MARK MATHESON : Tracking the Home Builders : Analyst Concentrates on County’s Premier Public Firms

One of the first things most people do when seriously researching a public company is read the reports of the stock analysts who follow it. If the company is General Motors or one of the other industrial giants, there are literally dozens of analysts at brokerages and financial services firms around the country writing reports and analyzing the company’s operations. Most of the analysts are on Wall Street, but a significant number work at firms in smaller cities.

Analysts usually specialize in certain industries; they scrutinize the companies, then issue recommendations to the firm’s brokers and its customers on whether to buy or sell certain stocks.

The smaller the company, the fewer the analysts who follow it. But that’s changed a bit in Orange County, where Newport Beach investment banker Cruttenden & Co. recently opened a small research department with three analysts.

Cruttenden says it wants to keep an eye on companies “in our own back yard,” the “smaller, more rapidly growing companies” that it says abound in the region.

One of those three new analysts is Mark Matheson, who follows publicly held home builders, such as J.M. Peters Co. Inc., and high-technology companies, such as Printronix.

Matheson, 31, has an undergraduate degree in chemical engineering and an MBA from Harvard. He joined Cruttenden last year. Before that he was chief portfolio manager for Fidelity National Title Insurance Co. in Irvine, and before that a stock analyst in Florida.

Matheson talked recently with Times staff writer Michael Flagg about some of the home-building companies the analyst follows, the Southern California real estate market and how he keeps track of nearly two dozen companies.

Q. What do you look for when deciding whether to recommend a home-building company to investors?

A. First thing I look at is the brand name: What’s their reputation in the community? A good reputation helps a builder weather the storms in the down cycles of the real estate industry and will help them do even better in the good times. I was surprised, however, to find a few of the smaller public companies here in Southern California have still been reporting losses or slight profits over the last two years, which has been a great time for builders.

Q. Do you follow the little guys closely?

A. I tend to stay away from smaller companies and concentrate on the premier public firms like J.M. Peters or Standard Pacific or Kaufman & Broad, companies where people recognize the name. I live in a Standard Pacific home myself, and I find people tend to think of their homes that way. When my friends move out of the neighborhood, they don’t say, “I’m moving.” They say, “I’m moving into a Peters home.” So the name becomes like Kleenex or some other brand names with a lot of recognition.

Q. That’s a fairly conservative approach, isn’t it?

A. I’m conservative by nature. I like to look at book value (the net assets of a company). I don’t want to be buying at the top of the housing market. The fact we’re a local firm helps. The combination of knowing the market and the company and being close to both means we can keep an eye out for opportunities.

Q. As an analyst, what kind of sources of information do you use: For instance, how much of your job is crunching numbers and how much is actually going out and taking a look at the subdivisions and talking to executives and suppliers and the like?

A. I think the reason I have a good knack for the business is because I wanted to be a detective when I was little. Growing up, I read a series of books on detectives, and essentially what I am now is a stock detective. I’m out there finding undervalued companies. Instead of a homicide detective looking for clues, I’m looking for clues in the financial community.

Q. Where do you look most often?

A. I’m willing to pick up information from all different sources. The companies themselves, the 10-Ks and 10-Qs (periodic financial reports required by federal regulations), any other reports to the Securities and Exchange Commission, their annual report, press releases, everything.

Q. That doesn’t sound too arcane. Those are the sort of things most serious investors would look at, aren’t they?

A. Yes, but I’m always amazed that people aren’t more alert. I keep thinking, “Gosh, why isn’t everyone onto this idea?” They just aren’t aware of the opportunities around them.

Q. Do you talk a lot to chief executives and other officers of the company you’re researching, and are they generally helpful? One hears analysts sometimes complain, as do reporters, that publishing a critical report often dries up access to a company.

A. I take a look at the company, and if I like what I see I’ll call and set up an appointment to meet management. You want to do that to see what they’re saying currently, because their financial statements are already a little outdated and you want to get the freshest information on the company. And you want to get some of the instinctive reaction: You know, do you like the guy or lady personally? Do you have a good rapport with them? Do you believe what they’re saying? Obviously, that’s easier to do in person.

Q. But do you get a lot of static from executives and employees of the company, especially when you’ve written, say, an unflattering report on their activities?

A. If they’re saying to you, “Your estimates (of future earnings) sound low, we’re going to do better than that this year,” then I go back and see if I can justify that in my own calculations. And then I look to their clients and customers, their suppliers and vendors, and real estate brokers, for example, if it’s a real estate business--anybody who might be able to give me a clue about how the company is doing.

Q. How often do you get good information from these people?

A. Well, Centennial Group (a local developer and home builder), for instance, is in the midst of selling a lot of their properties. So I keep tabs with some of the local real estate brokers where most of their properties are, read the local business journals and business articles, and just have my ear to the ground, like the scout trying to find out which direction the Indians are going.

Q. Do you ever get caught with your pants down--missing a significant development at one of your companies, for example?

A. You have to keep up with an awful lot of information, but if you don’t it can hurt you. With one company I was following, I had a list of customers to call, and I called a couple and got good readings. But something else came up, and by the time I got around to finishing the list the situation had turned and I was a little behind in knowing that. I was not as alert as I should have been. The excuse I use is that there’s so much going on in Southern California that we just have too much to do.

