THE TIMES 100 / THE BEST PERFORMING COMPANIES IN AMERICA : A VIEW FROM THE STREET : Shifting Tides of the Market
TECHNOLOGY STOCKS are in, utility and financial stocks are out. Or maybe it’s the other way around. On Wall Street, judging what’s in and what’s out is a relatively simple exercise, of course: Just look at the trend in stock prices.
That’s what our Market Value 100 listing essentially does for the biggest California companies.
A company’s market value is its stock price times the number of shares outstanding. So as stock prices rise or fall, so do companies’ gross market values--investors’ collective judgment of each firm’s dollar worth at any particular moment.
What the 1994 Market Value 100 tally shows is that investors bid the shares of many California technology companies sharply higher over the past year, while stocks of banking, utility, energy and insurance firms were slammed.
The market value of computer chip king Intel Corp., for example, jumped from $24 billion a year ago to $28.2 billion as of March 31, a big enough rise to make Intel No. 1 on the Market Value chart--knocking the perennial leader, oil giant Chevron Corp., into second place. March 31 was the cutoff date for the Market Value 100 chart.
Meanwhile, SCEcorp, parent of Southern California Edison Co., saw its market value plummet to $7.4 billion in the 1994 tally from $11 billion a year ago, dropping it to 14th from 9th on the list.
In market parlance, investors have been exhibiting a clear preference for “growth” stocks--faster-growing young companies--over “value” stocks, the slower-growing, high-dividend, old reliables such as utilities.
At least, that was true until recently. Over the past few weeks, Wall Street has begun to turn back to the value stocks, while tossing many technology stocks and other growth issues out the door.
Blame these shifting tides on interest rates’ fluctuations. A year ago, when interest rates were still declining in a sluggish economy, value stocks such as SCEcorp, BankAmerica Corp. and Unocal Corp. were the market’s undisputed favorites.
That made sense: Better to count on the dependable dividend of a plodding giant than on the iffy prospects of smaller growth companies who were at the mercy of the economy.
By last fall, though, business activity was clearly on the upswing, and interest rates responded accordingly by edging slowly higher.
For the utilities, banks, insurance companies and other classic value stocks that fare best when rates are stable or falling, the turn in rates was murder. Investors began selling value stocks in a frenzy.
The natural beneficiaries of the economy’s newfound strength, meanwhile, were growth stocks, especially in technology, the Golden State’s favorite-son industry. The stocks soared in the fourth quarter and into the first two months of this year as investors bet on booming sales and earnings.
But by late March, rising interest rates became too much even for go-go growth investors to bear. The growth stocks began to slump, and the value stocks went down with them.
Until last week. After three successive boosts in short-term interest rates this year by the Federal Reserve Board, investors’ thinking now appears to have come full circle: Many experts see the economy slowing again by summer, eventually leading to lower interest rates.
Suddenly, the value stocks are in again, while many growth stocks remain on the outs.
Of course, though Wall Street pundits concern themselves with the horse race between value and growth, for most investors the game need not be so cut and dried. By definition, a well-balanced portfolio would contain value stocks and growth stocks.
The key is knowing how to recognize when stocks in either group are bargains and when they’re overpriced. Bargains you buy; overpriced stuff you ignore (or unload), just like in the department store.
That’s where the other elements of our Market Value 100 chart can help: The listings of “book value” and “market value as a percentage of book.”
Book value is the theoretical liquidation value of a company--in other words, the assets that would be left for shareholders after all debts were paid.
Market value as a percentage of book value, therefore, tells you how Wall Street currently values a company relative to shareholders’ equity.
In the case of Intel, market-to-book is 403%: The company’s assets, less liabilities, are theoretically worth $7.01 billion, but the value of its shares is $28.2 billion.
Investors thus believe Intel’s future is bright enough that paying four times its true worth today is fair.
There is no single “correct” market-to-book ratio for stocks; in general, the ratio will always be highest for companies with the fastest growth rates, and lowest for the slowest-growing firms or those whose stated book value is most suspect.
