THE TIMES 100: THE BEST COMPANIES IN CALIFORNIA : VIEW FROM THE STREET : PLAYING FAVORITES : Popular With Investor Crowd, Some Firms Aren’t Necessarily Material for a Good Marriage

What does it take to become a favorite on Wall Street?

According to The Times’ rankings of the most popular California stocks--based on those with market values most exceeding annual sales or book value--it helps to be a fast-growing firm on the leading edge of technology.

Thus, the lists of “Overvalued” and “Favorites” include such high-flying biotechnology companies as Genentech and Cetus; bright medical products firms such as Alza and Diagnostic Products, and up-and-coming computer outfits such as Adobe Systems and Chips & Technologies.

It also helps to have a strong balance sheet. Thus, the strong rankings of Apple Computer, Neutrogena and WD-40, all with no long-term debt.

And it helps to be a takeover candidate, which accounts for the appearance of Lucky Stores, the supermarket chain facing buyout offers from American Stores or other possible suitors.

But just because these and other stocks score high on the charts doesn’t necessarily mean investors should buy them.

First, some may be overvalued and risky, their stock prices more likely to fall than rise, analysts say.

Second, the ratios used in these tables--price to sales and market value to book value--could be misleading if viewed in isolation and without comparison to other measures of stock values.

“These ratios are only a starting point to investigate a company further,” says Kevin Colosimo, vice president of MZ Group, which compiled the data for The Times. No one should buy a stock using these measures alone, he says.

Take the price-sales ratio found on the “Favorites” and “Forlorn” tables. It measures the price per share divided by annual sales per share. It’s sometimes considered more stable and reliable than the more commonly used price-earnings ratio (which measures price per share divided by earnings per share), because a company’s earnings can fluctuate sharply because of one-time gains or losses or manipulations through accounting gimmicks or tax changes.

Also, some new and fast-growing companies, such as those in biotechnology or computers, haven’t recorded much profit yet, so their price-earnings ratios will be artificially high.

But the price-sales ratio must be looked at in context. Certain industries, such as biotechnology, tend to have higher ratios because of expectations of torrid growth in sales. For example, Genentech has a price-sales ratio of nearly 13, far above the combined ratio of about 2 for stocks in the Dow Jones industrial average. It is expected to double its sales this year over last year, says Larry Selwitz, a vice president of research at the Los Angeles brokerage of Bateman Eichler, Hill Richards.

By contrast, supermarket firms--with relatively slow sales growth and low profit margins--tend to have price-sales ratios of only 0.1 to 0.2, says Donna Hostetler, director of research at the Los Angeles brokerage of Crowell, Weedon & Co. Thus, the placement of Craig Corp., which owns 51% of the Stater Bros. grocery chain, and Vons Grocery on the list of lowest price-sales ratios is not far out of line.

The market-to-book ratio also has its limitations. It measures the relation of market value to book value, which is generally the value that a firm’s assets are carried on its balance sheet. But that value often reflects the cost of the assets when acquired, not necessarily their value now, which may be higher because of inflation or lower because of soured business conditions.

That explains in part why Tejon Ranch Co., which owns 270,000 acres of land north of Los Angeles, ranks fourth on the market-to-book listing at about 20 times book. Its book value is far understated at only $18.1 million. (Tejon Ranch also ranks top in price-sales ratio, at slightly more than 13 times sales, in part because its annual sales of $27.2 million are low compared to the value of its assets. Tejon Ranch is 50% owned by Times Mirror Co., publisher of The Times, and by affiliates of Times Mirror.)

Conversely, banks and savings and loans dominate the list with the lowest market-book ratios because investors perceive their book values as overstated, given extensive problem loans that are not fully accounted for.

Several companies, such as Carter Hawley Hale and Tiger International, score high on market-book ratios not so much because their stock prices are skyrocketing, but because restructurings or poor earnings have battered their book values. Carter Hawley Hale, for example, actually has a negative book value, following a restructuring in which it spun off several specialty department store divisions and made a large cash payment to shareholders.

But perhaps the main reason for caution with high-ratio stocks is the danger that they may already be overvalued.

On average, about eight of 10 stocks with price-sales ratios of more than 3 lose money for shareholders during the ensuing five years as their prices fall, contends Kenneth L. Fisher, president of Fisher Investments Inc., a Woodside money management firm.

“I would be cautious about buying these stocks with such high price-sales ratios,” says Mansoor Zakaria, president of MZ Group. Stocks that will go up are more likely to be found among firms with the lowest ratios, he says.

But even some of these lowest-ratio stocks may not be great buys either, analysts caution. Most have severe operating problems such as high debt, sagging earnings or major questions surrounding restructurings.

That is certainly true of S&Ls; and banks, which make up 12 of the 25 firms with the lowest market-to-book ratios.

And companies with the lowest price-sales ratios include such troubled firms as Maxicare Health Plans, a health-maintenance organization burdened with high debt and losses because of ill-timed acquisitions, and Transcon, a freight transportation firm saddled with heavy operating losses.

The key to investing in these and other troubled firms is to determine whether they can turn themselves around, and to what extent that possibility is already expected and thus factored into the stock price, money manager Fisher says. If it isn’t expected and the firm does turn around, its stock could post sharp rises, he says.

