The Times 100 : The Best Performing Companies in California : VIEW FROM THE STREET : High-Tech Stocks Won Hearts of Many; Will It Stay That Way? : Analysts say investors shouldn’t count on the same appreciation from last year’s high fliers and may get better results elsewhere.
Financial institutions got trashed on Wall Street, while the stock of high-tech companies soared during the past year.
A wide variety of computer and disk drive makers, cellular phone companies and electronics firms--including Leo’s Industries, AST Research, Anthem Electronics and Conner Peripherals--topped the list of those Charging Ahead in the stock market. Meanwhile, savings and loan companies such as Financial Corp. of Santa Barbara, Columbia Savings and Farwest Financial were California’s biggest market losers, with share prices Falling Behind by as much as 95% over the course of the year.
“High tech finally turned around during this last nine months,” said Mark Matheson, director of research at Cruttenden & Co. in Newport Beach.
Meanwhile, investors got scared away from financial stocks by continuing troubles in the savings and loan industry and credit woes in the real estate and junk bond markets. The financial companies that got hit hardest last year were those that took steep writedowns on their investment portfolios, which often caused annual losses.
First Executive Corp., for example, saw its share price plummet 84% after announcing it would post substantial losses for 1989 because of its souring portfolio of junk bonds.
Columbia Savings & Loan, which owned more than $3 billion in junk bonds, also posted huge writeoffs, rendering the company insolvent and causing its share price to plunge 92% to just 63 cents from $7.50.
The bright side of the picture was companies such as Leo’s Industries and Magma Power Co.
Leo’s Industries, which owns the Leo’s Stereo chain, saw its shares soar 302.9% during the past year, largely because the company’s sales and earnings rocketed after it got into the cellular phone business.
The company’s chief executive expects its cellular phone business to generate more revenue over the long haul than its retail electronics stores.
Magma has also seen tremendous growth. Its revenue tripled in 1989, reaching $63.1 million compared to $26 million the prior year. The reason: Magma, an alternative energy company, brought two new hydroelectric power plants on line last year. That also helped boost net income to $22.3 million from only $9.3 million the year before.
And the stocks of other companies on the Charging Ahead list, such as Quantum Corp. and Conner Peripherals, have appreciated during the past year after posting consistently strong sales and earnings in the relatively new and growing 3 1/2-inch hard disk drive business.
Ironically, analysts think investors would be poorly advised to invest now in most of the top performers of the past year. Indeed, some believe the best bets can be found by sifting through the ashes of the worst-performing stocks.
It is almost always a bad idea to chase the high fliers, mainly because it is usually too late for average investors to profit, Matheson said. Moreover, the share prices that did the best in the past year are due for falls or, at the very least, substantially lower appreciation rates, he added.
Magma and Leo’s are good examples, he said.
Both saw profit and revenue rocket because of events--such as Leo’s entree into the cellular business and Magma’s new plants--that are not likely to be repeated soon, he said.
Leo’s faces stiff competition in the cellular market and at retail electronics stores. Meanwhile, Magma has no new power plants under construction, so it is likely to start posting mere 10% sales and profit gains versus the 300% jumps of the past year.
The steeply slower growth rates are bound to surprise and disappoint some investors. So Matheson predicts that these two top-performing companies may become the underperformers of tomorrow.
“If I had to choose today, I would take my profits,” he added.
While Conner and Quantum are strong and healthy companies, neither is likely to see triple-digit gains in its stock price again, said John Girton, vice president of research at Van Kasper & Co.
“I would think the stock is going to rest here for a while,” Girton said.
Meanwhile, some of those that did the worst may become strong performers, Matheson said.
Advanced Marketing Services did well on Wall Street two years ago. The San Diego close-out bookseller had been posting consistently strong earnings, and its potential markets were growing.
But last year Advanced had a small inventory writedown, and its stock plunged 56% from $13.25 to its recent trading price of $5.88. Still, Matheson is bullish on Advanced shares.
“There is a chance there could be more writeoffs, but their stock is selling for less than book value,” he said. “I think they have a pretty interesting niche, and the stock is looking much better.”
MAI Basic Four also seems to be turning around. The Tustin company, which sells computer business systems, had attempted to take over Prime Computer last year. The bid failed, and in the interim, MAI’s basic business soured and its market price declined by one-half.
