(FORTUNE Magazine) – FROM RAGS TO RICHES

BUY TARRANT APPAREL

Why all the fuss over high-fashion names like Tommy Hilfiger and Gucci, when the apparel industry owes more than a quarter of its business to private-label manufacturers--which have been steadily stealing market share from the big brands? Witness Tarrant Apparel Group (TAGS, Nasdaq), a supplier of trendy yet low-cost clothes--to retailers like the Limited and Target--where revenues have almost tripled over the past five years. Tarrant's edge, aside from its modest production costs and hip designs, is its novel system for test-marketing its wares: Stores are able to showcase samples to gauge customer approval before having to commit to a big order.

Wall Street is starting to catch on. In the past few weeks, three analysts have initiated coverage of Tarrant with "buy" ratings, pushing the share price up 15%. Still, there's plenty of room for more. Among 20 apparel makers tracked by Prudential Securities, Tarrant has the highest return on equity and one of the lowest valuations--nine times projected 1997 earnings, compared with 14 for the overall group.

AT HOME ABROAD

BUY FIRST SOUTH AFRICA

No need to go on safari to find South Africa's emerging growth stories. First South Africa, publicly traded in the U.S. (FSACF, Nasdaq small cap), is a holding company for ten indigenous businesses that are each showing profit growth of 30% to 40% annually: South Africa's largest maker of pies, for instance, and a producer of metal washers. The opportunity is in part arbitrage: On their own, these outfits are too small even to be listed on the Johannesburg market, making them cheap to acquire. The company's long-term strategy is to bundle similar businesses together and spin them off in Johannesburg, where combined they can fetch prices several times higher than what First South Africa paid for them.

Of course, there's also a traditional growth story. Additional acquisitions will help drive overall earnings growth to 60% this year and nearly 100% next year, says analyst David Boczar at Value Investing Partners. Yet the stock is trading at just six times projected 1997 earnings.

SQUEAKY WHEELS

WATCH OUT CARMAX

Three and a half years ago, CarMax (KMX, NYSE) kicked off a revolution in the $300 billion used-car business with the opening of its first superstore, replacing the smarmy stereotype of the used-car salesman with no-haggle pricing. Almost overnight "used cars" became "pre-owned vehicles." Now CarMax's parent, consumer electronics behemoth Circuit City, is offering investors a way to share the potential wealth, issuing a special class of stock on February 4 that tracks the performance of its subsidiary.

CarMax's opportunity is immense: The company has just seven stores so far--generating almost $450 million in revenues--and plans to expand to 80 or 90 by 2002. At the same time, the stock still hovers around its $20-a-share offering price.

But there are plenty of reasons to be wary. CarMax boasts gross margins of only around 8%, compared with 11% for the average used-car dealer, leaving the company little leeway in the event of an economic downturn. And CarMax itself forecasts losses until 1999--even assuming that a growing horde of new competitors, including Wayne Huizenga's Republic Industries, doesn't cut into profitability. Indeed, the lack of a pop in CarMax's stock may be due to an already generous valuation: $2 billion in total. "For this stock to see $22 would be quite remarkable," says Vincent Slavin at Cantor Fitzgerald.