But some stock pickers advise to avoid these issues anyway. Stick with strong companies that are undervalued, not weak companies that are undervalued, Crowell Weedon’s Hostetler advises.

WALL STREET FAVORITES

Ranks companies by market price-to-sales ratio.

4/4/88 1987 Price- mkt. value revenue to-sales Rank Company ($ millions) ($ millions) ratio 1 Tejon Ranch Co. 364.6 27.2 13.39 2 Genentech Inc. 2,949.2 230.5 12.79 3 Magma Power Co. 232.1 19.4 11.98 4 Alza 790.5 70.8 11.16 5 Chiron 171.0 17.4 9.81 6 Cetus 373.3 40.0 9.34 7 Adobe Systems 303.3 39.3 7.71 8 Trimedyne 93.0 12.3 7.54 9 MacNeal-Schwendler 222.9 32.2 6.91 10 Autodesk 546.6 79.3 6.90 11 Diagnostic Products 211.7 34.7 6.10 12 Informix 231.5 41.6 5.57 13 Cypress Semiconductor 395.3 77.3 5.12 14 Digital Microwave 177.4 35.0 5.07 15 Neutrogena 680.8 135.1 5.04 16 Oracle Systems 930.2 186.9 4.98 17 Linear Technology 166.2 35.2 4.72 18 Teradata 218.5 46.8 4.67 19 Dionex 262.2 56.3 4.66 20 Acuson 491.0 105.6 4.65 21 Armor All Products 444.3 108.9 4.08 22 Westwood One 327.8 87.2 3.76 23 Farmers Group 4,109.2 1,133.0 3.63 24 Applied Biosystems 320.0 88.4 3.62 25 Verticom 44.6 12.5 3.57

WALL STREET FORLORN Ranks companies by market price to sales ratio.

4/4/88 1987 Price- mkt. value revenue to-sales Rank Company ($ millions) ($ millions) ratio 1 Financial Corp. of America 49.4 2,976.3 0.02 2 Ducommun 14.5 446.7 0.03 3 Craig Corp. 31.8 954.5 0.03 4 Maxicare Health Plans 69.0 1,838.6 0.04 5 Transcon 16.0 328.5 0.05 6 Nu-Med 14.9 298.7 0.05 7 Allisons Place 2.1 37.9 0.06 8 Vons Grocery Cos. 196.1 3,276.0 0.06 9 Bercor Inc. 10.6 175.8 0.06 10 Erly Industries 12.3 190.7 0.06 11 Gibraltar Financial 82.3 1,232.5 0.07 12 Anderson Jacobson 2.7 39.4 0.07 13 Verit Industries 1.9 25.9 0.07 14 Fin. Corp.-Santa Barbara 35.7 483.8 0.07 15 Tosco Corp. 90.7 1,187.3 0.08 16 Phone-Mate 8.7 112.6 0.08 17 Carter Hawley Hale 224.6 2,869.2 0.08 18 New World Entertainment 31.2 384.3 0.08 19 Engineered Sys. & Dev. 1.9 22.4 0.08 20 Covington Technologies 7.4 81.0 0.09 21 Bergen Brunswig 346.9 3,376.0 0.10 22 Columbia S&L; 127.4 1,229.7 0.10 23 National Lumber & Supply 16.9 159.9 0.11 24 Intermark 60.9 558.7 0.11 25 IPM Technology 4.9 43.0 0.11

CHARGING AHEAD

Ranks companies by percent gain to investors of stock appreciation plus dividend.

4/4/88 12/31/86 Cash Total stock stock dividend Rank Company return price price paid 1 Am. Shared Hospital Svcs. 363 9.25 2.00 0.00 2 United Educatn. & Software 300 21.00 5.25 0.00 3 Bridgford Foods 272 14.50 3.92 0.07 4 Computer Automation 257 12.50 3.50 0.00 5 Kevex 226 12.63 3.88 0.00 6 Oracle Systems 208 16.00 5.19 0.00 7 L.A. Gear 198 24.63 8.25 0.00 8 Micro Mask 176 8.63 3.13 0.00 9 Applied Materials 171 25.75 9.50 0.00 10 Finnigan 134 24.00 10.25 0.00 11 Adobe Systems 130 29.75 12.94 0.00 12 Molecular Biosystems 130 12.63 5.50 0.00 13 Integrated Device Tech. 119 13.50 6.17 0.00 14 C&R; Clothiers 116 20.50 9.50 0.00 15 Calmat Co. 114 43.13 20.31 0.40 16 MSI Data Corp. 113 23.75 11.13 0.00 17 Intel 112 29.63 14.00 0.00 18 Nichols Institute 110 10.50 5.00 0.00 19 Pyramid Technology 110 10.50 5.00 0.00 20 Software Publishing 109 14.63 7.00 0.00 21 ABI Am. Businessphones 106 8.75 4.25 0.00 22 Jacobs Engineering Grp. 105 16.75 8.18 0.00 23 Applied Magnetics 103 15.13 7.44 0.00 24 Informix 103 20.00 9.88 0.00 25 Armor All Products 101 21.25 10.75 0.40