Much Pain, No Gain for S&L; Investors
How many times do you have to be hit in the head with a board before you start asking some serious questions--such as, why am I putting up with this?
That pretty much sums up the conversation among savings and loan investors this week. When HomeFed Corp. of San Diego announced late Tuesday that its problem loans jumped in May, the stage was set for another big hit to the S&L; stocks. Sure enough, HomeFed shares plunged $8.25 to $25 Wednesday, dragging other S&Ls; down too: H. F. Ahmanson lost $1 to $21.25, CalFed fell $1.875 to $19.50 and Great Western lost $1.625 to $18.875.
The HomeFed news wouldn’t have been so devastating except that the S&L; stocks had just begun rallying in late May, on the belief that the worst of California’s real estate troubles were already behind the S&Ls.; Now, as a former U.S. President used to say, “Well, here we go again.”
The gut feeling a lot of S&L; investors should be experiencing is, enough is enough. The cockroach theory of investing says that when you spot one major problem in an industry, a lot more problems are certain to be right behind it. And there have been more than a few roaches around lately.
So if you’ve made a little money by getting into the S&L; stocks near their lows this year, why not take your profits and buy something less risky? If you’ve lost money in the stocks, why not cut your losses before they’re completely out of hand?
Ask Wall Street S&L; analysts and money managers who own the stocks why they don’t just throw in the towel, and they have some good answers. But they’re the usual answers.
“The stocks are already discounting a lot of trouble,” argues E. Gareth Plank, analyst at Dean Witter Reynolds in San Francisco.
Mike Kucera, a partner at Charlotte, N.C.-based Wedge Capital Management, says of his firm’s 900,000 shares of HomeFed: “We still think there’s a lot of value there. We’re contrarians.”
Long-term, many S&L; investors expect to be vindicated. But most of them also believe that, short-term, there are going to be more real estate loan losses and more problems generally in the industry, especially in California. “For sure, the real estate market in California will become a lot more normal,” says Michigan State Treasurer Robert Bowman, who runs that state’s pension money. “Normal” means slower, which means tougher business for mortgage lenders.
But Bowman says he has no plans to dump his Great Western or Ahmanson shares because their business is mostly residential. HomeFed, in contrast, has been a big player in commercial real estate. “We’ve got a lot of faith in Great Western’s and Ahmanson’s abilities to manage themselves” through a slowdown, Bowman said.
Thursday, some new buyers emerged to boost a few of the S&Ls.; Though HomeFed lost another $1 to $24, Ahmanson rose 25 cents to $21.50.
But even if many of the S&Ls; escape new real estate problems, the big question is how much perception is going to rule reality this summer, if more bad news flows from institutions such as HomeFed. More trouble for a few is likely to be perceived as more trouble for the many.
Some big investors now are so skittish, they won’t even go public defending S&Ls.; One East Coast money manager who owns Great Western shares declined to be named, saying simply: “I figure the whale that spouts gets harpooned.”
Murphy’s Law: Michael Murphy, the San Francisco-based publisher of the Overpriced Stock Service newsletter, rarely hesitates to spout off about stocks he doesn’t like. And in his June newsletter, Murphy makes it clear where he thinks the stock market overall is headed. The newsletter’s headline: SHORT EVERYTHING!
This isn’t the first time Murphy has been bearish, of course. As a professional short seller, Murphy hunts for stocks that he believes are headed for a fall. He then borrows the shares and sells them in the open market, expecting to be able to buy them back later for a lot less.
Though he’s always shorting something, Murphy says his current 60-stock target list is the longest he’s had since just before the 1987 market crash. The roster is heavy with S&L; stocks, banks, defense contractors and entertainment companies.
Why so bearish? Murphy figures there’s no way the Federal Reserve will allow interest rates to drop substantially until Congress and the Bush Administration cut the federal budget deficit. But there won’t be a budget agreement, Murphy says, so rates will stay up and the slow economy will soon slip into recession.
His target for the Dow Jones industrial average: 2,200, versus 2,928.22 Thursday. Love him or hate him, at least he’s willing to take a stand.
Briefly: Investors Intelligence newsletter’s weekly tally of money manager sentiment shows a big jump in the percentage expecting a market correction: 20% this week, up from 16.8% last week. Bulls composed 46.1% of those surveyed this week versus 47.8% last week. Bears: 33.9% versus 35.4%.
SHORT-SELLING TARGETS
Here are some of the stocks that professional short-seller Michael Murphy believes are most vulnerable in the months ahead. Also listed is the month and year that Murphy began recommending the stock as a short-sale target.
Short sale Thurs. Target Stock date close price H.F. Ahmanson July ’88 $21 1/2 $12 AMR (Amer. Airlines) May ’90 67 1/8 48 Amgen Dec. ’89 75 1/8 45 Circus Circus May ’90 61 1/2 48 Citicorp June ’90 23 1/8 17 Disney May ’90 129 100 Great Western Finl. July ’88 18 1/4 11 Lockheed Jan. ’89 35 1/4 33 McDonnell Douglas Jan. ’89 39 3/8 35 Northrop May ’88 19 3/8 -0- 20th Century Indus. Sept. ’88 22 1/8 13
Source: Overpriced Stock Service
