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Stock Strategist

The Babe Ruth Portfolio Takes a Big Swing

We make a purchase and update our small-cap portfolio's performance.

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With the World Series a week away, we've decided to get in the mix by taking a swing at specialty retailer  Finish Line (FINL). We believe this stock has home-run potential. As we discussed in our first article, "Bat Like Babe Ruth," swatting a few home runs in your portfolio could have a much greater impact than your batting average on your future performance. We think that stocks with market values below $2 billion can offer exceptionally fertile ground for finding home-run opportunities. (For breaking news and updates on the Babe Ruth Portfolio, be sure to sign up for our free e-mail alerts.)

After reaching a high of $23.55 in March 2005, Finish Line's stock price has fallen more than 80% to its current level of around $4. The stock initially became cheap in late 2006 after a severe drop in operating margins following a missed fashion trend. But, after announcing plans to acquire casual shoe retailer and competitor  Genesco (GCO) this summer, the stock fell even further. Analyst Brady Lemos believes Finish Line is overpaying for Genesco and thus destroying a lot of value. But, even after accounting for this, Lemos' $10 fair value estimate is more than 2 times the current stock price.

Justin Perucki has a position in the following securities mentioned above: FTEK, VIMC. Find out about Morningstar’s editorial policies.