Market Watch : High-Tech’s a Winner
The story of Southland stocks in the first quarter was that the rich kept getting richer and the poor generally got poorer. Many of the region’s high-technology stocks zoomed in the quarter as investors nationwide rediscovered the tech group. Meanwhile, out-of-favor groups such as savings and loans continued to disappoint, outside of some brief rallies.
Now what? A trader’s inclination might be to sell the winners and chase the losers. But the high level of nervousness in the market suggests that the themes that worked in the first quarter might work in the second quarter as well.
On the winners’ side, Irvine-based AST Research saw its shares leap 61% for the quarter, to $16.75. AST, a big player in personal computers, lost 64 cents a share in the year ended last June 30, then turned itself around dramatically. It earned 86 cents a share in the six months ended Dec. 31, as sales rose 11% to $244 million.
AST refocused its business over the past year, putting new emphasis on its formula for success in the crowded PC industry: develop the best products faster than competitors. Indeed, AST has proven again “that they can get you the product, and they can support it,” said Steven Ossad, analyst at Montgomery Securities in San Francisco.
Earnings in the current fiscal year should reach about $1.85 a share, Ossad said. So AST stock sells for about nine times earnings. Though that might look cheap, Wall Street has been keeping all computer hardware stocks at low price/earnings multiples, because the business has been so mercurial. If AST management can continue working its magic, however, the stock is bound to get noticed by more investors. A kicker: AST’s strong overseas push.
Another Irvine high-tech stock that created a stir in the first quarter: Western Digital, which makes an array of computer parts, from semiconductors to disk drives (which handle a computer’s storage and retrieval functions). The shares soared 34%, to $11.25. Western has been trying for years to promote itself as a “one-stop shopping company for personal computer components,” notes Edmund Spelman, analyst at Oppenheimer & Co. in New York. The strategy finally seems to be working, he says.
The irony is that Western can’t yet trumpet that. It’s widely believed that Western has won a major contract to supply key parts for IBM’s upcoming notebook-sized computer. But IBM hasn’t put out the news yet, so Western must keep quiet.
Analyst Richard Whittington at Kidder, Peabody & Co. believes that the IBM contract is “just the tip of the iceberg” in new contracts for Western. Last week, he upgraded the stock to “buy” and raised his earnings estimate for the year ending June 30 to 70 cents a share from 50 cents. In fiscal 1991, he sees $1-plus per share on sales of $1 billion.
So this is another stock that looks cheap, on the surface. But Spelman warns that “the risk here is that we’ve heard wonderful things before, yet the company failed to execute.” Western’s earnings have been in a slump since 1987, when it earned $1.78 a share. Obviously, Wall Street needs a lot more convincing. But the tide could turn if the next few quarters show consistent growth. Earnings should hit 25 cents a share in the quarter just ended, which should look great versus 15 cents a year ago, Spelman notes.
Among far riskier turnaround plays is Chatsworth-based Micropolis Corp. The computer disk drive maker’s stock rose 32% in the quarter, to $4.625. After losing $4.31 a share last year in the highly competitive disk drive business, the firm is expected to earn 50 cents a share this year, thanks to cost cutting. But it still faces a long recovery.
In the losers’ column, no group of local stocks suffered as much as the S&Ls.; Most ended the quarter near their 52-week lows. Despite many Wall Streeters’ belief that the stocks are ridiculously cheap, analyst Ken Funsten at Wedbush Morgan Securities in Los Angeles said he’s been telling clients that “it’s too early to get into (them).”
The S&Ls;, Funsten said, “are living in a very strange world,” where the federal government calls almost all the shots. For example, no one is sure how much real estate the government will begin dumping out of bankrupt S&Ls; (potentially hurting healthy S&Ls;’ business), or how much tougher the government will make S&L; capital standards. There’s no question that major S&Ls; will survive long term. But for now, Wall Street has lost interest in trying to pick the likely winners.
FIRST QUARTER WINNERS . . .
These Southland stocks were among the best performers in the first quarter ended Friday:
Stock Dec. 31 Fri. Change Tandon 13/16 1 9/16 +92% AST Research 10 3/8 16 3/4 +61% Jacobs Engineer. 27 1/4 40 1/4 +48% Teradata 22 31 1/2 +43% Pathe Commun. 3 1/4 4 5/8 +42% Western Digital 8 3/8 11 1/4 +34% ERLY Indus. 6 1/8 8 1/8 +33% Micropolis 3 1/2 4 5/8 +32% Marshall Indus. 18 7/8 24 7/8 +32% Whittaker 7 3/4 10 +29%
. . . AND LOSERS
Some area stocks that suffered major drops in the quarter:
Stock Dec. 31 Fri. Change Finl. Corp. S.B. 13/16 5/64 -89% Imperial Corp. 15/16 9/64 -83% First Executive 9 3/4 2 3/4 -72% Far West Finl. 6 1/2 2 5/8 -60% Columbia Savings 2 3/4 1 1/8 -59% Nu-Med 5 3/4 3 3/8 -41% Transcon 1 7/8 1 1/8 -40% Amer. Med. Intl. 7 1/8 4 3/8 -39% Great Amer. Bank 6 7/8 4 1/2 -35% Hilton Hotels 82 1/2 54 3/8 -34%