Q. Are stock prices rising for most of the companies you follow?

A. Yes. I heard reports that people were shorting (in effect, betting the stock price would go down) in J.M. Peters stock. That’s crazy. Peters’ stock has been going up, and while Standard Pacific’s been as low as $12 a share this year, it just hit a new high of $16.

Q. Are investors in those companies too optimistic, however? Might these companies be hurt if interest rates, for instance, start rising again and curtail home sales?

A. I think the Orange County housing market will probably do better than any market in the country. Interest rates affect the whole country, but they don’t have as much impact here because this economy is so incredibly strong and very diverse.

Q. So Southern California companies are likely to be a more stable investment than home builders in parts of the country where the market’s more susceptible to drastic swings?

A. I believe so. Although I think we’re getting near a plateau: You can’t continue on with 30% increases in home prices every year, as we had last year. For example, we have somebody here at the company who just moved from Denver, and he’s agonizing over whether to buy a house or not. The Denver market’s been out of favor for the last couple years, and he may not be able to sell his house for what he paid for it. Yet he has to come down here and pay three to four times more for a house of similar quality.

Q. The daunting prices make home buyers a lot more cautious, in other words?

A. Yes, the prices keep people from pulling the trigger. So they wait, and it creates pent-up demand. But right now it means a slowdown. To be honest, I rent right now. I was a little nervous about buying a $350,000 home in Southern California.

Q. Are there a lot of buyers out there like you, who are taking this wary approach to the market?

A. I think some of that wariness has worn off in the last few months. As interest rates have gone down you’ve had some people moving into the housing market. Between the climate and the strength of the economy, over the long term housing prices will always do well here compared to other parts of the country. Maybe after the big earthquake, people will want to move back to Nebraska, but I wouldn’t even bet on that.

Q. What’s your best guess on what’s going to happen to the Southern California real estate market in the next year or so?

A. I think we’ll see a little boom through the rest of the summer. Mortgage rates are low enough to get people interested in the market again, and summer’s typically the time people make a move. Then, depending on how the economic climate goes, I’d be a little more cautious about the rest of 1989. For 1990, of course, people are still saying “recession,” although nobody can pinpoint when it may be coming. It keeps getting pushed back.

Q. Some investment guides warn investors to be careful of stock analysts, saying they’ve been known to plump for stocks the company is anxious to sell to customers. How do you avoid that pitfall?

A. You avoid that by going for younger analysts. I’ve been in the business less than four years, and I want to build my track record. I think I have the best job in the world. It’s fun, and I’m well compensated. If I want to move, I don’t want my track record being tainted by things that might be forced upon me by my employer. So I have a lot of incentive to remain disinterested and to not make any recommendations just because the boss thinks, “Hey, this is an idea you should follow.”

Q. Does the boss say that?

A. In fact, you get ideas from all sorts of places, and I’ve already told the boss several times, “No, thanks, I’m not interested in looking at it,” and he respects that. And I’ve had enough good recommendations in the last few months that he’s pleased to have me do it on my own.

Q. You’ve mentioned J.M. Peters often. What’s likely to happen to the company with Southmark Corp., its parent, in such financial straits? Will Southmark sell the 87% or so of Peters that’s not owned by the public?

A. They had it lined up to sell a year ago to another company, and that fell through. So you never know what’s going to happen.

Q. Has San Jacinto Savings & Loan Assn. (the Southmark subsidiary that actually owns J.M. Peters) been materially affected by the problems at the parent corporation?

A. I think the regulators made them put up a Chinese wall between Southmark and the S&L.; I’m sure it has been hands-off. On the other hand, there’s no doubt San Jacinto has been affected at least a little by the problems of the parent--if nothing else by the diversion of their attention from their basic business while the parent’s having problems. I’d like to see Southmark sell it all, and I think eventually they will, perhaps as one way for San Jacinto to raise money to meet the new capital requirements for thrift institutions that have been proposed. Peters seems to have had a good relationship with San Jacinto, which has given Peters some credit lines they’ve needed.

Q. With housing prices having risen so high so rapidly in the last few years, the builders are making some incredible profits these days, aren’t they?

A. They’ve done well. The value of J.M. Peters has nearly doubled in the last two years, and there aren’t too many companies around the U.S. you can say that about. It’s got people saying, “What can they do for an encore in ‘89, since ’88 was such a great year?” But now that interest rates have turned back, home builders’ stocks are on the rise again.

Q. What about their costs, specifically the cost of land? It’s rising tremendously here in Southern California, and if you’re buying land now to build on, it’s extremely expensive. Isn’t that going to put some pressure on profits in the future?

A. Yes, it could be a problem. Plus in San Diego and Orange County you’ve got the threat of slow-growth initiatives in the future. That’s why one of the hottest areas right now is Lancaster and Palmdale (at the far northeast end of Los Angeles County), where builders are scrambling to get lots. It could be the hottest housing market in the state.

Q. While you like the way these companies make money, you’ve been critical of the way some of them make houses, haven’t you?

A. For a person coming from the East, the quality of homes isn’t what I’d really like to live in for the rest of my life, if I had my choice. My son opens the door really hard at home and puts the doorknob through the wall. It’s because they don’t have to build a super quality home here. The homes aren’t the sturdy brick homes I grew up with. So that also makes you a little less comfortable with buying one, particularly if you’re from somewhere else.