ORANGE COUNTY 1986 YEAR IN REVIEW : In Bull Market, Local Firms Were Never in the Running

Despite a generally bullish 1986, Orange County’s publicly traded companies as a group were weak performers on Wall Street last year.

Based on a study of nearly 100 leading area issues, the aggregate market value of local companies increased by less than 1% during 1986. A similar survey of nearly 80 local companies a year earlier showed an aggregate increase of more than 30% for 1985.

In sharp contrast to the lackluster growth locally, the Dow Jones industrial average rose by more than 22% during 1986, while the Standard & Poor’s 500--another indicator of overall market performance--rose by nearly 15%.

Unlike the blue-chip stocks that make up the Dow Jones industrial average, most Orange County stocks are issued by smaller companies and are traded over the counter. These so-called “secondary issues” generally did not benefit much from the 4-year-old bull market during 1986.

Some analysts blame the soft performance on investor uncertainty over changes in tax law, sluggish economic growth and the growing federal budget deficit. Other analysts say program trading and insider-trading scandals have driven off the small investors who buy secondary issues.

Dow Near Record High

“That really was the story of the market in 1986,” said Dave Wright, associate director of research for the Los Angeles investment firm of Bateman Eichler, Hill Richards Inc. “Even though the Dow is closing near its record high, the secondaries really haven’t come back.”

Among the Orange County stocks tracked by The Times, losers narrowly led gainers, with the biggest loser, Irvine-based CompuSave Corp., plunging 99.3%. The biggest winner, Costa Mesa-based Viratek Inc., posted a hefty 492% increase in stock price.

All industry groups--with the exception of petroleum-related companies--produced both winners and losers, something analysts said reflected the performance of the market as a whole.

“1986 was a year of cross-currents as evidenced by the fact that while Digital Equipment Corp. has reached new all-time highs, IBM is down 20% for the year,” said Jeff Weiss, a technical analyst with the investment firm of E.F. Hutton & Co.

Orange County’s technology group, for instance, supplied many of the year’s biggest gainers and losers.

Among the biggest winners was General Automation Inc., which returned to profitability during 1986 after a five-year losing streak. Shares of the Anaheim-based computer maker closed on NASDAQ Wednesday at $4 a share, up 113.6% from their year-ago close.

Another high-tech turnaround, Irvine-based Laser Precision Corp., increased 120.7% to close Wednesday at $8 a share. And Western Digital Corp. of Irvine enjoyed strong gains during 1986. It closed Wednesday at $18.50 on the American Stock Exchange, up 76.1% from its Dec. 31, 1985, close of $10.50 a share.

Five of the county’s 10 biggest losers last year were in the high-tech sector, including CompuSave Corp., which fell to a bid price last week of just 2 cents a share from $2.06 a share a year earlier. Its all-time high was $10.625 a share.

Ejected from Exchange

Coming in with a drop of between 96% and 98%--depending on which market maker one talks to--is Helionetics Inc., an Irvine-based laser research firm whose board of directors once read like a Who’s Who of the military-industrial complex.

Ejected from the American Exchange last year after the company went bankrupt, Helionetics stock is now being quoted at a bid price of between 6.25 cents and 12.5 cents a share. Its all-time high was $29 a share.

AST Research Inc., which blasted into 1986 with a staggering 237% increase in price, has fallen by 58% to a 1986 closing price on NASDAQ of $12.875 a share. A year ago, AST closed at $30.75 a share, near its all-time high of $32.75 a share. Stock in the nation’s largest manufacturer of add-on products for IBM personal computers began to plunge early last year after IBM announced plans to muscle in on AST’s market by offering more powerful computers.

Applied Circuit Technology Inc., an ailing Anaheim-based maker of electronics equipment and generic drugs, fell 57.9% to a 1986 closing bid price of 50 cents a share. A Texas investment group recently acquired a 33% interest in ACT.

