Waiting in vain?

John Rogers of Ariel Capital picks stocks that could be loved

It's not easy picking small-cap stocks. Just ask John W. Rogers Jr., president and founder of Ariel Capital Management in Chicago. He runs the $223 million small-capitalization value fund Ariel Fund (Nasdaq: ARGFX) at a time when the market has showered its affections on fast-growing large-cap growth stocks over the past eight years. At the same time, small caps have languished, as their earnings have failed to grow at the same pace as their larger brethren.

"I think it's time for caution," says the easygoing Rogers, who maintains he isn't waiting in vain. His strategy: buy companies with either a leading position in niche markets or those which have exclusive arrangements with top firms in other industries, figuring such alliances will translate into earnings growth. Rogers typically holds on to stocks for three to five years on average.

Specialty Equipment (NYSE: SEC), an Aurora, Illinois, food service equipment manufacturer, fits the latter profile. The firm's Taylor division produces softserve ice cream and frozen drink equipment used by a number of stores and restaurants, most notably McDonald's (NYSE: MCD), with which it has a contract. Rogers says he expects Specialty Equipment's earnings to grow 12% to 15% over the next three to five years.

Rogers also touts Herman Miller (Nasdaq: MLHR), a Zeeland, Michigan, manufacturer of office products and furniture. He sees Herman Miller benefiting from a strong commercial real estate boom in the Midwest, as cities such as Chicago are erecting new office buildings in their downtown business districts. He expects "positive earnings growth" of about 15% a year, he estimates.

He likes Central Newspapers (NYSE: ECP), a Phoenix-based newspaper chain. Rogers says the company's Phoenix and Indianapolis papers, which essentially have a monopoly in those markets, are experiencing strong growth in both advertising and circulation as the populations of those two areas boom. Also beneficial: cost-cutting measures and stock buybacks.

Rogers' last two picks are definitely turnaround stories. Pawtucket, Rhode Island-based Hasbro (NYSE: HAS) has languished as some investors have become convinced the toy manufacturer can't sustain recent earnings growth. And Reno, Nevada-based slot machine manufacturer International Game Technology (NYSE: IGT) is in the process of introducing new machines it hopes will boost sales.

Roger's Rebounders

Company                                12-Month
Exchange: Symbol           Price(*)   Price Target

Central Newspapers         $45.00        $57
NYSE: ECP

Hasbro                      22.81         32
NYSE: HAS

International Game Tech.    16.88         23
NYSE: IGT

Herman Miller               22.75         28
Nasdaq: MLHR

Specialty Equipment         24.25         34
NYSE: SEC

                                              Est.5-Yr.
Company                    P/E on Projected   Annual EPS
Exchange: Symbol            1999 Earnings       Growth

Central Newspapers               22.2           12.7%
NYSE: ECP

Hasbro                           19.5           14.1
NYSE: HAS

International Game Tech.         12.1           14.5
NYSE: IGT

Herman Miller                    13.3           14.0
Nasdaq: MLHR

Specialty Equipment              10.8            8.5
NYSE: SEC

Company
Exchange: Symbol                Why Stock Will Outperform

Central Newspapers         * High advertising and circulation
NYSE: ECP                  growth rates in its Indianapolis and
                           Phoenix newspapers should translate
                           into higher earnings

Hasbro                     * Although stock has languished,
NYSE: HAS                  strong toy brands like Star Wars and
                           Pokemon licensed action figures and
                           Monopoly could boost earnings momentum

International Game Tech.   * While losing ground to competitors
NYSE: IGT                  with new slot machines, company is
                           poised to rebound as it introduces
                           more innovative gaming devices

Herman Miller              * Innovative office furniture concern
Nasdaq: MLHR               should benefit from commercial real
                           estate boom in the Midwest, and its
                           worker-friendly environment

Specialty Equipment        * Foodservice equipment manufacturer
NYSE: SEC                  could gain from its units' leading
                           positions in several market niches, and
                           through arrangements with leading
                           restaurant chains

(*) Closing price as of 9/24/99

Source: John Rogers, Ariel Capital Management; Yahoo! Finance; Zacks Investment Research.3