Stock of Small Firms Touted and Scouted : The market: Those attending the Growth Stock Conference conceded that small, publicly held companies are surrounded by uncertainty, but, at the same time, attendees were scouting for sound investments.
It was no coincidence that UC Irvine professor Robert A. Haugen delivered the keynote speech at the Southern California Growth Stock Conference Thursday.
Haugen, an investment-markets specialist and author of “The Incredible January Effect,” is a firm believer in the investment value of smaller, publicly traded companies.
His book argues that small companies’ stocks pay higher investment returns than large companies’ stocks and that small stocks show their biggest gains in January.
The conference is an annual event dedicated to showcasing smaller, publicly traded companies to potential investors and stock analysts, thus, Haugen’s message and his prediction that small stocks will continue to outperform large stocks was greeted enthusiastically.
But the enthusiasm of the nearly 100 investment portfolio managers and stock analysts attending the two-day session at Le Meridien Hotel was tempered by the mood of caution that has enveloped the investment industry as it departs the high-flying ‘80s.
“The small stocks are owned by the public, and the general public is scared to death,” said Joseph Sullivan, vice president of Renaissance Capital Group, a Dallas investment firm that specializes in smaller public companies with $125 million in capital or less.
“That has made it a bear market for small stocks for the past two years, and it means that, in terms of public sentiment, the economic outlook is definitely unsettled.”
But Sullivan, who came to the conference looking for leads on companies that might make investment candidates, said the trick to doing well in a fuzzy or even depressed market is to “really do your homework and tend to the fundamentals. Investors in this kind of climate are less likely to extend themselves and take a shot at a high flier.”
Still, many investors believe that the current climate bodes well for the stock of small firms. “There are a lot of companies out there that are really undervalued in the market,” said Michael T. Jackson, a general partner at Hambrecht & Quist Equity Management in San Francisco.
Jackson, who said he attends half a dozen or more investment conferences a year looking for companies with potential, said he believes that investors’ disenchantment with smaller firms is ending. “We are at the bottom of the cycle, and it will shift away from large companies that have leveraged their balance sheets,” he predicted.
Professional investment managers didn’t worry too much about heavily debt-laden companies in the past because profits were heading up, said Joel Tillinghurst, manager of Boston-based Fidelity Management’s new Low Price Stock Fund.
“But this year, we are all looking for solid balance sheets,” he said. “Last year, leveraging didn’t matter much because most surprises were good ones. This year, most surprises are going to be negative surprises.”
Ronald Murray, a private investor and former computer-industry executive, said he believes that the economy has entered a period in which many companies’ profits and stock performance will deteriorate.
“In positive times, you look at the best of the winners” in making investment choices, the Anaheim Hills resident said.
“In flat times, like these, you look at the micro-economic scene and focus on small-growth companies with lots of potential. It takes a lot more research than just picking the best-of-a-bunch of winners, but that’s what this business is about.” he noted.
Murray said he finds investment shows like the Southern California Growth Stock Conference valuable as a research tool because they enable investors to listen to a company’s top officers and to ask them questions and get a feel for their personalities.
“When you are investing in IBM, it really doesn’t matter what the president is like,” he said. “But in these small companies, the president is really what you are investing in, and it is critical to have a chance to see them perform.”
In all, the presidents, chairmen or other executives of 39 companies are scheduled to pitch their firms during the conference, which ends this afternoon. All are from Southern California and 18 are headquartered in Orange County.
The high proportion of locally based firms underscores the county’s role as a major business incubator, said Walter Cruttenden II, president of Cruttenden & Co., the Newport Beach investment banking firm that sponsors the conference.
And that is what attracted Peter Lablans, area director of the Netherlands Foreign Investment Agency.
The Netherlands, with a centuries-old tradition as a trading nation, is one of Europe’s most aggressive recruiters of foreign investment. Lablans, who works out of a regional office in Los Angeles, said his government is especially hungry for medical and computer firms.
While the Dutch government doesn’t make direct equity investments in foreign companies, it offers tax breaks, grants for plant construction and employment training, and other incentives.
O.C. COMPANIES’ PITCH TO INVESTORS
Here is a summary of the information Orange County-based companies supplied prospective investors at the Southern California Growth Stock Conference.
Enhancements Inc.: Revenues have grown from $10 million to $220 million over the last five years. Net income has improved from $120,000 to more than $4.5 million, and shareholders’ equity has grown from $152,000 to more than $25 million in the same period.
Rainbow Technologies Inc.: Average sales have grown at a rate of more than 100% annually since 1986 to $11.5 million in 1989. Average annual net income growth rate, 150% since 1986.
American Health Services Corp.: Revenue for 1988 was $14.6 million, and the estimate for 1989 is $26 million. The number of company-operated medical imaging centers has increased from nine in 1988 to 29 at the end of 1989 and is expected to surpass 40 by the end of 1990.
PDA Engineering, Costa Mesa: Underlying values include no long-term debt and a stock price-to-earnings multiple of nine times estimated fiscal 1990 earnings. Customers for the company’s engineering software include half of the Fortune 500 companies. Revenue for 1989 is estimated at $27.3 million.
Furon Co.: Revenue base has tripled since 1987 to $250 million through acquisitions, and no new equity has been issued. The company has a debt-reduction plan expected to enhance earnings and significantly reduce leverage.
Gateway Communications Inc.: Revenue in 1989 was $25.7 million, up from $16.7 million in 1988. The computer-networking manufacturer has captured numerous industry awards for its products.
Cimco Inc.: Profitable every year since 1963. Average growth rate over the last five years for revenues has been 21.7%, for net earnings, 43.5%.
Vestro Foods Inc.: A recent $9.6-million private placement--underwritten by four major institutional investment firms--substantially supported the specialty and health food product company’s program of growth by acquisition. Revenue for 1989 is estimated at $200 million.
Advantage Life Products: Second quarter fiscal 1990 revenues increased 83% over previous year’s second quarter. Company produces “Cigarrest Smoking Alternative Gum.”
Unilab Corp.: Provides clinical laboratory testing to health care providers. Estimated 1989 revenue is $25.9 million.
Safeguard Health Enterprises Inc.: Membership in the company’s prepaid dental health plans has declined but still totals more than 730,000 in 13 states. Higher margins and stock repurchases have offset impact of drop in enrollment.
Commerce Bancorp: Successfully completed a $5-million cumulative convertible preferred stock offering in June, 1988. All shares were converted to shares of common stock in 1989.
Eldorado Bancorp: Company is strategically positioned to benefit from the acquisition environment of the ‘90s. Estimated 1990 revenue of $35 million will produce $4.5-million profit.
Liberty National Bank: Has full-service branches in Huntington Beach and downtown Los Angeles and loan offices in San Francisco and San Bernardino.
PNB Financial Group: Shareholders recently provided capital injection of $4.7 million for increasing market share through acquisition and expansion.
Emulex Corp.: Company is the leading third-party vendor to the Digital Equipment Corp. market. Estimated 1989 revenue is $148.6 million.
Micro General Corp.: Every time the U.S. Postal Service or a carrier such as UPS changes rates, Micro General replaces the memory chips in automated parcel shipping systems, generating substantial high-margin revenues.
Fidelity National Financial Inc.: Doubled its pre-tax profit and dividends in fiscal 1989. Is the only employee-owned title insurance underwriter in the United States.
