Wonder Tot Still Holds Edge : But Rival Funds Reel From Black Monday
It’s an old joke: How do you make a small fortune in the stock market? Start with a big fortune.
It took all the cunning and wisdom the four members of the San Fernando Valley business staff could summon to turn our hypothetical $40,000 investment in the stock market into $27,000 in just nine months. That’s a loss of 32 cents on the dollar.
People who dream small lose small, of course, especially if they are small.
Our chief rival in the pretend-portfolio business, 4-year-old Jennifer Foxworth, the daughter of a Times employee, lost only 26 cents per dollar. After nine months, Jennifer shrunk her $40,000 to $29,500.
The Oct. 19 stock market crash didn’t help us any. About $500 billion in paper value disappeared on the three major American stock exchanges on Black Monday, and our two modest portfolios would have added to the damage report.
Simpler in February
The world seemed simpler in February when we set out to match wits against the stock market. Everybody was making money in stocks, and so would we.
The rules were simple. Each fund began with a hypothetical $40,000 to be invested in eight stocks from our weekly Valley stock list of 73 public companies. As any serious investor does, we tabulated our transaction costs for buying and selling stocks, and added in any dividends, to come up with our total return--or loss. After each quarter, as needed, we’d rejuggle our portfolio.
In August, six months into the game, the Wonder Tot held a measly $700 lead. But both funds were humming along: Jennifer’s portfolio was up 9.4%, and our Sepulveda Fund was up 7.1%. In August, the stock market celebrated the fifth anniversary of the great bull market, having already climbed 245%. Then, late in the month, the Dow cracked another barrier, topping the 2,700 mark. Would it ever end?
After climbing out of our bomb shelter and sorting through the rubble, we can report that it has ended. Over nine months, the Sepulveda Fund’s portfolio (excluding transaction fees) has now lost 31.2% of its value, while Jennifer’s Crayon Fund dropped 25.3%. In the same time, the Dow Jones industrial average, a collection of 30 blue-chip stocks, tumbled 15.5%, and the Standard & Poor’s 500 Index fell 15.9%.
After taking into account transaction costs and such, the net losses for both pretend portfolios are even higher. After nine months, the Wonder Tot has boosted her lead over us to $2,477. Put another way, she has lost $2,477 less than we have.
‘We’ll Go Together’
What to do now? Johnny Carson recently said: “I asked my broker today what I should buy. He said, ‘Two guns. We’ll go together.’ ”
Advice from the fortunetellers, of course, varies. Robert Prechter Jr., editor of the Elliott Wave Theorist, recently told Business Week that by the early 1990s, the Dow average would sink below 400, to be followed by a depression and maybe a war. Not long ago, Prechter insisted the Dow would climb to 3,700. Meanwhile, a Fort Lauderdale newsletter called Mutual Fund Forecaster predicts that its list of 40-odd mutual funds will climb 53% in the next 12 months.
As for the Sepulveda Fund, we decided to punt on third down and sold all eight of our stocks. Granted, many of the stocks we dumped are from sound companies, but we’ve suffered enough trauma. There’s only one more quarter to go, and we’re in the game not only to thrash the Wonder Tot, but to get back some of our losses. I say some because to reach break-even, our portfolio must appreciate 50% in the next three months. The Clippers are a better bet to win the NBA title in the spring.
Our new and improved stock-picking formula is to gamble on smaller, lightly traded companies, figuring that they are more likely to take a big bounce in a short time than more established firms. A prime example is Computer Memories, the former computer disk drive company that has shuttered its operations and exists only as a shell corporation. It’s still a registered entity, however, and has a certain offbeat appeal for another company that wants to go public via a simpler and cheaper method than issuing its own stock.
Until a few weeks ago, Hemdale Film Corp. (“Platoon” and “Hoosiers”) planned to merge with Computer Memories and go public. That deal fell through, but with Computer Memories’ stock trading at $1.56 per share, we hope someone else might notice the for-sale sign.
