Hunt for Value Turns to Small Stocks
Anyone who still believes that the stock market rally is a skinny, anemic creature ought to take a look at the chart at right.
That list is a sampling of small and mid-size Southland companies. Many of those stocks, all of which trade over the counter, either went down or went nowhere in the first four months of the year. But since April 30, the group has been on fire.
Clearly, while the Dow Jones industrial average has been the attention getter in the spring surge, the real strength has been in smaller stocks. Which tells you that a growing number of investors--individual and institutional--are hunting for new stories to play in this rally.
Many brokers say the action is building on itself. “You are certainly seeing significantly more interest now in the second-tier stocks than a month ago or even two weeks ago,” said Tracy Wheeler, OTC trading chief at Seidler Amdec Securities in Los Angeles.
Wall Street always views such a broadening of interest in two ways: It’s healthy because it tells you there is a growing willingness to trust stocks again; but it’s scary because the faster the smaller stocks move, the greater the speculative sentiment in the market. And wild speculation almost always ends in stocks becoming drastically overpriced, then crashing.
If you were around the market in 1982-83, you probably remember how small stocks went almost straight up from August, 1982, to June, 1983--an 80% rise in the NASDAQ OTC composite index. Then the party ended, and prices plunged. Many OTC stocks didn’t climb back to those June, 1983, peaks until midway into 1986.
So what time is it in this cycle--August, 1982, June, 1983, or somewhere between?
Will Porter, head of OTC trading at brokerage Cruttenden & Co. in Newport Beach, argues that “OTC stocks that have been dead for a long time are just starting to move. . . . We’re a long, long way from where we were in 1983.”
Brokerage executives say this isn’t a market where investors are blindly rushing into any stock that appears to have a mildly interesting tale. On the contrary, “I think the investing public is very value-oriented,” said Donna Hostetler, research chief at Crowell, Weedon & Co. in L.A. “They’re willing to buy if you can show real value there.”
Indeed, what’s sparking interest in many established smaller stocks is the spate of new stock offerings hitting the market, Hostetler said. When a new company’s investment bankers are deciding how to price a new stock, they take a look at where other stocks in that industry are trading. Investors, likewise, compare a new stock to what’s already on the market, and lately that kind of comparison shopping is turning up many ignored small stocks that look relatively cheap compared to their earnings potential, Hostetler said.
One area where Crowell Weedon is getting many more customer inquiries is in small bank stocks, Hostetler said. Her firm’s estimate of 1990 earnings for $3-billion (assets) Imperial Bancorp of Inglewood is $2.50 a share, up 13% from 1989. At $22, Imperial trades for nine times this year’s earnings estimate, which gives it more of an aura of value than a lot of pricey stocks.
Investors also apparently see value in Fountain Valley-based FHP International, which operates health-care facilities throughout the West. The company’s stock has risen nearly 24% since April 30, to $18.25, and now trades for about 14 times the $1.30 a share that Cruttenden & Co. expects FHP to earn this year. As a long-profitable company in a tough field, FHP has the kind of track record which, at the very least, is likely to make investors look twice these days.
Still, there’s certainly some hard-core speculation going on in the OTC market now as well. Micropolis, the Chatsworth-based computer disk drive maker, has turned profitable again after bleeding red ink in 1988 and 1989. Investors have bid the stock up 71.8% since April 30, to $8.375, betting that the recovery is for real--even though the disk drive business remains a volatile one.
Another stock that has jumped in recent weeks is American Ecology, which disposes of low-level radioactive waste. The Agoura Hills firm has faced a mountain of troubles in recent years and has exited many waste-disposal businesses where it couldn’t compete well. American Ecology lost $1.07 a share last year on revenue of about $42 million. Chairman William Prachar says he expects the firm to start making money again this year. But the stock is very thinly traded; Prachar said he knows of only one brokerage that regularly makes a market in the shares.
There’s an important lesson there for any investor who wants to hunt small stocks: If you’re dealing with a company that has relatively few shares outstanding, the price of the stock can soar very quickly if just a few buyers show interest. The flip side also is true: The stock can plunge in no time if just a few big sellers surface.
That’s a basic tenet of OTC investing, but it’s also one that investors conveniently forget in times like this. So far, the path of least resistance for small stocks has been up. Analysts can make a good case that, after being ignored for most of the late 1980s, small stocks are ready for a sustained move higher. Just be sure that you’re buying real value and that you’re prepared to handle the volatility that is the unfortunate reality of small-stock investing.
Briefly: One large cloud on the stock market’s horizon: The bond market’s honeymoon may be over soon. Economist Lacy Hunt at CM&M; Group in New York notes that “the issue of exceptionally strong credit demands by the Treasury will begin to resurface with the announcement of a four-year Treasury note auction on June 20.” Then, on July 3, the S&L; bailout agency, Refcorp, will announce plans for its next bond sales. What’s more, Hunt notes, West and East Germany will begin borrowing heavily in the third quarter to finance East German reconstruction. If ever the planet needed savers and investors, it does now. . . .
Is 32 times earnings too much to pay for a stock? Dean Witter Reynolds argues that it isn’t, in the case of building supply retailer Home Depot. Dean Witter analyst Donald Trott reiterated his buy recommendation on the stock last week. He estimates that Home Depot will earn $1.90 a share this year and $2.45 a share next year. At $61, the stock is up 66% this year. This is one everyone on Wall Street seems to love, but any buyer at the current price better pray that absolutely nothing goes wrong this year. . . .
Prudential-Bache Securities is going out on a limb for long-troubled computer company Unisys Corp. Analyst Rick Martin expects Unisys to continue reducing its debt significantly as the year goes on, while earnings begin to recover. “When investors begin to look at margins and earnings, rather than focusing on the past, we expect sentiment toward Unisys to turn up quickly,” Martin is telling clients. He sees the stock, now $15.125, in the mid-$20s by this time next year.
SMALL STOCKS, BIG MOVES
How stocks of some smaller Southland companies have fared since April 30, and year to date:
Tuesday Percentage change from: Stock close April 30 Dec. 31 Micropolis $8 3/8 +71.8% +139.3% Syncor Intl. 9 1/8 +40.4% +15.9% Tokos Medical 15 +36.4% na Pinkerton 19 3/4 +26.4% na Kasler 11 7/8 +25.0% +31.9% Carl Karcher 9 5/8 +24.2% -23.0% FHP Intl. 18 1/4 +23.7% -12.0% American Ecology 5 1/8 +20.6% -18.0% Western Waste 38 +13.0% +18.8% Imperial Bancorp. 22 +7.3% +10.0% Quiksilver 26 1/4 -0.1% +37.3% NASD OTC compos. 466.56 +11.1% +2.6% Dow industrials 2,933.42 +10.4% +6.5%
na - not applicable (new issue in 1990)
Los Angeles Times
