Wonder Tot Has Edge in Stock Wars, but Times Staff Closes Gap

After six months, the sunsuit is ahead but the pinstripes are catching up.

In February, the four members of the crack San Fernando Valley business staff--with a collective 20 years of experience covering business--decided to pit their stock-picking skills against those of a preschooler named Jennifer Foxworth, daughter of a Times employee.

Both the make-believe stock funds started out with a hypothetical $40,000 to invest, and each fund selected eight stocks from our weekly list of 74 public firms on the Valley Stocks index. Ground rules limited us to buying or selling stocks only at the end of each quarter. Our fund is named the Sepulveda Fund after the honored New York mutual fund, the Sequoia Fund. Jennifer’s is named the Crayon Fund, for obvious reasons.

Six months into the contest, the kid is ahead by $726. Both funds, however, have discovered what a high-pressure, perform-or-else business this is. In our first six months of competition, both funds were aced by the rest of the stock market.

The Dow Jones Industrial average, made up of 30 first-rank companies including American Express and Coca-Cola, was up 18.8%. Standard & Poor’s 500 Index climbed 15.5%. Meanwhile, Jennifer’s Crayon Fund rose 9.4%, and the Sepulveda Fund moved up 7.1%.

As any serious investor does, we arrived at our total return on investment by adding our stock dividends and subtracting transaction fees for buying and selling stocks. In six months, the Sepulveda Fund has turned a pretax profit of $2,169, while the Crayon Fund is up $2,895. Both funds are doing better than if we’d left our Monopoly money asleep in a money market fund paying 6.5% interest.

We’re gaining on the wonder tot. After the first three months, she was ahead by $5,245; now it’s one-seventh of that amount. Who said little girls could pick stocks as well as big boys?

Let’s face it, even Edwin Moses hits a hurdle once in awhile. We hit ours in the first quarter. For the first three months ended May 19, the Sepulveda Fund lost about $5,200 of our $40,000, while the kid turned a modest profit.

Head Start

So we gave the kid a head start. She deserved it. Jennifer is a year younger than the bull market.

Our problem was a glitch in our technical analysis. That’s it; we had a glitch. We’ve made some adjustments. Our two worst stock-pickers don’t work here anymore. One of them went to the Wall Street Journal. Their parting had nothing to do with their stock-picking sagacity, or lack thereof, but it could only help.

And it has. For the three months ended Aug. 19, the Sepulveda Fund’s picks were up 21%, while the so-called enfant infallible ‘s picks were up a mere 7.6%. Obviously, now that we’re warmed up, we’ll scoot right past the kid.

As for the rest of the stock market, it remains a bit unsettled. The market is up about 36% this year, but the pack mentality remains. You can almost hear the bleating of the sheep on Wall Street as the latest news of the trade deficit, climbing interest rates or the limp dollar spooks them in another direction.

Ed Korff, a professional stock-picker who manages the IDS Discovery Fund in Minneapolis with $270 million in assets, confesses: “I’m a bit on the confused side.” He’s begun putting some acorns away for the winter by selling off some stocks. Some 18% of his portfolio is in cash, up from 11% two months ago.

The bull market has lasted so long that “people are in territory they don’t understand,” he said.

Record Market

Consider what happened in August, the fifth anniversary of the bull market. On Aug. 11, the market went up 31 points to another record in very heavy trading. Reuters reported, “Wall Street stocks surged again Tuesday as investors embarked on a ‘panic buying’ spree.” By month’s end, the market had begun a two-week slide and would drop more than 200 points. Crandall Hays, an analyst with Robert Baird & Co. in Milwaukee, said, “Everybody is asking now, ‘Is the bull market over?’ ”

Well, is it?

No, says Robert Prechter, editor of the newsletter Elliot Wave Theorist. “The Dow Jones is on a path that is likely to carry it into the upper 3,000s,” he said.

Yes, says Charles Allmon, editor of the Growth Stock Outlook. “If I were to see the Dow Jones fall by 35%, I would not be surprised one bit,” he said.

Kenneth L. Fisher, Forbes columnist and a San Francisco money manager, said, “You could think of the stock market as God’s mechanism for teaching humility.”

Fortunately, in the second quarter, six of the Sepulveda Fund’s eight stocks were up. Our biggest moneymaker continues to be Martin Lawrence, the Van Nuys operator of a chain of art galleries that sells Warhols like other stores sell Maytags--on easy monthly installments. Profits keep fattening as the company opens new stores. The stock, up from $5 per share when we bought to $8.25 recently, has made us a $3,250 pretax profit on a $5,000 investment.

We’ve also done well with 20th Century, the discount California auto insurer that continues to get ink in the national business press.

Takeover Rumors

Another good pick has been Lockheed. We bought Lockheed because it was a relatively inexpensive stock. One guideline to stock-picking is the price-to-earnings ratio (divide the stock’s current price by its earnings per share). Lockheed’s p/e was about seven, versus the market average of 16. The stock has since moved to $57.13 a share from $44.50. It didn’t hurt that Lockheed has been rumored to be a takeover candidate.

Our May selection of Walt Disney--made in hopes of adding some ballast to our leaky portfolio--was certainly timely. The stock has jumped by nearly 30%. Uncle Walt’s theme parks had a busy summer; a recent deal to develop a quasi-theme park in Burbank looks promising, and record profits seem assured this year.

