Round 1: Crayon Fund : In Pretend Portfolio, Tot Is Hot as Picks Eclipse Staff’s Gaffes
In February, the crack Times’ Valley business staff decided to challenge the stock market and a 3-year-old girl. Both the kid and the quartet of business writers started with a hypothetical $40,000 to invest in local stocks.
Well, the kid did better than the grown-ups, at least for the first three months. The San Fernando Valley business staff’s fictitious Sepulveda Fund stock portfolio lost 11.2% of its value in the first quarter. After adding our dividends and subtracting the transaction costs, our total loss was even higher. In absolute dollars, we would have lost $5,189.
No real money was invested, however. The newspaper’s code of ethics prohibits staff members from investing in companies they write about.
As for the Crayon Fund, managed by Jennifer Foxworth, 3, the daughter of a Times employee, in the first quarter the value of her stocks was up 1.7%. That was a better showing than the Dow Jones Industrial Average (down 1%) and the Standard & Poor’s 500 Index (down 2.1%) managed over the same period. Overall, factoring in transaction costs and dividends from her stocks, Jennifer netted a gain of $19.51. It’s not much, but it doesn’t take much to make a 3-year-old happy.
“Where’s my pretend money?” she asked.
The Sepulveda Fund’s picks, as it turned out, made great contrarian advice, the kind that causes smart investors to run in the opposite direction. Only one of our eight stock picks made any money--Martin Lawrence Limited Editions, a chain of art galleries. We selected two stocks to short--that is we sold borrowed stock, agreeing to replace it later on, betting the price of the stocks would drop.
Alas, both shorts--Amgen, the biotechnology firm, and MCA, the entertainment conglomerate--went up instead of down.
The ground rules were simple. Both stock funds selected eight stocks from our list of 69 public companies in our Valley Stocks Index. We used the Feb. 19 closing price of the stocks as our initial cost, and we could sell whenever we wanted but had to charge ourselves a transaction fee for each buy and sell order. If we did sell a stock, we could not buy another stock until the first three months were up.
Back in February, when this competition started, trying to grab a profit in the stock market was like trying to jump into a moving roller-coaster car. The Dow Jones Industrial Average had swollen from 800 in the summer of 1982 to about 2,250 in February. The average hit a high of 2,405 in early April, but inflation worries, the trade deficit, a weakened dollar and the higher prime rate have raised jitters that the bull market is just about out of gas.
One worry is that institutional investors--mutual funds, pension funds and insurance companies--control too much of the stock market now. Institutions commonly account for 50% or more of the daily trades on the New York Stock Exchange. Computers also play an increasing role, automatically triggering buy and sell orders for institutions if certain stock price plateaus are hit.
A chilling fact is that the average price-earnings ratio--the current stock price divided by earnings per share--is at a 12-year high, whereas dividend yields are at a 12-year low.
It all worries James Gipson, president of Pacific Financial Research in Beverly Hills, with $1.8 billion under management. Gipson, an old-school investor who looks for value, thinks most stocks are bloated. Today he keeps 25% of his assets in cash and 30% in bonds; just 45% are in stocks. Except for some insurance companies and savings and loans, most stocks, he believes, are overpriced.
Gipson likens today’s bull market to a boozy party that has gone on too long. “Do you stay until the police arrive, or do you leave early?” he said.
Optimists, however, point out that the U.S. trade deficit is coming down, however slowly; that the weakened dollar bodes well for capital-goods companies selling overseas; that years of cost-cutting at U.S. companies should pay off, and that U.S. stocks remain cheaper than many on foreign stock exchanges.
What does it all mean? Long ago, J. P. Morgan was asked what he thought the stock market would do. “It will fluctuate,” he said.
The Sepulveda Fund’s worst category was insurance stocks--our two picks took a $2,600 paper loss. But we’re going to stick with Zenith National Insurance, a worker’s compensation and property-casualty insurer, and 20th Century Industries, a low-cost auto insurer with a possible takeover play.
We think both companies are solid franchises that have been hurt by an overall drop in insurance stocks rather than by problems at the two companies.
We’re also keeping Martin Lawrence Limited Editions, our one good buy. The company, which is based in Van Nuys, continues to open art galleries and sell art--Miro, Warhol lithographs and such--on easy monthly installments, like selling furniture or refrigerators.
Two other stocks that dipped modestly, are also holds: Zero Corp., the nicely diversified maker of Halliburton aluminum briefcases and metal and plastic devices for the electronics industry, and Datametrics, a Chatsworth maker of computer printers for the military. Datametrics continues to have a good order backlog, and despite a 54% drop in second-quarter earnings, sales continue strong. We like both companies’ chances.
Our two stock shorts, Amgen and MCA, lost $875. We thought MCA--the film, TV and record conglomerate--would suffer now that belt-tightening has struck the TV business. But the stock has held up.
We did get an angry call from a Merrill Lynch stockbroker who said he was galled over our shorting of MCA. That was “a joke,” he said. It was probably worth losing $387 on MCA just to make a stockbroker laugh.
Amgen, meanwhile, with a 350 p-e, seemed overpriced to us. Amgen’s stock is now pegged at what analysts expect the biotechnology company to earn five years from now. But, if anything, investors like Amgen more than ever.
We also sold our stock in Dick Clark Productions after taking a $1,504 loss. The television production firm, headed by 57-year-old boy wonder and “American Bandstand” host Dick Clark, went public earlier this year, and the stock has fallen steadily. Production cutbacks by the cost-conscious networks have hurt, and we decided that the company would only tread water for a while.