Timely Business
We also bought HemaCare (at $1.25 per share), a Sherman Oaks firm that is still losing money but competes in a timely business: blood. It sells platelets and blood-cleansing technologies and stores blood. Only about 5% of its business is tied to AIDS prevention, but the stock seems a worthwhile gamble.
We also bought Micom Systems, the Simi Valley computer communications firm, on the something-has-got-to-happen theory. Micom is trading at $6.75 a share--less than its book value; its three-year high of $47.50 per share seems a distant memory. The company turned down a takeover bid earlier this year, and long-suffering investors have to be pressing for action.
We’re also betting on a takeover play with MCA, the $3-billion entertainment conglomerate. Earlier this year, when Chairman Lew Wasserman was ill, the stock soared. Now that the crash has knocked MCA from about $50 to $36.50 a share, some wolves might be lining up.
We also bought Price Pfister, one of the nation’s biggest faucet makers. The Pacoima company went public in August at $15 per share; then the crash knocked the stock down to $8.25. We think the company has a solid franchise.
We also decided to plan for the worst by “shorting” three stocks, that is, betting that their prices will tumble. To sell short, an investor sells borrowed stock with an obligation to replace the same number of shares at a later date. If the price paid to replace the stock is lower than what it was “sold” for, the difference is all profit.
Our first short is Digitext, the Thousand Oaks firm that has its fortunes riding on a new machine that can quickly transfer large amounts of text, from notes or typewritten pages, directly into a computer. The only problem is that the company can’t seem to exorcise the gremlins on its production line. Computer giant Wang has been waiting to buy $800,000 worth of Digitext’s machines, but until Wang actually takes its first delivery, it has an escape clause and could walk away from the deal.
It takes plenty of moxie to short a stock that has already sunk to $1.75 per share, down from $9 a share in July. But as of mid-November, 51,000 shares of Digitext’s stock were held in short positions by other doomsday investors.
We’re also shorting Drewry Photocolor, the Burbank film-developing outfit. The stock is thinly traded and, since the company went public in 1972, its stock has largely been unimpressive--until recently, that is. In the latest quarter, the company’s cost cutting helped boost earnings by 500%. The only reasons to short the stock are obdurateness and the law of gravity.
Our last short is Superior Industries, the Van Nuys wheel-rim maker for the Big 3 auto companies. Superior’s stock has already taken a beating, from $19 earlier this year to $11 recently, but most auto analysts expect 1988 to be a grim year. Chrysler has announced plans to lay off 2,900 workers, and if it’s tough for the car companies, auto suppliers figure to take a hammering as well.
As for Jennifer, news of the stock crash escaped her notice for several weeks. When she finally learned how much money she, and much of the Western world, had lost, her response was, “That’s not nice.” She hasn’t fully mastered the alphabet, so her mother read her the stock list and jotted down what Jennifer wanted to keep and what to sell.
Although Jennifer decided to trade in four of her eight stocks, her replacements are all big, stable companies, making it clear to us that she’s trying to protect her $2,477 lead by keeping the ball on the ground.
She is sticking with Dick Clark Productions (“American Bandstand” et al), even though the firm has reported disappointing earnings since going public last winter. Jennifer remains committed. Why? “Because I’m bad. I’m bad,” she sang. Michael Jackson, Dick Clark, rock and roll. There’s a connection in there someplace. Maybe she’s buying the rock and roll industry as a hedge, figuring sales will hold up even in a recession.
Jennifer is also holding Walt Disney. Disney took a terrible fall on Black Monday, dropping nearly $20 a share, but the company continues to do well with its theme parks and films. Jennifer cited other reasons: “Snow White, Cinderella and Pinocchio.”
She also will keep Hamburger Hamlets, despite a $1,200 paper loss on her investment: “I love hamburgers.”