What Wall Street pros look for are stocks whose market-to-book ratios are at the lower end of their historical ranges, at the same time that the companies’ prospects appear to be improving. The idea is to buy assets for as small a premium as you can, just before the value of those assets is enhanced by better earnings.
Given the beating taken by many classic value stocks over the past six months, bargain hunters may naturally be drawn to stocks such as Home Savings parent H.F. Ahmanson & Co., now selling for a mere 67% of book value (compared to 83% a year ago); BankAmerica, at 102% of book (compared to 139%), and Countrywide Credit Industries Inc., at 174% (compared to 268%).
True, investing in financial stocks today requires a leap of faith that interest rates won’t rocket off the charts.
Yet the same can be said of growth stock investing. The surest way to bring down lofty market-to-book valuations on technology stocks and other growth issues would be to offer sharply higher interest rates on bonds and other competing investments.
With many tech stock market-to-book ratios still far above year-ago levels, even with the latest sell-off in those shares, only bargain seekers with very long time horizons may find technology a relative value now.
The Market Value 100
Companies ranked by market value as of March 31, 1994
3/31/94 1992 Market Value Book Value Rank Rank Company ($ Millions) ($ Millions) 1 2 Intel Corp. 28,227.6 7,012.7 2 1 Chevron Corp. 27,352.5 14,015.0 3 3 Walt Disney Co. 22,552.8 5,407.6 4 4 Pacific Telesis Group 22,183.3 7,264.0 5 6 Hewlett-Packard Co. 20,752.8 8,511.0 6 5 Atlantic Richfield Co. 15,167.3 6,694.0 7 7 BankAmerica Corp. 14,068.6 13,826.0 8 8 Pacific Gas & Electric 12,389.4 8,631.8 9 Airtouch Communications 10,101.1 3,337.3 10 16 Oracle Systems Corp. 9,315.7 593.1 11 12 Rockwell International Corp. 8,763.1 3,041.7 12 15 Cisco Systems 8,676.8 546.9 13 14 Wells Fargo & Co. 7,774.9 3,513.0 14 9 SCE Corp. 7,387.7 5,978.5 15 18 Gap Inc. 6,440.1 1,023.7 16 10 Unocal Corp. 6,090.1 2,625.0 17 20 First Interstate Bancorp 5,700.2 3,137.7 18 17 Amgen Inc. 5,127.7 1,095.3 19 24 Genentech Inc. 5,031.8 1,085.3 20 11 Occidental Petroleum 4,902.1 3,418.0 21 37 Mattel Inc. 4,210.7 629.2 22 25 Fluor Daniel Inc. 4,105.3 1,044.1 23 23 Lockheed Corp. 4,030.0 2,304.0 24 19 Times Mirror Co. 4,001.9 1,751.7 25 22 Transamerica Corp. 3,906.5 3,024.5 26 13 Apple Computer Inc. 3,898.3 2,053.3 27 46 Applied Materials 3,679.0 598.8 28 26 Franklin Resources Inc. 3,341.1 774.7 29 43 Silicon Graphics Inc. 3,275.1 728.0 30 Southern Pacific Rail 3,271.5 312.5 31 31 Wellpoint Health Networks 3,121.3 1,142.0 32 40 Homestake Mining 3,070.2 493.3 33 21 Syntex Corp. 3,065.5 1,266.4 34 39 Advanced Micro Devices 2,884.3 1,303.0 35 34 Hilton Hotels Corp. 2,725.6 1,038.1 36 30 Clorox Co. 2,714.4 856.2 37 52 National Medical Enterprises 2,673.5 1,475.7 38 29 San Diego Gas & Electric 2,577.3 1,504.2 39 28 Sun Microsystems Inc. 2,558.1 1,469.5 40 27 Golden West