Hometown Brokers Find Their Niche

Times Staff Writers

"The Street."

The expression conjures up images of harried specialists jamming the trading floor, brokers leaning over their stock-quotation terminals and noontime crowds of gray-suited investment bankers scurrying up and down Wall Street.

But for the handful of full-service brokers and investment bankers who are based in Orange County, "The Street" might be Newport Center Drive or Dove Street in Newport Beach. But there's no trading floor, and the gray suits frequently mingle with blue jeans and deck shoes.

Although nobody views the county-based brokerages as serious competition for the big New York wire houses--most of which have opened retail offices here--a small but growing number of local firms nevertheless occupy an important niche. They follow local companies to which few other analysts pay attention, and they try to provide more personalized service to their customers.

"I have a very home-grown Orange County kind of attitude," said Jeffrey Kilpatrick, president and founder of Newport Securities Inc. in Costa Mesa. "Why should local investors support branch offices of firms that are based in New York?"

In fact, local stockbrokers and investment bankers usually rely on local businesses or specialized services so they can compete with their well-heeled brethren from the East.

"When Western Digital was trading at $11, we did a research report," said Jack Norberg, a partner in Diehl & Co., a Newport Beach investment banking firm concentrating on Southern California companies.

"We knew it was coming out with new (computer circuit) boards because we talked to management. New York wasn't going to take the time to come out and talk to them," he said.

After the company's stock nearly tripled, he said, analysts in the big houses in the East regularly check on the company.

As one of the nation's premier spawning grounds for entrepreneurs, Orange County offers a substantial array of new companies itching to produce the next Apple computer or create the next Genentech research laboratory.

And the niche that local brokers and investment bankers have created in following the companies is aimed at helping both new-found firms and investors.

Kilpatrick opened his Costa Mesa brokerage in 1980 after spending four years as a retail broker at the Newport Beach office of Sutro & Co. Kilpatrick, who fell into the securities business after earning an MBA from UC Irvine, wanted to concentrate on local stocks.

"I wanted to write my own research reports on Orange County companies, but Sutro wouldn't let me," said Kilpatrick, whose firm not only handles retail accounts, but does corporate finance work for local companies. "Those are the kinds of things that we can do as an independent company that I could never do as a broker for Sutro."

Starting with about 500 retail clients, Kilpatrick has transformed Newport Securities Inc. into a full-service brokerage that serves 2,500 clients and recently has geared up to take a stab at investment banking.

For Newport Securities, the focus will always be on Orange County. Frequently, the only investment research performed on many of the county's more than 100 publicly traded companies is done by Kilpatrick and his associates.

"That really seems to be their niche," said J. Calvin Mead, an E.F. Hutton vice president and broker at the firm's Costa Mesa office. "I don't know of anybody who keeps track of Orange County stocks the way they do."

Kilpatrick likes to think of Newport Securities as the county's leading full-service investment firm.

But Newport is not alone.

Ranks in County Growing

In fact, there appears to be an increase in brokers and investment firms setting up shop in the county, said Craig Silvers, an associate examiner with the Los Angeles office of the National Assn. of Securities Dealers.

While NASD does not have statistics for individual counties, the group's records show that the number of member firms in NASD's California, Nevada and Hawaii region grew 78% over a four-year period to 917 at the end of last year from 515 at the end of 1982.

And most of the growth occurred in California, Silvers said.

Why do brokers leave the relative security of Wall Street-based firms to strike out on their own in Orange County? The reasons vary.

For Kelley Hagerty, president of Hagerty, Stewart & Associates in Newport Beach, the decision to go it alone came when he decided that the big houses simply can't take care of their clients the way small, local brokerages can.

Hagerty spent 21 years with Dean Witter Reynolds Inc., rising to the post of vice president and manager of the firm's Santa Ana office by 1978, when he and one of his brokers pooled their client lists and $100,000 to start their own firm.

"They just kept getting bigger and bigger," he said of major brokerages like Dean Witter. "And I like to provide a more personalized service."

Starting with 500 retail clients and a 600-square-foot office, Hagerty, Stewart & Associates managed to turn a $78,000 profit in its first year. Today, Hagerty said, the firm's eight brokers occupy a 4,000-square-foot-office and serve about 1,200 retail clients.

Hagerty won't say how much business the firm does now.

Galloping Revenues

But, he said, revenues are growing at about 20% a year. Nearly two-thirds come from retail brokerage commissions, while the balance of the revenues is generated by the corporate finance side of the business, he said.

Hagerty, Stewart & Associates has worked with Orange County companies seeking venture capital or private placements of stock.

Unlike Newport Securities, the firm doesn't consider local stocks to be an area of prime concern, particularly when managing client portfolios, Hagerty said.