Jennifer is also shrewdly holding onto United Education & Software, the Encino career-schools chain. Some months ago, the word education caught Jennifer’s ear because her aunt and uncle are teachers. Her timing was good; UES’s earnings began to fatten and, even after the stock crash, she is nearly $1,300 ahead on this pick.
Monthly Payments
The first stock that Jennifer dumped was Martin Lawrence, a chain of art galleries that sells Warhols, Miros and other artwork much as appliance stores sell Maytags--on easy monthly installments. She visited a Martin Lawrence gallery recently, but didn’t like the pricey art as much as what she saw in a cheaper poster shop across the way.
Jennifer also jettisoned Semtech, the Newbury Park semiconductor firm. Her reasoning for buying Semtech had been murky. “I like the sound of it, but only in the morning,” Jennifer said in August. And now? “I don’t like the sound of it.”
She dumped Patlex, the Chatsworth laser firm, and the hair care supplier, St. Ives, for equally cryptic reasons. Maybe it’s the $4,300 loss she suffered on those two picks, or it might be the pressure she’s been under. All she’s known in her life is a bull market, much like those yuppie stock brokers.
Jennifer decided to buy House of Fabrics, the fabrics store chain--again, she liked the sound of the company. She also bought Lockheed, the $11-billion aerospace and defense contractor. “Aerospace. Wow. Outer space,” she said.
She also placed a bet on Olson Industries, which until last year was one of the nation’s biggest egg producers. But Olson scrambled that business to concentrate on plastics (it makes the containers for McDonald’s hamburgers), yet plastics has not been very kind to the bottom line. Still, Jennifer is investing in the concept: Her playthings, she reasoned, “are made of plastics, so I can play and play and play.”
Her final choice was General Motors, one of the time-honored defensive stocks, although the outlook for the auto giant isn’t robust. Both Ford and Chrysler enjoy higher profit margins than GM. Nevertheless, Jennifer enjoys bouncing around “in Mommy’s new GMC truck.” She particularly likes the back seat because there’s plenty of room for her and her dog.
She might like it back there, but we’re sick of the dog house. See you in three months.
COMPETING STOCK FUNDS
CRAYON FUND
Stocks Held:
Purchase price Price as Number Company Industry per share of 11/19/87 of shares Dick Clark TV $6.88 $4.50 700 Walt Disney Entertainment $59.13 $53.13 100 Hmbrgr Hamlets Restaurants $5.75 $4.25 800 United Education Career schools $9.13 $11.88 465
Stocks Sold:
Purchase Selling price price on Number Company Industry per share 11/19/87 of shares Martin Lawrence Art $6.00 $4.13 750 Patlex Laser $15.00 $10.50 325 St. Ives Hair care $14.75 $6.13 330 Semtech Electronics $3.63 $3.00 1,310
Stocks Bought:
Purchase price per share on Number Company Industry 11/19/87 of shares General Motors Auto $59.25 50 House of Fabrics Fabrics $12.25 250 Lockheed Aerospace $38.00 80 Olson Industries Plastics $9.50 323
SEPULVEDA FUND
Stocks Held:
None
Stocks Sold:
Purchase Selling price price on Number Company Industry per share 11/19/87 of shares AME Film services $11.13 $6.63 315 Walt Disney Entertainment $60.88 53.13 70 Lockheed Aerospace $44.50 $38.00 100 Martin Lawrence Art $5.00 $4.13 1,000 Micropolis Disk drives $35.00 $18.50 87 Redken Hair care $24.00 $20.75 170 20th Century Insurance $22.75 $18.25 200 Zenith National Insurance $24.75 $16.63 300
Stocks Bought:
Purchase price on Number Company Industry 11/19/87 of shares Cmptr Memories Disk drives $1.56 2,230 Digitext* Cmptr keyboard $1.75 1,930 Drewry* Photography $7.50 400 HemaCare Medical $1.25 2,710 MCA Entertainment $36.50 100 Micom Systems Data comm. $6.75 500 Price Pfister Faucets $8.25 410 Superior Inds* Car wheels $11.00 310
* sold short
