about this company, he claimed that the Super Micro Computer’s “management thinks it can grow the top line by 20%, to $1.72 billion, in 2015.” Along with his faith in the management team’s assertion, Black also thinks that once you do the math, the stock is actually pretty cheap.

As of Scott Black (Trades, Portfolio)’s most recently reported quarter (Q1) he did not actually hold any shares of the company’s stock. The two gurus with holdings as of the first quarter were Steven Cohen (Trades, Portfolio) and Chuck Royce (Trades, Portfolio) who holds the largest position.

Super Micro Computer is the leading manufacturer of customized, high-performance and Intel-based servers. It develops and provides high performance server solutions based on an innovative, modular and open-standard architecture. The Company's solutions include a range of complete rackmount servers, storage systems, workstations, blade servers, networking devises and complete rack solutions.

Super Micro Computer’s historical revenue and net income:

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In his Roundtable interview Black claims that if management believes that the top line can grow 20%, then you add in the operating margins of 7% you get operating margins of $120.4 million. After you subtract the interest expense of $600,000, then you have a profit prior to taxing of $119.8 million. He gets more in depth with the calculations on Super Micro, and ultimately states that the company cound generate $30 million in free cash flow, and from that Black and his fund believe would lead to Micro earning $1.60 a share in fiscal 2015.

The Peter Lynch Chart suggests that the company is currently overvalued:

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The GuruFocus analysis on the company reports that its asset growth is faster than its revenue growth, its price is close to a 10-year high and it has issued $19.124 million of debt over the past three years.

Here is a look at Super Micro Computer in comparison to its competition:



Super Micro Computer has a market cap of $1.13 billion. Its shares are currently trading at around $25.20 with a P/E ratio of 25.00, a P/S ratio of 0.80 and a P/B ratio of 2.50. The company had an annual average earnings growth of 3.10% over the past five years.

PDC Energy (PDCE)

Black’s second pick of the Midyear Roundtable was in PDC Energy which was trading at $65.28 at the time of the article. The guru remains optimistic about the company’s future and about its possibility for a takeover. He states that at the end of the last year PDC had “proved oil reserves of 93.8 million barrels, with an estimated net present value of $18 per barrel, or $1.688 billion.

As of the first quarter Scott Black (Trades, Portfolio) held on to 123,060 shares of the company’s stock. This position makes up for 0.34% of the company’s shares outstanding as well as 0.83% of Black’s total assets managed. Prior to the first quarter Black had been sold out of PDC Energy since the second quarter of 2013.

Black’s historical holding history:

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Black believes the company’s net income could total $46 to $49 million this year, which would make the company’s earnings per share somewhere between $1.30 and $1.37. Also by adding back noncash charges yields a discretionary cash flow of between $250 million and $275 million, representing $7 to $7.70 per share.

Formerly, the company was a gas producer, but when the management left PDC sold off some of its gas properties and turned its focus towards developing mostly oil and natural-gas liquids. Now the company is an independent oil and natural gas company focused in Colorado in the Wattenberg Field and Appalachian Basin.

PDC Energy’s historical revenue and net income:

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The analysis on PDC Energy reports that the company’s revenue per share has been in decline over the past five years, it has issued $339.891 million of debt, its Piotroski F-Score is high, and it’s P/S ratio is close to a 1-year low.

Check out the new GuruFocus Analysis page which now has a great comparison chart on every stock page like the one featured below!



The Peter Lynch Chart suggests that the company is currently overvalued:

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PDC Energy has a market cap of $1.85 billion. Its shares are currently trading at around $51.64 with a P/E ratio of 109.60, a P/S ratio of 3.80 and a P/B ratio of 1.90. The company had an annual average earnings growth of 7.60% over the past five years.

You can read the entire Barron’s Midyear Roundtable article here. Also, check out Scott Black’s real-time and most recent portfolio holdings!

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Comments

rsheeley
Rsheeley premium member - 2 months ago

where are his stock selections

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