With what “cash” remained after our stock sales, we bought three new stocks, and two of them, we hope, will provide some needed ballast: Walt Disney and Lockheed.
Lockheed, the $10-billion defense contractor, has a low p-e ratio of 9 (the average stock is about 17), and the company has some new missile and electronic warfare projects. The fact that Lockheed has become the subject of takeover rumors since our purchase is a bonus.
Disney’s management, meanwhile, continues to aggressively merchandise its name. It is opening a theme park in Europe, plus another hotel at Disney World. The fact that Jennifer’s Crayon Fund also owns Disney had no influence on us whatsoever.
We also decided to invest in Micropolis, the Chatsworth disk-drive maker that supplies Digital Equipment, Wang, Hewlett-Packard and other computer makers. Its first-quarter earnings were up 66%.
Jennifer’s Portfolio
As for Jennifer’s octet, she had three winners and four losers, and one stock was unchanged in the first quarter.
Jennifer’s mom read her a list of the results--Jennifer is still making her way through the alphabet--and the youthful portfolio manager divined which stocks to keep, and which to say adios to.
She is going to hold her two biggest winners. One is American Ecology, which is up $1,725 since she bought it. The Agoura Hills-based radioactive-waste management firm has been battling some potentially costly lawsuits filed by the state of Illinois over a dump the company operated. But analysts like the company’s chances to settle the lawsuits without too much damage.
And Jennifer? “I hate yucky garbage, no poop,” she said.
She also made a killing with SFE Technologies, the San Fernando electronics firm that was in technical default of some industrial bonds last year. But her contrarian timing was neat. SFE narrowed its loss in the most recent quarter. She has made $1,914 on that stock, and she continues to like it. Why? “Because there’s an F in it, like my name,” she said.
She’ll also hold onto two big losers: Dick Clark--”I love rock ‘n’ roll”--and Hamburger Hamlets, the restaurant chain--”Oh hamburgers, my favorite.” And she still likes Mickey Mouse, a.k.a. Walt Disney.
As for Jennifer’s new picks, she bought Compact Video, the Burbank firm that does post-production video and film work. The company has had its financial problems and is effectively controlled by New York corporate raider Ronald O. Perelman. Jennifer liked Compact Video immediately because each morning she watches a videocassette of “Top Gun.” The movie is on videotape, right, so she likes this stock too.
She also likes Martin Lawrence, the art-chain stock. Why? “I just do,” she said. Probably she peeked at our list.
The Crayon Fund also bought United Education Software, the chain of career schools based in Encino. “Education,” she said, pondering the syllables. “Is that like vacation?”
To make room for her three new picks, Jennifer sold three stocks. The first was Cherokee Group, the chain of stores selling women’s shoes and clothing. Jennifer liked the stock in the first place because she had an Indian friend, but her friend hasn’t been around lately. Out of sight, out of mind, out of portfolio.
She also sold GTE, the big telephone company. The stock has dropped from $41.63 per share since she bought it to about $35 because its US Sprint long-distance joint venture is piling up losses. She also unloaded Redken Laboratories, the shampoo maker. It wasn’t that she disliked either stocks. “They’re OK,” she said. But she added, “Mommy, we can do better.”
So can we, kid. Check with us at the next quarter-mile pole.
THE MARKET Stock Market performance between 2/19/87 and 5/19/87 Crayon Fund +1.7% Dow Jones Industrial Average -1.0% Standard & Poor’s 500 Index -21.15 Sepulveda Fund -11.2% SEPULVEDA FUND
Stocks Held Purchase price per share as of Company Industry 2/19/87 Datametrics Computer printers 3.75 Martin Lawrence Art 5.00 20th Century Insurance 22.75 Zenith National Insurance 24.75 Zero Cabinets 18.75 Stocks Sold Dick Clark TV 6.8 Stocks Sold Short Stock “replacement” Company Industry price per share Amgen Biotechnology 37.25 MCA Entertainment 45.88 Stocks Bought Purchase price per share Company Industry as of 5/19/87 Walt Disney Entertainment 60.88 Lockheed Aerospace 44.50 Micropolis Disk drives 35.00
Stocks Held Price as Company of 5/19/87 Number of shares Datametrics 3.38 775 Martin Lawrence 6.00 1,00 20th Century 17.63 200 Zenith National 19.50 300 Zero 17.75 300 Stocks Sold Dick Clark 4.88 750 Stocks Sold Short “Borrowed” stock price Company as of 2/19/87 Number of Shares Amgen 34 150 MCA 42 100 Stocks Bought Number of shares Company “bought” Walt Disney 75 Lockheed 110 Micropolis 100
CRAYON FUND
Stocks Held Price per share Company Industry as of 2/19/87 American Ecology Waste disposal 17.25 Dick Clark TV 6.88 Walt Disney Entertainment 59.13 Hamburger Hamlets Restaurants 5.75 SFE Electronics 3.88 Stocks Sold Cherokee Group Apparel, shoes 17.50 GTE Telephones 41.63 Redken Labs Hair care 22.25 * adjusted for stock split Stocks Bought Purchase price per share Company Industry as of 5/19/87 Compact Video Video 4.63 Martin Lawrence Art 6.00 United Education Career schools 9.13
Stocks Held Price as Company of 5/19/87 Number of shares American Ecology 23.00 300 Dick Clark 4.88 700 Walt Disney 60.88 100 Hamburger Hamlets 5.00 800 SFE 5.38 100 Stocks Sold Cherokee Group 17.50 300* GTE 34.88 500 Redken Labs 20.50 200 * adjusted for stock split Stocks Bought Company Number of shares Compact Video 93 Martin Lawrence 750 United Education 500
