Open the vaults, throw cash at shareholders, then slam the doors shut and go out of business.
Money manager David Ryan, president of Ryan Capital Management in Santa Monica, wonders aloud if this isn’t what some chief executives and boards at publicly held Internet companies ought to do.
Due to the vagaries of Wall Street, some e-companies were able to raise truckloads of lucre in venture money back before the spring tech wreck. For example, Westlake Village-based NetZero Inc., the free Internet service provider, now has about $264 million in cash and other assets in the bank, which pencils out to $2.17 a share. But it was trading last week at $1.50, down from its peak of $40 a share.
Also consider Santa Monica-based Stamps.com, with assets in the bank that pencil out to $5.78 a share but which was trading last week at $2.75 a share.
Elsewhere in the country, there are some true whoppers, points out Ryan. If Colorado-based DSL provider Rhythms NetConnections Inc. was to liquidate, its shareholders could receive $8.89 per share, free and clear, yet the stock was trading last week on Wall Street for only $1. It once commanded $50 a share. Other infamous e-bombs, such as iVillage.com and TheGlobe.com, similarly would be worth more dead than alive, pointed out Ryan.
If new groups of shareholders could buy and agitate for liquidation of certain e-companies, some quick kills could be made, noted Ryan, who calls himself a decidedly “passive” shareholder, not one for corporate boardroom battles.
Despite the chance that takeover sharks will begin to sniff money to be made by eating e-stocks, Ryan thinks the tech sector has not yet hit bottom.
“I think (the tech decline) still has further to go, although we are getting closer to the bottom,” he said. “But even after we hit bottom, you may wait six to nine months before a recovery can begin. People have to get used to the fact they may make 12 percent, 15 percent a year (investing in stocks).”
The lush, late 1990s brought double-digit gains to the Nasdaq every year, but now the market has a hangover that might last for some time.
“If you want to make money, you might want to look at some of the sectors which were passed over in earlier rallies.” Ryan says.
Old Brand Rising
Andrew Kneeter, 39, portfolio manager at the low-profile Round Hills Asset Management in Pasadena, is one of a shrinking breed on Wall Street: a money maven who invests only after doing his own intensive research on a company. For him, that work includes getting to know management and their pay formulas an effort he almost always expends on small- or mid-cap stocks, the kind not researched by Wall Street’s big brokerages and money managers.
As widely noted, the blue chips have trounced small caps going on 20 years now, starting with the great bull markets of the 1980s and 1990s. The huge mutual funds and others have favored blue chips for almost two decades running, leaving even good-quality small caps to struggle by as “orphan” stocks, unwanted by institutional Wall Street. Still, Kneeter thinks he has unearthed a real gem in an old Los Angeles name Cherokee Inc.
A generation back, the Van Nuys-based firm was known as a hot Southern California manufacturer of shoes, and then clothing, geared to the younger set. It then became over-leveraged when it attempted a junk-bond-fueled expansion back in late 1980s, underwritten by now-defunct Drexel Burnham Lambert.
Since then, Cherokee has abandoned actual manufacturing and even design and instead licenses the Cherokee brand to Target Corp. stores. It has other licensing deals inked or pending with retailers in other nations, said Kneeter, including one reached in October with Paris-based Carrefour Group, the largest retailer in Europe. Target subcontracts for actual manufacturing of the Cherokee-branded clothes in the Far East.
Cherokee also licenses the Sideout brand and recently bought the right to license the Mossimo brand.
In its latest reported quarter ended June 30, Cherokee posted net profit of $2.8 million (34 cents per share), compared with net profit of $2.2 million (25 cents) in the like period a year earlier. Revenue was $7.7 million vs. $6.4 million. Cherokee’s stock was trading last week in the $9-a-share range, less than eight times earnings.
As Cherokee pays down its debt, its future gets brighter and brighter, said Kneeter, who cut his teeth learning investment strategies for insurer Geico, a part of the Warren Buffet empire, Berkshire Hathaway Inc. “You look for value, and you buy and hold,” said Kneeter. “Sooner or later, the value will tell the story.”
One aspect of Cherokee that Kneeter doesn’t like is the compensation package of Robert Margolis, chairman and CEO, who’s drawing down $4.3 million in wages and benefits in year 2000. That’s fairly stiff for a company that has annual sales of under $40 million. “I would like to see Margolis’ interests more aligned with shareholders,” said Kneeter. “But you can’t have everything.”
Quick Takes
Pasadena-based Integrated Micromachines Inc. has just raised another $45 million in venture capital, including a slug of cash from Century City-based SunAmerica Ventures. Integrated Micromachines is hot right now, as it manufactures very small mechanical devices used in optical switching, so the company stands to benefit as the use of optical cable spreads and Internet traffic grows. The company’s devices are so small they are measured in microns (thousandths of a millimeter)…
Jeff Brown, Los Angeles partner in the nationwide law firm of Morgan Lewis & Bockius, could call his latest legal victory “Toy Story 3.” Brown defended client Fisher-Price (a unit of El Segundo-based Mattel Inc.) against three plaintiffs Toys to Grow On, Lakeshore Learning Materials and Lakeshore Equipment who together sought $60 million in damages and an injunction to stop Fisher-Price from selling its very successful line of adventure-related playsets, books and computer software worldwide. The trio backed down, and Brown donated the 150 toys used as courtroom exhibits to Toys for Tots.
Contributing columnist Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. He can be reached at [email protected].