We plan to hold all of the above stocks, as well as two others that are down slightly since we bought them: Micropolis, the Chatsworth computer disk drive firm, and the worker’s compensation insurer, Zenith National.

Micropolis continues to sign new contracts, lessening its dependence on its biggest customer, Digital Equipment Co. Analysts look for Micropolis to pad last year’s record profits by 50% this year.

Zenith National, meanwhile, continues to have solid operating profits while it pays a healthy 3.7% dividend. Insurance stocks tend to run in cycles, and we think the cycle is starting to climb.

2 Stocks Sold

We did sell two stocks. Zero, the maker of aluminum suitcases and camera gear, made us a modest profit, but the company no longer has its headquarters in the Valley. We also bailed out of our worst pick: Datametrics, a maker of computer printers for the military. In February, we liked the company’s bulging order backlog. Since then, the only thing bulging has been our loss. We dropped $1,162.25 on this stock.

To fill out our portfolio, we bought AME, the Burbank firm that makes master videotapes for movie studios so they can sell hit films like “Dragnet” and “Beverly Hills Cop II” to the videocassette market. AME is only 7 years old, but it ranks as one of the biggest in its field. We hope we’ve caught a young stock on the rise.

We also bought Redken, the Canoga Park hair-care firm. The stock was 25% off its high of last year; its p/e was below the market average, and the company is rolling out new products.

As for Jennifer, five of her Crayon Fund’s eight stocks were up. Jennifer’s reading skills remain in the formative stages, so we asked her mother to read her the list of available stocks and record Jennifer’s orders.

She decided to hold her worst stock, Dick Clark Productions, the newly public firm headed by you-know-who. The company continues searching for a hit to match “American Bandstand,” and the stock has tumbled from $6.88 a share when Jennifer bought it to $4.38 recently. She remains undaunted: “I love rock and roll.”

Disneyland Pilgrimage

She will also hold on to Walt Disney, although she soon plans to inspect one of the company’s places of business by making her first pilgrimage to Disneyland in celebration of her fourth birthday.

She’s sticking with Hamburger Hamlets. “Hamburger. The best food for fast times,” she said, parroting a Burger King commercial.

She will keep United Education, a chain of career schools that has recently scooted from $9.13 a share to $13. Jennifer continues to like the stock for familial reasons: “Because my Auntie Barbara is a teacher for education.”

Her last holdover stock is Martin Lawrence. She’s made a healthy profit on the stock, but, like Hemingway, she doesn’t like to talk too much about the creative process for fear it will vanish. Why does she like this stock? “I just do, Mommy,” she said.

Jennifer did a bit of housecleaning, though, dumping SFE, the struggling electronics firm, and Compact Video, the Burbank film and TV production firm controlled by New York financier Ronald Perelman. Jennifer lost about $1,100 on those two picks.

‘I Want New Ones’

She also bid goodby to American Ecology, the waste disposal firm that had made her a tidy $1,575 profit. “I just don’t like these no more. I want new ones,” she said.

Her new toys include Patlex, the Chatsworth firm that is battling in court to win the rights to various laser patents. “Laser. Oh, I like that. We can play laser tag,” Jennifer said. Laser tag cost her about $4,900.

She also purchased--for “no reason”--St. Ives, the newly public Chatsworth shampoo maker.

Jennifer concluded her shopping by selecting Semtech, a semiconductor firm. “I like the sound of it, but only in the morning,” she said mysteriously.

Let’s face it, Jennifer has gone inscrutable. She isn’t about to hand out any tips on her technique.

Kid, we don’t need them. See you in three months.

COMPARING STOCK FUNDS

CRAYON FUND

Stocks Held:

Purchase price Price as Number Company Industry per share of 8/19/87 of shares Dick Clark TV $6.88 $4.38 700 Walt Disney Entertainment $59.13 $77.88 100 Hmbrgr Hamlets Restaurants $5.75 $6.75 800 Martin Lawrence Art $6.00 $8.25 750 United Education Career schools $9.13 $13.00 465

Stocks Sold:

Purchase Selling price price on Number Company Industry per share 8/19/87 of shares Amer.Ecology Waste disposal $17.25 $22.50 300 Compact Video Film services $4.63 $4.13 900 SFE Electronics $3.88 $3.38 1,280

Stocks Bought:

Purchase price per share on Number Company Industry 8/19/87 of shares Patlex Laser $15.00 325 St. Ives Hair care $14.75 330 Semtech Electronics $3.63 1,310

SEPULVEDA FUND

Stocks Held:

Purchase price Price as Number Company Industry per share of 8/19/87 of shares Walt Disney Entertainment $60.88 $77.88 70 Lockheed Aerospace $44.50 $57.13 100 Martin Lawrence Art $5.00 $8.25 1,000 Micropolis Disk drives $35.00 $33.75 87 20th Century Insurance $22.75 $27.50 200 Zenith National Insurance $24.75 $23.00 300

Stocks Sold:

Purchase Selling price price on Number Company Industry per share 8/19/87 of shares Datametrics Computer printer $3.75 $2.25 775 Zero Cabinets $18.75 $20.00 300

Stocks Bought:

Purchase price on Number Company Industry 8/19/87 of shares AME Film services $11.13 315 Redken Hair care $24.00 170

THE STOCK MARKET

Stock Market Performance between 2/19/87 and 8/19/87:

Dow Jones

Industrials Average +18.8%

Standard & Poor’s

500 Index +15.5%

Crayon Fund + 9.4%

Sepulveda Fund + 7.1%