Financial 2,456.4 1,922.3 41 42 McKesson Corp. 2,404.8 525.8 42 61 Safeway Inc. 2,396.7 319.6 43 58 National Semiconductor 2,344.3 956.1 44 63 Sybase Inc. 2,135.4 164.8 45 32 Great Western Financial 2,127.0 2,441.9 46 54 Chiron Corp. 2,124.7 510.3 47 35 H.F. Ahmanson & Co. 1,971.6 2,936.6 48 48 Northrop Corp. 1,958.9 1,370.0 49 38 Dole Food Co. 1,872.9 1,079.8 50 62 Computer Sciences Corp. 1,841.6 765.9 51 33 ALZA Corp. 1,755.1 255.4 52 71 3Com Corp. 1,730.2 299.5 53 41 Pacific Enterprises 1,699.1 997.0 54 70 Seagate Technology 1,645.3 1,097.2 55 57 Tandem Computers Inc. 1,610.3 765.1 56 47 Raychem Corp. 1,596.9 697.7 57 49 Avery Dennison Corp. 1,566.3 761.3 58 60 Charles Schwab Corp. 1,553.5 344.4 59 80 Linear Technology Corp. 1,523.7 188.2 60 44 Countrywide Credit Indus. 1,452.8 836.1 61 36 Litton Industries 1,397.2 1,699.9 62 73 Autodesk Inc. 1,375.7 288.9 63 72 Informix Corp. 1,342.4 171.1 64 53 Allergan Inc. 1,330.9 521.9 65 76 PacifiCare Health Systems 1,321.6 319.3 66 45 SynOptics Communications 1,271.8 294.1 67 75 QUALCOMM Inc. 1,248.5 243.0 68 59 Electronic Arts Inc. 1,244.5 156.9 69 81 Solectron Corp. 1,232.3 274.0 70 55 Potlatch Corp. 1,222.1 915.1 71 82 Varian Associates 1,174.5 416.0 72 IDB Communications 1,172.2 263.5 73 66 Sunamerica Inc. 1,160.7 657.7 74 56 National Health Labs 1,139.6 170.6 75 88 Xilinx Inc. 1,134.5 159.2 76 74 Adobe Systems Inc. 1,129.5 266.6 77 67 Caesars World Inc. 1,113.4 501.9 78 84 Foundation Health Corp. 1,086.2 292.2 79 Callaway Golf 1,066.7 93.3 80 85 Superior Industries Int’l. 1,054.3 169.1 81 50 20th Century Industries 1,003.2 641.1 82 LSI Logic Corp. 994.6 279.6 83 64 Union Bank 957.6 1,072.0 84 65 Teledyne Inc. 956.3 280.5 85 96 Adaptec Inc. 942.7 272.3 86 68 Fleetwood Enterprises 930.6 527.9 87 TakeCare Inc. 930.5 238.3 88 Consolidated Freightways 930.4 467.4 89 Viking Office Products 923.2 126.7 90 87 Pyxis Corp. 915.7 103.2 91 100 Wesco Financial 914.9 425.3 92 99 Cirrus Logic Inc. 911.0 155.4 93 Atmel Corp. 870.3 204.3 94 Integrated Device Tech. 834.1 193.3 95 KENETECH Corp. 825.1 417.3 96 KLA Instruments Corp. 791.1 127.5 97 91 FHP International Corp. 778.9 387.6 98 86 Conner Peripherals 770.0 191.4 99 79 Argonaut Group Inc. 751.0 709.3 100 69 Vons Cos. 747.6 506.0
Market as Rank % of Book 1 403 2 195 3 417 4 305 5 244 6 227 7 102 8 144 9 303 10 1,571 11 288 12 1,587 13 221 14 124 15 629 16 232 17 182 18 468 19 464 20 143 21 669 22 393 23 175 24 228 25 129 26 190 27 614 28 431 29 450 30 1,047 31 273 32 622 33 242 34 221 35 263 36 317 37 181 38 171 39 174 40 128 41 457 42 750 43 245 44 1,296 45 87 46 416 47 67 48 143 49 173 50 240 51 687 52 578 53 170 54 150 55 210 56 229 57 206 58 451 59 810 60 174 61 82 62 476 63 785 64 255 65 414 66 432 67 514 68 793 69 450 70 134 71 282 72 445 73 176 74 668 75 713 76 424 77 222 78 372 79 1,143 80 624 81 156 82 356 83 89 84 341 85 346 86 176 87 391 88 199 89 728 90 887 91 215 92 586 93 426 94 432 95 198 96 620 97 201 98 402 99 106 100 148
Source: STAR Services.