And Datapower Inc. fell 88% to close Wednesday at a bid price of just 25 cents a share. The ailing Santa Ana-based company has blamed a soft market for personal computers for its mounting losses.

Other Industries Lose

Although a large number of losers were concentrated in the technology sector, other industries were also hard hit. For example, all five of Orange County’s publicly traded petroleum-related companies declined during 1986.

NYSE-listed Smith International Inc. started 1986 at $6.75 a share before plunging to an all-time low of $1.25 a share in March after the Newport Beach-based company filed for bankruptcy. Since mid-1986, Smith rebounded somewhat, closing the year at $4.50 a share, down $2.25 a share, or 33.3% in price. The partial recovery appears to be the result of Hong Kong interests acquiring a large stake in Smith and investor speculation that the crushing $204-million judgment lodged against the company will be lowered.

Despite analysts’ opinions that Baker International Corp. of Orange has been among the best managed of oil-service concerns, its share price nevertheless fell 33.6% to close 1986 at $11.875 a share on the NYSE.

Also hard-hit was Orange-based Varco International Inc. That oil-patch dependent company fell 38.2% to a NYSE closing price of $2.625 a share Wednesday.

Seahawk Oil International Inc. of Newport Beach fell 54% to close Wednesday at 62.5 cents a share, while Petrominerals Corp., a Stanton-based oil company, fell 52.2% to close at $1.375 a share, reflecting the havoc that cheap foreign oil has wrought on domestic producers.

Among Orange County’s health-care companies, the consistent profit makers fared best on Wall Street. Irvine-based Caremark Inc., whose in-home brand of health care has been popular with hospitals and insurers, increased 54.7% on NASDAQ to close Wednesday at $22.65 a share, up $8 for the year.

Investor Confidence

Companies that faltered lost investor confidence rapidly and suffered steep drops in stock price.

For example, the share price of Lake Forest-based Westworld Community Healthcare Inc. fell 92.6% after it began losing money in early 1986. Westworld closed Wednesday on NASDAQ at 87.5 cents a share, down sharply from its 1986 high of $15.375 a share.

Safeguard Health Enterprises Inc. fell 53.2% during 1986 as the Anaheim-based prepaid dental plan continued to report sharply lower net earnings despite increased revenues. Safeguard closed Wednesday on NASDAQ at $5.50 a share. Its high for the year was $13.25 a share.

During 1986, investors placed high premiums on stocks of drug companies with potentially promising products. As a consequence, Viratek Inc., its sister company, SPI Pharmaceuticals Inc. and their parent, ICN Pharmaceuticals Inc., enjoyed a hefty run-up last year.

All three are involved in the manufacture, sale and distribution of the anti-viral drug Virazole, which is being touted as a treatment for AIDS and a possible influenza medication.

Viratek gained 492% in price to close at $63 a share on NASDAQ. Its restated closing price in 1985 was $10.625 a share.

SPI, also listed on NASDAQ, increased in market value by 138.3%, closing Wednesday at $28 a share. ICN, which is traded on the NYSE, increased in price by 31.5% to close at $17.75 a share.

FDA Rejection

At the opposite end of the spectrum was Newport Pharmaceuticals International Inc., a Newport Beach company whose drug Isoprinosine was rejected last February by federal regulators as an AIDS treatment.

Speculation that Isoprinosine was a miracle drug for acquired immune deficiency syndrome boosted Newport’s price to a 1986 high of $15.125 a share. But after the Food and Drug Administration rejected Isoprinosine, the company’s price plunged to a 1986 low of $4.125 a share. It closed Wednesday at $4.25.

In general, real estate and construction firms benefited from the strong housing market during 1986.

Home builder Standard Pacific Corp. of Costa Mesa increased 66.9% in price to close the year at $26.50 a share on the NYSE. It closed a year earlier at $15.875 a share, adjusted for a 3-for-2 stock split last year.

