THE TIMES 100 : The Best Performing Companies in California : View From the Street : Searching for Value Among Small Stocks

In the stock market’s peculiar if not infinite wisdom, investors collectively decide each day which companies are worth the most in pure dollar terms. That’s the simple concept of market value.

This year, oil giant Chevron Corp. again ranks as the most valuable business franchise among California companies. Its market value, which is merely the stock price times the number of shares outstanding, totals $27.3 billion, up 14% from a year ago.

Meanwhile, at the bottom of our Market Value 100 list is restaurateur Collins Food International (the Sizzler chain), now worth $433 million versus $428 million last year.

Beyond the moment-in-time yardstick appeal of this list, investors haven’t had much use for market value as a stock-picking tool for at least eight years. For most of the 1980s, the smaller a company’s market value, the smaller the audience of investors that paid any attention to the stock. Big stocks were what people wanted to own, and everybody knew the big stocks’ names.

This year, all that has changed. Suddenly, investors again want to own smaller, up-and-coming companies.

The big stocks are in demand too but not like their smaller brethren.

Market value--often referred to as market capitalization--is the standard measure of what’s big and what’s small in stocks. Institutional investors look at market capitalization, rather than sales or earnings, to gauge size because they need to know how much of a market there is to play with in a given issue. Ideally, the institutions want something small and undiscovered--but not too small.

Nobody’s definition of small capitalization is exactly the same, but in general a company whose market value is about $500 million or less is considered to be a relatively small stock. (For some institutions, though, even a $1-billion market value is pocket change.)

What’s in the new appeal of the “smaller cap” stocks?

* Investors seem to believe that the companies are bargains, because many didn’t enjoy much of a stock move in the 1980s.

* There’s also a feeling that many big companies bolstered their earnings in the 1980s with special events--restructurings, stock buybacks or takeovers, for example--that were outside the capabilities of smaller companies.

In the ‘90s those special events are harder to engineer. So large and small companies alike will be judged purely on the earnings they produce from their basic businesses. And investors know that, historically, smaller companies grow earnings faster than big companies.

Does that mean the smartest investors this year are picking from the bottom rungs of The Market Value 100 rather than the top? Not necessarily.

True, investors are paying more attention to small stocks. But say you had bought No. 100 on the market value list a year ago. That was Teradata Corp., a maker of high-speed computer systems. The company’s market value was $404 million a year ago, when the stock was about $32 a share.

Today, the stock is about $17 a share, and the company’s market value has shrunk accordingly, to about $260 million--off our chart. Teradata’s orders dried up with the economy last fall, and its recovery has been slow.

Meanwhile, No. 5 on last year’s Market Value 100, electronics giant Hewlett-Packard Co., keeps the same slot this year. Its market value is $12.7 billion, up from $10.7 billion last year as its stock has jumped to about $53 from $45.

The point is, the smaller stocks offer far greater potential reward, but that also means the risk of something going wrong is far greater. The bigger-capitalized companies tend to be much steadier in sales and earnings trends, though they don’t grow as fast. This is a basic concept, but it’s one investors tend to forget in the frenzy to buy small stocks.

Teradata’s case notwithstanding, many of our bottom-decile market value companies this year appear to have great potential. Debuting at No. 98 is Mips Computer Systems. With a market value of $445 million, Mips is a leading supplier of “RISC” technology for computers. RISC--reduced instruction set computer--is a technology designed to improve a computer’s performance for the same or lower price.

No. 93, Dreyer’s Grand Ice Cream, also is new to the list. Dreyer’s has a booming franchise in the premium ice cream market here and in the Far East. Investors have rewarded the company by boosting its market value to $482 million from $270 million a year ago.

At No. 90 is Charles Schwab & Co., the discount brokerage that sees itself as the top choice of smart independent investors in the ‘90s. With the latest bull market surge, Schwab’s market value has jumped to $520 million from $431 million a year ago.

These are some of the small stocks that investors are counting on in the ‘90s. Whether that hope is misplaced remains to be seen. But for now, Wall Street is clearly more interested in small-stock excitement than big-stock consistency.

THE MARKET VALUE 100Companies ranked by market value as of April 12, 1991.