But over the long run, Matheson expects the firm to get its act together, which could help its market price in late 1990 and 1991, he said.
Of course, not every company on the list of those Falling Behind is set for a turnaround and not all those that have done well are set for a fall.
The shares of AST Research soared nearly 173% during the past year; Matheson expects the Irvine company’s stock to at least keep pace with the market. The shares of the Irvine computer maker suffered in 1988 because the company was viewed as one of the “also-rans” of the market. But its newer products will accept a wider variety of software and it is making a foray into Japan, which Matheson sees as a gutsy and possibly lucrative move.
Meanwhile, a number of the losers are likely to stay that way, or possibly even get worse.
Financial Corp. of Santa Barbara and Columbia Savings & Loan Assn. are on their last legs, said analyst Peter Treadway. Neither meets any of the new capital standards to ensure safety of deposits. And that gives thrift regulators the power to take them over at any time.
(Thrift deposits are insured to $100,000 by the federal government, so generally shareholders lose money only when a savings and loan is taken over.)
There’s always the chance that someone will come along to inject millions of dollars into the firms and save investors from ruin, Treadway said. “But that’s miracle stuff, and I don’t recommend miracles.”
CHARGING AHEAD Companies ranked by percent gain in stock price.
% change 4/10/90 4/10/89 stock stock stock Rank Company price price price 1 Leo’s Industries 302.9 17.63 4.38 2 Adaptec 251.0 21.50 6.13 3 AST Research 172.9 20.13 7.38 4 Sunrise Medical 155.2 9.25 3.63 5 Anthem Electronics 146.9 25.00 10.13 6 Pacesetter Homes 143.8 9.75 4.00 7 Quantum Corp 141.3 13.88 5.75 8 Conner Peripherals 128.8 18.88 8.25 9 Magma Power 117.8 35.13 16.13 10 International Rectifier 115.6 8.63 4.00 11 Silicon Graphics 115.4 33.13 15.38 12 Fredericks of Hollywood 113.2 15.75 7.39 13 Williams-Sonoma 111.3 32.75 15.50 14 Nellcor 109.7 18.88 9.00 15 Varco International 108.8 8.88 4.25 16 Pyramid Technology 105.7 27.25 13.25 17 Synoptics Communications 105.3 33.88 16.50 18 Quiksilver 102.9 26.38 13.00 19 Optical Radiation 101.0 26.13 13.00 20 Teradata 100.0 30.00 15.00 21 Charles Schwab 91.5 17.00 8.88 22 Western Waste Industries 88.7 33.50 17.75 23 Fluor 88.2 44.00 23.38 24 Jacobs Engineering Group 84.4 23.63 12.81 25 L.A. Gear 84.3 36.75 19.94
FALLING BEHIND Companies ranked by percent decline in stock price.
% change 4/10/90 4/10/89 stock stock stock Rank Company price price price 1 Financial Corp.-Santa Barbara -95.3 0.09 2.00 2 National Lumber & Supply -93.5 0.19 2.88 3 Columbia Savings & Loan -91.7 0.63 7.50 4 Daisy Systems** -88.1 0.56 4.75 5 Central Bank -86.8 1.88 14.25 6 First Executive -83.6 2.38 14.52 7 American Medical Intl. -78.8 4.50 21.25 8 Ironstone Group** -74.5 0.88 3.44 9 National Education -73.0 5.38 19.88 10 Farwest Financial -71.6 2.38 8.38 11 Leisure Technology -68.3 1.63 5.13 12 Homestead Financial -67.7 1.25 3.88 13 Adac Laboratories -66.7 1.50 4.50 13 Traditional Industries -66.7 2.63 7.88 15 Microsemi -65.9 1.75 5.13 16 Arix -65.0 1.75 5.00 17 Xicor -64.5 2.75 7.75 18 Great American Bank -63.8 4.25 11.75 19 Dataproducts -62.2 6.38 16.88 20 MAI Basic Four -61.9 3.00 7.88 21 Siliconix -58.3 1.88 4.50 22 Advanced Marketing Services -55.7 5.88 13.25 23 TCI International -55.1 5.00 11.13 24 Centennial Group -55.0 1.12 2.50 25 EECO -53.8 3.00 6.50
** See company notes, page 45.
