Investing in North Carolina stocks is not for the timid, as shown by this year's annual list of the 75 largest public companies based in the state. While the Standard & Poor's 500 notched a modest 5% gain during the year ended June 30, 32 Tar Heel companies gained or lost at least 20%. Big winners include small-capitalization drug stocks such as Cempra and Chimerix, which gained 220% and 111% respectively, while large-caps Lowe's, Red Hat and Hanesbrands each jumped more than 35%. Several stocks disappointed, including SPX, Cree and EnPro Industries, each declining by more than 20%.
The average share price of the Top 75 at mid-year was about 22 times earnings, a red flag for most value-oriented investors, suggesting the market is near a peak, says Don Olmstead, managing director at Charlotte-based Novare Capital Management LLC, which compiled this year's list. That's higher than the ratio of 17.5 for the S&P because the North Carolina list includes more small, faster-growth companies. The average market cap of North Carolina-based companies is around $8 billion, while the S&P average is $32 billion.
But an elevated PE ratio isn't a signal to dump shares, because interest rates are at record lows and the economy is improving, Olmstead notes. "A PE of 22 isn't outrageous," he says. "Most economists expect growth to pick up in the second half because sales of cars and homes are increasing, more people are working and consumer confidence seems robust."
Stronger consumer spending boosted results for retailers such as Lowe's and apparel companies VF and Hanesbrands. Lowe's is now North Carolina's second-most valuable company, overtaking Duke Energy, which lost a half percent. More home sales benefited LendingTree, which pairs buyers with lenders. Its shares have increased more than tenfold since 2010, including 170% last year.
The best North Carolina stock to own last year was one of the least known: Chapel Hill-based Cempra tripled because investors are bullish about its experimental treatment for bacterial pneumonia, the most common bacterial infection. Shares jumped another 30% during the first three weeks of July and have increased more than sixfold since its initial public offering in February 2012.
Four companies on the list had IPOs compared with seven in 2014 and six the previous year. Bojangles' raised $147 million in its May debut, landing at No. 46. Biscuits haven't proved popular with investors, with shares trading lower than the first-day closing price.
The list includes few energy companies, which have dragged down results on the S&P 500 because of slumping oil prices, says James Harlow, a Novare vice president who helped compile the list. The top 75 also has few companies dependent on international sales. The strong dollar has made American goods less competitive overseas.
Sealed Air, the largest corporate relocation in Charlotte history, starts at No. 12 after moving from New Jersey. The packaging company posted a 52% gain last year as margins improved after cost cutting.
Bank of America has nearly triple the stock-market value of the No. 2 North Carolina public company and is worth more than the smallest 67 companies combined. But size doesn't equal strength. After paying more than $70 billion in mortgage-related litigation and settlements, the bank's shares have returned 21% in five years. The S&P 500 index more than doubled in that period.
TOP 75 PUBLIC COMPANIES
3 Reynolds American had the biggest increase in market cap among the top 25 public companies following its $25.8 billion acquisition of Greensboro-based Lorillard, No. 7 on last year's list, in June. The cigarette company gained Newport, the nation's No. 2 brand with a 12.4% market share in 2014. Reynolds also has ramped up production of VUSE, which it rolled out nationwide in June 2014 and has become the top-selling electronic cigarette in the U.S.
10 In February, LabCorp, the nation's second largest medical testing company, acquired Princeton, N.J.-based Covance, a contract research organization, in a $6.2 billion deal, creating a company with pro forma 2014 revenue exceeding $8.5 billion. In a June report, Barron's predicted LabCorp shares could rise more than 20% over the next year. The company stands to benefit from an aging population, who will require more diagnostic testing. More Americans have medical coverage because of the Affordable Care Act and therefore are having more tests done.
20 Extended Stay America, the 682-hotel chain led by former Starbucks CEO Jim Donald (cover story, August 2014), had the worst stock performance over the last year out of the top 25 companies. Ongoing extensive renovations of three-fourths of its properties have affected occupancy rates, but revenues per available room increased 6.8% in the first quarter of 2015. The company predicts revenue growth of 5% to 7% in 2015. Gerry Lopez will replace...