Analysts

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By JASON BOOTH

Staff Reporter

If you want an analyst’s comment on L.A.-based fashion designer Guess, call Morgan Stanley Dean Witter in New York.

What are the prospects for Westside brokerage Jefferies Group? Ask Philo Smith & Co. in Connecticut.

Want to know what’s happening at Calabasas-based Countrywide Credit Industries? Try UBS Securities in San Francisco.

Los Angeles is America’s second-largest city, boasting a diverse field of growth industries ranging from entertainment to health care. But when it comes to financial analysts whose job it is to research and recommend these companies to potential investors, L.A. remains understaffed.

The Los Angeles Society of Financial Analysts has about 110 members who cover stocks. That compares with more than 200 stock analysts registered in San Francisco and 1,600 in New York.

The lack of analysts is due in great part to the small number of remaining independent brokerages. In most cases, a brokerage wants to keep its research arm in close proximity to its sales and corporate finance operations. So as local houses are bought by out-of-town institutions, research has been concentrated in New York and in some cases San Francisco.

There also is the fact that many analysts simply want to be in New York, where they are closer to the major financial markets and their performance is more likely to be noticed.

“That is where the action is,” said Michael Gardner, managing director of capital markets for downtown brokerage Wedbush Morgan Securities. “And if you are with one of the big brokerage houses in one of the satellite offices, you are like the red-headed stepchild. No matter how good your work is, you are always second best to what is happening in New York.”

The decline in the number of major conglomerates based in Los Angeles has also reduced the need for brokerages to post analysts in this city.

When a major corporation moves, it takes with it a large pool of money in the form of employee benefits and pension plans, said Jeff Holzman, associate at San Francisco-based brokerage Van Kasper & Co.

That’s why, Holzman says, analysts are concentrated in cities like New York, Boston and San Francisco where the pools of institutional money are deepest.

“You could say that it is more important to be close to the money than to the company,” he said.

But do you really need more analysts in town to get more and better-quality coverage of local companies?

Many analysts say yes particularly for the small and mid-sized companies that now make up the mass of the local economy.

“Absolutely it makes a difference,” said Thomas Weinberger, executive vice president at Sutro & Co. in West Los Angeles. “An analyst is far less likely to fly to L.A. to see a small company than one closer to home. It’s about where you are going to spend your time resources.”

He said a study done by Sutro’s parent, Freedom Securities, showed that analysts are more likely to cover companies that are within two hours flying time from their office.

The continuing consolidation among brokerages nationwide adds to the lack of coverage of smaller L.A. companies. Big brokerage houses in most cases can only invest in companies with large market capitalizations that is, market caps exceeding $1 billion.

The majority of L.A. companies, even relatively large ones, have market caps well below $1 billion.

“As brokerages and financial institutions merge and centralize you have seen a decline in the number of analysts. It does a disservice to local coverage,” said Marla Harkness, president of the Los Angeles Society of Financial Analysts and vice president and portfolio manager at Westside-based RNC Capital Management.

“If you are going to maintain a healthy capital flow there has to be really good coverage of small and medium-sized companies,” she said.

The problem is particularly acute in the current market conditions. Investors nationwide are pouring money into safer large-cap stocks that have shown consistently strong returns, rather that risk their money on smaller companies.

Virco Manufacturing Corp., Farr Co., Haskel International Inc. and Bell Industries were each cited as well-managed local companies with strong earnings that have received little or no analyst coverage.

The problem is that narrow or nonexistent coverage tends to make a stock more volatile. So an issue that has soared on one set of strong results could crash on the next disappointment.

“If it does not get covered, a stock will be volatile or will not get the value it deserve,” said Fredric Roberts, president of local investment bank F.M. Roberts & Co. and former chairman of the National Association of Securities Dealers.

Roberts also argues that the management of a small public company could hurt itself by trying to win the approval of one or two junior analysts in New York or San Francisco. Trying to please analysts can create problems for the company, Roberts said particularly when analysts are more interested in analyzing a sector of the economy and do not fully understand the dynamics of a particular company and local market conditions.

Not everyone in Los Angeles is mourning the shortage of local analysts.

Donald Crowell, managing partner of downtown brokerage Crowell Weedon & Co., said that if some companies feel there is a lack of coverage it means they may need to get their act together to attract more attention.

“Good companies will always be found by good analysts,” he said.

The fact that the bigger players are not looking too closely at L.A. also opens the door for small, local brokerages to seek out the hot stocks of the future.

“That’s why we are in business. It would be much harder for us if we were in San Francisco where there are so many firms picking over Silicon Valley,” said Bryant Riley, of Westside brokerage B. Riley & Co. Inc.

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