Buying local: a guide to shopping around-the-corner investments

Sunday, January 15, 2012 at 10:05pm

Those calls don’t come as frequently anymore.

A generation ago — before the days of cheap online trading, CNBC tracking the Dow’s every move and funds that let you buy only Peruvian companies — Gary Collier’s phone would regularly bring him questions from local investors inquiring about Nashville’s most popular stocks.

“They’d ask about Service Merchandise, Shoney’s and Cracker Barrel,” said Collier, now executive vice president and manager at Pinnacle Asset Management, the investment arm of the largest bank headquartered in Nashville. “Now we’re buying indexes and funds.”

That shift reflects the huge leap in sophistication among both investors and the markets in which they put their money to work. Fueled by the rise of the 401(k) plan and other ways in which millions of us are now hooked into global investment markets, we no longer pay as much attention to the equity opportunities on our doorsteps.

But there is still a school of thought in the investment community that advocates buying local and regional stocks in a disciplined way. One Minnesota money manager left a big bank in 2008 and has used a local-heavy approach to grow his own firm’s assets under management to $300 million.

A big plus to emphasizing local companies, he told a trade publication last year, is that it puts clients more at ease. In a way, they are following Warren Buffett’s philosophy of investing in what they know and understand.

So if you’re up for finding some investment opportunities among Middle Tennessee stocks, we’re giving you a place to start. We ran each public company based here through a set of six operational parameters — measuring the growth of their revenues, profits and operating margins — as well as eight valuation measures that include widely used ratios as well as the gap between their prices and analysts’ price targets.

We gave companies a "plus" for strong growth in its operations and lower valuation ratios than its peers. Vice versa, they got a "minus" if they are shrinking or not growing much at all or are relatively more expensive. If the numbers were neutral, we didn’t give them either mark. Then we tallied up the two categories. The theory: A company that scores well on both is one that is on the right track and cheaper than its peers — and hence, a good risk-reward proposition.

Turns out there aren’t that many locals fitting that bill.

Only hospital chain Community Health Systems, aluminum maker Noranda and medical IT services venture MedQuist Holdings posted positive scores in both categories. Coming close were HCA Holdings — a great relative value but no standout operational numbers — and retailer Genesco, which tops its peers when it comes to fundamentals but is pretty much trading in line with them.

On the flip side are surgery chain operator AmSurg and real estate investment trust Healthcare Realty Trust, the only names our screen gave negative scores in both categories. In between is everyone else — either a strong performer with an expensive stock (see Tractor Supply and Dollar General) or a screaming value stock that is struggling to grow its earnings (such as O’Charley’s and Vanguard Health Systems) almost three years after the Great Recession officially ended.

Admittedly, our screen is very basic. But it is a start and does provide some basic insights into how the market is viewing certain sectors these days. All the public hospital companies based in the area are undervalued relative to other health care names, a clear signal that investors continue to be cautious about the regulatory and political risk facing the sector. Similarly, restaurant chains Cracker Barrel, O’Charley’s and J. Alexander’s are still working hard to raise their guest counts and lag in our performance measures.

If you do decide to buy any of these local stocks, you’ll not only want to take account of their situation, but your own as well. Pinnacle’s Collier said individual investors should be fastidious about investing according to a well thought-out plan with an appropriate timeline and risk level.

“An individual investor needs just as much structure and process as a Vanderbilt or another big institutional investor,” he said. “You’re managing risk just as much as you are to a return.” 

LocalInvestGraphic.pdf1.35 MB

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