4/12/91 ’89 mkt. value Book value Rank rank Company ($ millions) ($ millions) 1 1 Chevron Corp. 27,274.7 14,836.0 2 3 Atlantic Richfield Co. 20,479.9 7,149.0 3 2 Pacific Telesis Group 16,677.4 7,401.0 4 4 Walt Disney Co.* 15,005.2 3,488.6 5 5 Hewlett-Packard Co.* 12,756.8 6,363.0 6 6 Pacific Gas & Electric 11,293.4 8,607.1 7 7 Intel Corp. 10,828.7 3,591.5 8 11 Syntex Corp.* 9,383.6 771.7 9 8 SCEcorp 8,438.6 6,071.9 10 14 Apple Computer Inc.* 8,382.6 1,446.8 11 12 BankAmerica Corp. 7,827.1 6,419.0 12 13 Rockwell Intl. Corp.* 6,743.3 4,185.9 13 10 Unocal Corp. 6,411.4 2,550.0 14 9 Occidental Petroleum Corp. 5,742.0 4,112.0 15 52 Amgen Inc.* 5,349.5 297.6 16 28 Gap Inc.* 4,313.5 419.5 17 24 National Med. Enterprises* 3,930.1 1,366.2 18 20 Wells Fargo & Co. 3,813.4 3,359.8 19 17 Times Mirror Co. 3,743.0 1,917.4 20 21 Fluor Corp.* 3,638.6 864.0 21 36 Sun Microsystems Inc.* 3,462.8 926.8 22 31 Genentech Inc. 3,124.7 893.2 23 16 Security Pacific Corp. 3,008.0 4,708.0 24 15 Unocal Exploration Corp. 2,766.3 736.4 25 27 Lockheed Corp. 2,709.6 2,309.0 26 23 Transamerica Corp. 2,650.6 3,016.7 27 22 Pacific Enterprises 2,598.2 1,938.0 28 39 Price Co.* 2,571.1 616.3 29 29 San Diego Gas & Electric 2,482.7 1,445.8 30 34 Great Western Financial 2,249.2 2,075.8 31 33 Castle & Cooke Inc. 2,126.0 928.6 32 30 Clorox Co.* 2,093.6 810.5 33 35 First Interstate Bancorp 2,064.7 2,868.0 34 25 Hilton Hotels Corp. 2,052.6 923.3 35 43 Alza Corp. 2,027.8 219.6 36 40 H.F. Ahmanson & Co. 1,993.4 2,342.2 37 37 Litton Industries Inc.* 1,986.2 1,300.1 38 41 Amdahl Corp.* 1,855.0 1,370.6 39 42 Golden West Financial 1,833.2 1,220.4 40 47 National Health Lab. 1,733.7 256.7 41 51 Community Psych. Cntrs.* 1,710.4 460.5 42 54 Allergan Inc. 1,676.6 523.9 43 Safeway Inc. 1,645.5 (183.4) 44 38 Homestake Mining 1,548.9 806.6 45 26 Tandem Computers Inc.* 1,544.8 1,203.3 46 68 Conner Peripherals 1,538.3 603.9 47 45 Franklin Resources Inc.* 1,485.3 288.8 48 32 Oracle Systems Corp.* 1,470.6 374.1 49 46 Avery Dennison Corp. 1,464.3 846.3 50 65 Northrop Corp. 1,326.4 1,004.4 51 67 Adobe Systems Inc.* 1,312.5 107.8 52 61 Bergen Brunswig Corp.* 1,301.8 445.9 53 62 Acuson Corp. 1,301.3 199.8 54 53 Mattel Inc. 1,263.8 328.0 55 50 Autodesk Inc.* 1,262.6 204.8 56 59 Vons Cos. 1,259.6 272.7 57 55 Seagate Technology* 1,255.4 675.3 58 44 McKesson Corp. 1,250.4 668.6 59 18 Teledyne Inc. 1,129.1 523.5 60 76 Computer Sciences Corp.* 1,128.7 505.4 61 89 Chiron Corp. 1,124.3 120.3 62 69 Advanced Micro Devices 1,121.6 636.3 63 77 20th Century Industries 1,082.5 402.4 64 AST Research Inc.* 968.1 193.3 65 Synoptics Communications 919.7 100.4 66 86 Varian Associates Inc.* 908.8 400.2 67 49 Potlatch Corp. 898.0 896.1 68 56 Raychem Corp.* 876.6 690.5 69 71 Cadence Design Sys. Inc. 847.4 158.3 70 Borland International* 846.7 74.7 71 73 Union Bank 840.6 1,033.1 72 63 Longs Drug Stores Inc.* 829.3 359.2 73 74 Argonaut Group 829.1 488.1 74 64 National Semiconductor* 826.1 650.1 75 48 Newhall Land & Farm 801.4 116.9 76 Cisco Systems Inc.* 786.1 69.2 77 66 Magma Power Co. 721.5 192.6 78 81 Fleetwood Enterprises Inc.* 716.9 423.7 79 90 Cypress Semiconductor 711.1 242.2 80 85 Silicon Graphics Inc.* 694.6 244.3 81 99 FHP International Corp.* 681.7 141.8 82 Quantum Corp.* 670.6 215.6 83 75 McClatchy Newspapers 615.0 314.2 84 60 CalMat Co. 579.2 387.2 85 97 Applied Material* 557.3 300.3 86 84 Beckman Instruments Inc. 540.1 325.6 87 78 Consolidated Freightways 538.0 582.0 88 Xilinx Inc.* 536.8 77.1 89 92 Cetus Corp.* 522.4 111.3 90 93 Charles Schwab Corp. 519.9 154.1 91 88 Caesars World* 503.1 258.8 92 Symantec Corp.* 492.6 32.1 93 Dreyer’s Grand Ice Cream 481.5 93.9 94 Mercury General Corp. 455.8 219.4 95 California Energy Co.** 450.7 59.8 96 98 Diagnostic Products Corp. 447.1 87.0 97 72 City National Corp. 445.7 317.7 98 MIPS Computer Systems 445.1 151.6 99 Health Care Pptys. Invest. 443.5 219.9 100 94 Collins Foods International* 432.9 269.7

Market as Rank % of book 1 184 2 286 3 225 4 430 5 200 6 131 7 302 8 1,216 9 139 10 579 11 122 12 161 13 251 14 140 15 1,798 16 1,028 17 288 18 114 19 195 20 421 21 374 22 350 23 64 24 376 25 117 26 88 27 134 28 417 29 172 30 108 31 229 32 258 33 72 34 222 35 923 36 85 37 153 38 135 39 150 40 675 41 371 42 320 43 -- 44 192 45 128 46 255 47 514 48 393 49 173 50 132 51 1,218 52 292 53 651 54 385 55 617 56 462 57 186 58 187 59 216 60 223 61 935 62 176 63 269 64 501 65 916 66 227 67 100 68 127 69 535 70 1,134 71 81 72 231 73 170 74 127 75 685 76 1,136 77 375 78 169 79 294 80 284 81 481 82 311 83 196 84 150 85 186 86 166 87 92 88 696 89 469 90 337 91 194 92 1,533 93 513 94 208 95 754 96 514 97 140 98 294 99 202 100 161

* See exceptions, page 55.

** See company notes, page 55.