"We're a pretty conservative firm. Some of the smaller companies and some of the high-tech companies in Orange County don't fit for our clientele," he said. Some local bank stocks are traded by the firm, but Hagerty, Stewart & Associates generally trades in blue chips for its clients.

Hagerty said he finds a lot of personal satisfaction in knowing his clients and building relationships with them. Because of this, he said, the firm doesn't plan to expand much beyond its current size.

"We want to stay small," he said. "You develop some pretty close relationships. We want to know our clients, their wives and their kids."

Though staying small may have its merits, Walter W. Cruttenden III, founder and chairman of Cruttenden & Co. Inc. in Newport Beach, has a different set of goals.

"We want to be to Orange County what Robertson, Colman & Stephens; Hambrecht & Quist and Montgomery Securities have been to the northern part of the state," said Cruttenden about his aspirations to become a regional firm.

Raises Venture Capital

His company, started in 1977, had been a brokerage but evolved into a venture capital firm, raising $125 million for 50 companies--three-quarters of them headquartered locally--over the past decade.

The company helped launch Emulex Corp., a Costa Mesa computer products firm, and was a participating underwriter in last year's $9-million initial public stock offering of CIMCO, a Costa Mesa maker of plastics products.

But Cruttenden decided that he was too small to continue servicing companies like Emulex as they grew. He wanted his own firm to get bigger, so he renewed his securities licenses last year and began servicing retail clients to increase his capital.

Still, investment banking--raising capital for companies or for investors seeking to buy companies--is Cruttenden's main business: "We specialize in Southern California companies. We dig up the local stories and follow them. We put out research reports on" local firms.

Cruttenden said his firm has plenty of business because most New York investment banks are too big to get involved with most Orange County-based companies.

"The big boys generally won't do a deal for less than $10 million, so there's no competition" for the smaller deals that can be serviced by local firms like Cruttenden's or Diehl & Co.

Diehl, founded in 1978 by economist Russell Diehl, has developed into a "boutique" investment banking operation over the years, said Norberg.

"We don't want to be a full-service stockbroker," Norberg said. "We're going to come up with four to eight good ideas a year. Our idea is capital preservation. We're going to be a B performer in an up market, but an A performer in a down market."

Business Ignored by Others

The Diehl firm's work involves mergers and acquisitions, corporate finance and investment management. But its main investment banking strength, Norberg said, is in two areas--finding financing for little-traded, closely held companies ignored by the bigger houses and dealing with so-called special situations.

Diehl, for instance, helped Robert Quest engineer a leveraged buyout of Advanced Controls Corp., an Irvine maker of specialized equipment used to drill holes in tiny semiconductor chips. Using the assets of the firm as collateral, Diehl raised the funds needed for Quest to purchase the company from its parent, BMC Industries in Minneapolis. The deal closed April 10 and becomes effective at the end of the year.

The Diehl firm usually acquires 1% to 6% of a young company's stock when it targets that firm as a potential client. The stock gives Diehl a voice in the company's management affairs. If Diehl isn't hired as the company's investment banker, Norberg said, it remains as an investor and adviser.

In addition to full-service brokers and investment bankers, Orange County's fertile economy also has spawned a few home-grown independent firms that have found niches in highly specialized investment arenas:

- Geoffrey Beaumont opened his Beaumont & Co. in Newport Beach in 1980 and, according to industry colleagues like Norberg, has become an expert at arbitrage, a strategy that produces profits when a broker takes advantage of price fluctuations by rapid buying and selling of a company's shares on several stock exchanges or acquires positions in companies targeted for takeovers and profits when the stock price rises after the takeover bids are announced.

- Robert S. Mages and Ronald J. Johnson operate Archer Commodities in Santa Ana, the only county-based company to deal in commodity futures, buying and selling contracts for future delivery of crops or precious metals.

With six brokers, including a stocks-and-bonds trader, Archer offers "lower commissions, better service and an inordinate amount of experience," Mages said.

- Marine Corps buddies P. Bruce Anderson and Frank L. King own Titan Capital Corp. in Irvine, which has 267 offices in 35 states--including 127 in California--run by 1,090 agents. The company sells interests in mutual funds, limited partnerships and real estate investment trusts. Those interests are sold separately or as part of Titan's primary business--selling insurance policies and products. King said certain products, such as variable annuities, require brokers with both insurance and securities licenses.

Happily, for big boys and independents alike, Orange County's growing affluence seems to have resulted in an embarrassment of riches for those who sell securities for a living. There is plenty of business to go around, even for retail brokers.

"I haven't noticed any undue competition from Newport, or Hagerty, Stewart or, for that matter, anyone else," said E.F. Hutton's Mead. "There seems to be a lot of business here and it's well spread out."

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