Quake Leaves State Recovery Question Unsettled
Just days before Monday’s big quake, two of Wall Street’s major brokerages had come to the same conclusion about the California economy: Things were looking up. Time to start fishing around for recovery-related stock opportunities.
Roughly $30 billion in quake damage later, the analysts at Goldman, Sachs & Co. and Salomon Bros.--whose respective reports were titled “California Dreamin’ ” and “California is Turning”--admit that their clients may find the buy-California concept hard to swallow now.
“I’m agonized over how to make sense of this,” conceded David Hensley, author of the Salomon report and a former UCLA economist who left Los Angeles for New York last year.
Edward F. McKelvey, co-author of the Goldman report, said he believes “the broad brush of our report wouldn’t change,” though he adds that it’s difficult to judge the magnitude of the loss in business activity in L.A. in the near term.
In any case, Wall Street wasn’t in any hurry to jump on the California recovery wagon, even before the quake. While the stock market overall is hitting record highs, shares of most companies that are heavily dependent on the California economy remain far below their peaks of recent years.
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That, of course, is the point that Salomon and Goldman were making: If you believe that a recovery is in the wings, this would be the time to buy--before the crowd catches on and bids the stocks higher, anticipating an earnings turnaround.
Pre-quake, Salomon’s Hensley had based his optimism about a California upswing partly on a plunge in aerospace-related layoff announcements. Aerospace firms statewide have announced 5,800 job cuts since April, versus 36,605 in all of 1992, Hensley calculated. Because there is an average lag time of about 11 months between announcements and layoffs, he figured the relative dearth of announcements since April suggested a stabilizing of aerospace employment.
Likewise, McKelvey said that although there are few obvious signs of a California recovery in macro-economic statistics, “Our analysts have uncovered a great deal of . . . anecdotal data to that effect”--for example, better sales trends at some retailers and stronger home sales.
Does the quake now kill off any nascent recovery by casting new gloom over the Southland, which accounts for the lion’s share of California’s economic output? That is the $30-billion question, Hensley and McKelvey concede. Certainly, there will be some boost from the rebuilding effort and from replacement of damaged goods. But Hensley worries more about the damaged psychology of the Southland.
“I think so many people are disenchanted with life there, for whatever reason, that they don’t have a strong enough attachment to the place to want to get over this,” said Hensley, who professes to still be a big fan of L.A. himself. If, instead of rebuilding, many people give up and leave, he said, “That would obviously blow a hole in our paper.”
The upshot would be that stocks of California-dependent companies--in particular, banks, retailers and home builders--could suffer fresh declines or just stay depressed.
Some Southland money managers, however, warn against taking a simplistic, broad-stroke approach to “California” stocks. Even in the deep recession of the past three years, some California-dependent firms have managed to cope quite well. That suggests they may not need much help in the form of a healthier state economy to keep their turnarounds on track.
Robert Rodriguez, head of the FPA Capital stock fund in Los Angeles, cites electronics retailer Good Guys, in which he owns a big stake. Thursday, Good Guys reported record fourth-quarter earnings despite the sour state economy. (And looking ahead, people will need to replace quake-damaged electronics, Rodriguez reminded.)
Similarly, Kaufman & Broad Home sold a record number of homes in California last year by focusing on the first-time buyer and has begun to target the same market in Las Vegas and Phoenix. And grocer Smart & Final now is exporting its small-store wholesaling concept to Mexico.
Point is, rather than bet on or against California as a theme, investors would be smarter to zero-in on good companies run by savvy managers who just happen to have a big stake in California’s future. Those are the stocks likely to get the biggest lift when a California recovery arrives--or when the rest of Wall Street begins to anticipate it.
The Californians
How shares of some heavily California-dependent companies have fared in recent years.
‘89-93 peak Thurs. Pct. Stock price (year) close chng. Kaufman & Broad $25, ’92 $23 3/4 -5% First Interstate 70 3/8, ’89 66 3/8 -6 BankAmerica 55 1/2, ’93 45 5/8 -18 H.F. Ahmanson 25, ’89 19 3/8 -23 Smart & Final 20 1/8, ’93 13 3/4 -32 Union Bank 39 1/2, ’93 24 3/4 -37 Ross Stores 24 5/8, ’89 13 1/2 -45 Clothestime 15 3/8, ’89 7 3/4 -50 Vons 34 1/8, ’91 16 7/8 -51 Good Guys 30, ’91 14 -53 City National 28, ’89 8 3/8 -70
All trade on NYSE except Clothestime, Union Bank, Ross Stores and Good Guys (Nasdaq).
