Market Watch : Picky Over Pic ‘N’ Save
Until last week, Pic ‘N’ Save Corp.’s stock didn’t hold much potential for fast gains. That all changed with a surge in trading and a rumor that the retailer is a raider’s target.
But anyone who’s keen on chasing the stock now ought to be careful: The 24% run-up last week, to $13.125 from $10.625, could evaporate fast even if a raider does surface, say some analysts.
First, the rumor: David Batchelder, a former associate of T. Boone Pickens, is said to have a 7% stake in Dominguez-based Pic ‘N’ Save. Batchelder runs a La Jolla-based investment firm. He didn’t return calls, and Pic ‘N’ Save had no comment.
If Batchelder has such a stake, it will have to be disclosed soon: A buyer of more than 5% of a firm’s stock must reveal itself within 10 days.
Why would a raider target Pic ‘N’ Save? Sarah Stack, analyst at Bateman Eichler, Hill Richards in Los Angeles, can’t figure it. Pic ‘N’ Save, a close-out merchandise retailer, has seen its fortunes sag since 1987. The reason is that many other retailers are doing what Pic ‘N’ Save does: discount. So competition is growing. Last year, earnings were 87 cents a share versus $1.24 in ’88.
Pic ‘N’ Save’s chief problem is slowing sales at its core Southern California stores. To combat that, the firm has been expanding rapidly in other markets in the South and in the New York metropolitan area, running up expenses. Its 189 stores are expected to bring in revenue of $575 million this year, but at best Stack sees earnings of 95 cents a share.
Betty Kepley, an analyst with the Wisconsin Investment Board, one of Pic ‘N’ Save’s biggest shareholders (2.35 million shares), is angry with management. She feels that the expansion plan hasn’t been well conceived and that management isn’t willing to listen to ideas for turning the company around faster.
Would Wisconsin throw its support behind a raider who offered a better plan for Pic ‘N’ Save? “Yes, we sure would,” Kepley said.
But Stack questions what a raider could do for Pic ‘N’ Save. Though the company is debt-free, she sees no point in someone bidding to take it private. There are few assets to sell, because Pic ‘N’ Save doesn’t own much land. And if a raider’s goal would simply be to run the company better for shareholders, Stack wonders how. Most close-out retailers are in the same boat, she said--facing discount competition from all sides.
Still, Stack admits that Pic ‘N’ Save has terrific earnings potential, if it can boost sales at older stores. One answer might be relocating the mature Southern California stores to new sites, she said. But even that is chancy. What’s the stock really worth? “We feel we’d be lucky if it got to $14,” Kepley admits. So unless this alleged raider has some grand plan, let the buyer beware.
Earnings Early Warning? In the first quarter, the hottest stocks were those perceived to be capable of spectacular earnings growth this year--such as high-tech stocks. Last week, investors changed their minds, rushing into stocks of slower-growing, predictable-demand food, drug and tobacco firms. The message seemed to be that the promise of OK earnings growth suddenly was a bigger attraction than the chance of spectacular growth.
That attitude shift was fueled partly by more disappointing earnings projections from a handful of small high-tech companies.
The ominous aspect of the return to predictable-demand firms: It suggests that first-quarter earnings, though already expected to be weak at many companies, may not be shrugged off by Wall Street after all. Paine Webber Inc. analyst Thomas Doerflinger estimates that first-quarter earnings for the Standard & Poor’s 500 index of major companies will be down 22% from a year ago. It now appears that more people might actually look at those numbers, get upset--and perhaps bail out of stocks.
William Raftery, technical market analyst at Smith Barney, Harris Upham & Co. in New York, thinks that it’s a mistake to jump back on the food-drug-tobacco bandwagon. After a phenomenal performance in the 1980s, those stocks are spent for now, he said. Raftery believes that the shift in sentiment is another sign that the broad market is headed for a fall. By and large, money is flowing only into the biggest of the big stocks, he said. Action elsewhere “is incredibly thin and getting thinner.”
The market’s contrarians believe that kind of growing negativism is a great sign. They see the market doing the opposite of what the majority suggests. But Gerald Appel, editor of Systems & Forecasts newsletter in Great Neck, N.Y., notes that “the contrarian argument goes only so far. All the guys quoting it are obviously bullish.”
Maybe the contrarians are right. Maybe a plunge in the dollar or in oil prices will spark a rally. But in a market as weak as this one, anyone who owns stocks had better be prepared for trouble ahead.
REFUGE STOCKS
Stocks where nervous investors sought safe haven last week:
Stock Mar. 30 Fri. Change Circuit City 24 1/4 26 1/4 +8.2% Merck 69 1/2 72 3/4 +4.7% Coca-Cola 74 3/4 77 7/8 +4.2% Philip Morris 39 5/8 41 1/4 +4.1% Pepsico 62 5/8 65 +3.8% Lilly 64 5/8 66 3/4 +3.3% General Mills 73 5/8 75 1/2 +2.5%