Santa Ana-based First American Financial Corp., which provides title insurance, increased by 36.6% in price to close Wednesday on NASDAQ at $48.50 a share. The Hammond Co., a Newport Beach mortgage banking firm, saw its price increase by more than 25% to a closing price Wednesday of $5 a share.

In the heavy engineering and construction arena, Fluor Corp.--once Orange County’s most richly capitalized public company--fell 25% to a 1986 closing price of $11.50 on the NYSE. Fluor’s low for the year was $11.125 a share.

Helped along by the real estate boom and low interest rates, most of Orange County’s financial service companies enjoyed modest gains in stock price during 1986.

However, Financial Corp. of America, the troubled Irvine-based holding company for American Savings & Loan Assn., fell 25% on the NYSE to close Wednesday at $7.50 a share, off $2.50 for the year. Far West Financial Corp. of Newport Beach fell 15.9% to close Wednesday at $13.875, down $2.625 for the year.

Glass Maker Wins Big

Among manufacturing concerns, AFG Industries was the biggest winner. The Irvine-based glass maker, which realized a $23-million profit from its failed bid to acquire Lear Siegler, enjoyed a 72.4% increase in its share price during 1986.

Traded on the NYSE, AFG closed Wednesday at $28.875 a share, up $12.125 from a 1985 closing price of $16.75 that has been restated to reflect a 3-for-2 stock split last year.

ACI Holdings Inc., the Newport Beach holding company for AirCal--which recently agreed to be acquired by American Airlines for $225 million--was also a big winner. During the past 12 months, ACI’s share price has increased by 93%. Traded on the American Exchange, ACI closed Wednesday at $14.50 a share. A year earlier it closed at $7.50.

Although the bull market generally passed up the secondary stocks during 1986, some analysts believe that 1987 will be a better year because many secondary issues are undervalued when compared to the blue chips.

“At some point investors have got to realize that the blue chips are very nearly fully priced,” said Norman Fosback, who publishes several investment newsletters. “I look for the secondary stocks to handily beat the blue chips in 1987.”

Weiss of E.F. Hutton said secondary stocks should perform better this year if they can show some life in an early rally. “Once they begin to prove themselves, I’m a buyer,” he said.

However, because the market will be less forgiving of poorly run companies than in the past, investors must buy “the best performers in the best group,” Weiss said. “You can’t treat this market like Macy’s basement.”

ORANGE COUNTY WINNERS / LOSERS TOP 10

CLOSE CLOSE PERCENT COMPANY 1985 1986 CHANGE Viratek $10.625 $63.00 +492.9% SPI Pharmaceuticals $11.75 $28.00 +138.3% Laser Precision $3.75 $8.00 +120.7% General Automation $1.875 $4.00 +113.6% ACI Holdings $7.50 $14.50 +93.3% Western Digital $10.50 $18.50 +76.1% AFG Industries $16.75 $28.875 +72.4% Standard Pacific $15.875 $26.50 +66.9% El Torito Restaurants $12.625 $20.25 +60.4% Caremark $14.625 $22.625 +54.7% BOTTOM 10 CompuSave $2.06 $0.02 -99.3% Helionetics $3.375 $0.0625 -98.0% Westworld Community $11.875 $0.875 -92.6% Datapower $1.875 $0.25 -88.3% Newport Pharmaceuticals $13.125 $4.25 -67.6% Wespac Investors Trust II $3.25 $1.125 -65.4% Wespac Investors Trust I $6.50 $2.625 -59.6% AST Research $30.75 $12.875 -58.1% Applied Circuit Technology $1.19 $0.50 -57.9% Safeguard Health Enterprises $11.75 $5.50 -53.2%

Adjusted for a 2-1 split, September, 9/86. Adjusted for a 3-2 split, 4/86. Adjusted for a 3-2 split, 3/86. Sources: Associated Press; Standard & Poor’s Corp.; Newport Securities Inc.