Is It Time for Bottom Fishing? : Stocks: A Costa Mesa brokerage lists 15 county firms whose shares are selling below book value because of ‘exaggerated pessimism.’ But will they go still lower?
With the stocks of many local companies floundering, now may be the time to go bottom fishing.
That, at least, is the opinion of Newport Securities. The Costa Mesa brokerage has compiled a list of 15 Orange County firms whose shares are selling below the company’s book value because of “exaggerated pessimism” in the stock market.
Jeff Kilpatrick, president of Newport Securities, said he believes that the firms on the list are fundamentally sound and offer “excellent investment opportunities in anticipation of a market improvement.”
He said most of the stocks--real estate and computer industry firms--have been hurt by market fears of a recession at home and war in the Middle East. Others have been adversely affected by restructurings or specific industry problems.
“The current political and economic uncertainties have had an unprecedented effect on the values of Orange County’s public companies,” the brokerage said in a circular it is distributing to customers.
Still, the company added this note of caution: “In many cases, stocks which trade below their book value do so for good reasons.” Book value is the net value of all assets, including real estate, cash, equipment, investments and inventory, minus all liabilities, divided by the number of shares outstanding.
Bottom fishing is the age-old investment tactic of buying stock at its lowest ebb--when the price theoretically has nowhere to go but up. Orange County is a good place to look, because many of the publicly traded companies are small and quick to feel all the negative impacts of investor nervousness.
The Dow Jones Industrial Average, an index of 30 blue-chip industrial stocks, has dropped 11.2% so far this year, falling 309.39 points to 2,443.81 at the close of trading Thursday, from 2753.2 on Dec. 31. And the NASD Composite index, which tracks the smaller stocks traded in the over-the-counter market--has plunged 26%, off 118.45 points to 336.37 Thursday, from 454.82 at the close of trading Dec. 31.
The big question is where is the bottom. Many stock analysts, including Garfield Logan, a partner in the Newport Beach investment banking firm of Hagerty, Van Mourick & Logan, said he believes that the current bear market has further to fall.
“So even though some of these companies’ stock looks cheap, it doesn’t mean it can’t get cheaper,” he said, adding that a stock can fall more no matter how cheap it appears.
“Back in the 1920s, Anaconda Copper fell from the mid-$20s to $1, and the grandfather of a friend of mine figured it couldn’t go any lower,” Logan said. “So he hocked the family farm and bought Anaconda stock. It fell to 50 cents a share right after that.”
Still, Kilpatrick thinks that there are some bargains out there for investors willing to buy and hold for future appreciation.
Among the stocks on Newport Securities’ list are five real estate firms--three builders, a mortgage banker and a title insurance company--that are hampered by the overall economic downturn. In addition, many have been hurt by sluggish local real estate sales caused by the area’s high prices and by a credit crunch that is making it increasingly difficult for builders to obtain financing for projects.
Two real estate firms recommended by Newport Securities are home-builders Standard Pacific L.P., and J.M. Peters Co.
Standard Pacific is selling for $4.75 a share but has a book value of $9.54. And the company, a builder specializing in medium- to high-priced homes, has traded as high as $15 a share this year and hit almost $20 at its peak last year.
While most industry experts do not expect a turnaround in the local housing industry until at least late next year, the stock could prove a wise buy if the company weathers the current downturn, Kilpatrick said.
A riskier investment would be J.M. Peters Co., which is trading at a historic low of $1.25 a share, down from an all-time high of $14.88 last year. The Newport Beach builder of luxury homes has been hit hard by the buying slump and recently stopped building as it tries to sell more than 300 homes in its inventory. In addition, the company’s majority owner, ailing San Jacinto Savings in Houston, is in danger of being seized by the government.
Kilpatrick cautioned that the depth of the real estate slump makes it especially critical that investors study individual companies’ financial performance records before making decisions to buy stock.
In the computer area, Newport Securities lists four stocks that investors might consider. The firm said several have taken charges against earnings to restructure. “With these changes behind them, (the four) offer excellent investment opportunities,” the company said.
One example is Emulex Corp., a Costa Mesa manufacturer of computer data storage systems. The company recently took a major writeoff, as it disposed of products that were in development when the market for them disappeared.
The losses that resulted from that writeoff and from the overall slump in the computer industry has helped drive Emulex common stock to an all-time low of $4.38 a share, down from $8.50 earlier this year and far below its historic high of $27.75.
But the company’s book value is $5.80 a share--almost $1.50 a share above the stock’s current selling price. Kilpatrick said Emulex “is now beginning to benefit from its efforts to lower costs.”
Kilpatrick said he is marketing his euphemistically titled “special situations” stock picks to clients he considers sophisticated investors--generally local business executives or owners looking for for personal and corporate investment opportunities.
Newport’s sales pitch, he said, is that “bad times provide some of best opportunities in local markets like Orange County.”
When times are good and the market is soaring, it is difficult to determine that a stock really is worth the price, often two or three times book value, that it is selling for, Kilpatrick said.
“But it is not hard to see that a company’s stock is worth its book value or that there may be a bargain when it is trading at book or lower,” he said.
When a stock’s price falls below book value, “the market is suggesting that only the company’s physical assets have any value and that there is no value in a company’s market position, reputation or in the experience and abilities of its employees, and that’s not true,” Kilpatrick said.
“With this kind of strategy, the key is to buy a little bit of a lot of different stocks, and then wait for a general recovery,” he said. “I don’t think it is a question of whether these companies’ stocks will trade higher, but when.”
SELECTED O. C. STOCKS SELLING AT BELOW BOOK VALUE
11/8 Stock Book High Low Company Price Value 1990 1990 Archive Corp. Computer Products $4.50 $5.76 $13.88 $4.25 Clothestime Retailing 1.50 2.95 6.13 1.38 Covington Dvlpt. Home Builder .34 .82 1.00 .34 Diceon Elect. Circuit Boards 1.83 8.99 6.25 1.75 Emulex Corp. Computer Products 4.83 5.80 8.50 4.38 First American Fin. Title Insurance 9.25 12.83 14.75 7.88 Hammond Co. Mortgages 2.50 4.90 5.38 2.38 National Education Vocational Training 2.63 2.56 8.13 2.00 Newport Corp. Instruments 6.83 8.50 10.13 6.75 J.M. Peters Co. Home Builder 1.25 8.58 10.50 1.25 Printronix Computer Printers 8.63 14.26 14.50 8.75 Ropak Corp. Plastics 4.75 5.39 9.00 4.75 Standard Pacific Home Builder 4.75 9.54 16.00 4.75 Western Digital Computer Products 4.63 9.80 14.88 4.63 Wynn’s Int’l Automotive 14.00 20.63 24.00 14.00
Source: Newport Securities Corp.
