Suddenly, the Tune’s Right for Verit Stock : Sun Valley Stereo-Speaker Maker Rides the Crest of a Run-Up

Verit Industries is an obscure Sun Valley company that makes stereo speakers and distributes odds and ends like curling irons and clock radios. It lost money last year and made little the two previous years.

So why is the stock trading at $12.75 a share, down from a peak of $15.50 on Feb. 28 but still more than four times its price of a year ago?

Nobody can say exactly, but several factors appear to be involved: higher sales and profits, a raging bull market, recommendations in three investment letters, and the interest of two major outside investors.

Significant Sale

Company Chairman Lavere G. Lund, who holds a controlling 42% stake in the company, also says Verit’s shares were undervalued. And investors apparently liked Verit’s $3.6 million sale last April of its marginally profitable meat-processing business, a vestigial operation from the company’s days as a part of Republic Co.

“That was a significant move,” said Arthur Dalfen, a Bermuda investor whose stake in the company was 9.9% in July but now is below 5%. “Meat packing and consumer electronics are not a very good mix.”

Verit was founded in 1967 as Tangier Industries and was controlled by Republic, a Los Angeles conglomerate. Tangier, a holding company itself, had its stock acquired by a group of banks, including Bank of America, to settle a debt in 1973.

Trimming the Unprofitable

Lund bought a controlling interest two years later and changed the company’s name to Verit. He then closed or sold off unprofitable units, including a chemical company, a truck-building firm, a mobile-home business and, finally, the meat operation.

The company’s main business for years has been stereo speakers, which it makes through its Wald Sound subsidiary. Now, however, Verit’s close-out business, which buys manufacturers’ overruns and discontinued items ranging from telephones to typewriters, accounts for about half of its sales.

Close-outs can be extremely profitable, because there are few expenses beyond the cost of the products, which Verit resells to cut-rate dealers such as DAK Industries of Canoga Park. Verit also plans to open its own mail-order business.

Lund, 50, had been a vice president at Republic at a time when its president was Sanford C. Sigoloff, now chairman of Wickes, the giant Santa Monica-based retailer. Before joining Republic, Lund was a part owner of Republic National Banks of California, which is now owned by Hongkong & Shanghai Banking.

Several years ago Lund and Wald Sound’s president, Estle Finney, had run-ins with the Securities and Exchange Commission. In 1983, the SEC obtained a $12,500 judgment against Lund in a civil action alleging that he used inside information four years earlier in trading the stock of a Farmingdale, N.Y., company called P & F Industries. The chairman of P & F, Sidney Horowitz, is a director of Verit.

Run-Up Called Inevitable

Finney also traded P & F stock, but he settled with the SEC by disgorging profits of about $10,000. Both men deny any wrongdoing.

Lund says some of the increase in Verit’s stock price was inevitable. He says the stock, which traded early last year at under $3, was below the company’s book value, which now stands at $6.24.

Nevertheless, a financial executive who asked not to be named says none of Verit’s actions or financial results could fully account for the stock run-up, despite the rosy earnings projections of some analysts.

Strong Showings

Those projections are based on Verit’s strong recent performance. For the second quarter ended Dec. 31, which includes the critical Christmas season, net income soared 177% to $283,000, while revenue was up 43%, to $6.4 million. For the year ended June 30, Verit lost $122,000, but that includes a $475,000 charge for discontinued operations stemming from the sale of the meat plant. Sales were $16.3 million.

Dalfen was not the only outside investor to see something in Verit. Author Robert J. Ringer, who wrote “Winning Through Intimidation” and “Looking out for Number 1,” apparently wanted to build Verit into a major player in the cellular telephone business, Lund says.

On July 19, Tortoise Ventures, a company Ringer controlled, agreed to pay Lund $150,000 for an option to buy 260,000 of Lund’s 360,000 shares at $11.54, along with voting rights for the remaining 100,000. At the time shares were trading for about $6.50.

For reasons never fully explained--Ringer couldn’t be reached for comment--Tortoise let the option expire Jan. 28 without exercising it. All the same, Ringer’s and Dalfen’s activities drew attention to the stock.

Publications Pick Up Signals

In September, it was featured in The Insider’s Chronicle, a weekly investment newsletter published in New York by William Mehlman. Around the same time, Verit was recommended by The Dines Letter, published by James Dines in Belvedere, Calif., and his recommendation also appeared in Fortune. In December, Verit was cited in Big Base Investing, a newsletter published by Thomas Dowse in San Francisco.

But Verit, which has about 100 employees, claims to have more going for it than a couple of good quarters and analysts’ recommendations. As a speaker company, Verit says it can benefit from booming sales of compact disc equipment.

“The Japanese make the players, but they don’t make the speakers,” Dowse explained.

Impact of CD Players

Speakers need lumber and weigh a lot in relation to their cost, so it usually doesn’t pay to import them. Stereo makers typically import tuners, amplifiers and so forth, and add American-made speakers.

Because compact discs offer crystalline reproduction, many people opt for better speakers to go with their new CD players, retailers and speaker makers say. The industry hopes that CDs will bring new life to the relatively stagnant speaker market, which totaled $513 million in retail sales last year, according to Consumer Electronics Monthly.

But those new sales are mostly at the high end, since quality speakers are needed to complement CD sound. It’s not clear whether the trend can help Verit, whose Wald unit makes mostly low-end speakers, according to industry sources including Leo David, president of the Leo’s Stereo chain.

“We used to be known as a real low-end, black-box, down-and-dirty speaker company,” Finney acknowledged.

Magnetically Shielded Speakers

He insists, however, that Wald now makes middle-market speakers suited to CDs, and also is coming out with a line of magnetically shielded speakers that can be placed right next to a television set without interfering with the signal.

Wald makes speakers in Sun Valley using imported drives, the parts that actually produce sound. Verit’s speakers are sold under a variety of labels but the biggest customer by far is Sansui, Finney said. The speakers also are sold under the Verit name.

As for the stock, Dalfen has cut his stake by more than half since July 29, when he began selling. His most recent filing with the SEC showed him holding 32,000 shares, or 4.2% of the total outstanding. Dalfen says he thinks the current price represents a realistic value, and that, although he still likes the company, he doesn’t expect a further dramatic increase.