It was one of the strongest years for U.S. public markets since the dot-com crash and L.A.’s community of mostly small and middle market public companies in 2006 more than held their own.
Skechers U.S.A. Inc. was the only company with a billion dollar-plus market cap to see percentage share gains in the triple digits. But others weren’t far behind, such as DirecTV Group Inc., which rose steadily on improved revenues from a strategic turnaround to end the year up 77 percent.
Of course, there were more than a few duds, and some big ones at that. Once high-flying homebuilders such as KB Home saw their shares fall by almost a third, mirroring a slowdown in the housing market. And even a long-term stellar performer such as Amgen Inc. suffered the big pharma blues as questions abounded about its long-term growth prospects.
Still, as of the close of trading on Dec. 27, local stocks measured by the LABJ 200 Index rose 18 percent for the year, narrowly beating the Dow Jones industrial average’s 16 percent gain and leaving the Nasdaq Composite Index’s 9 percent appreciation in the dust.
And barring a catastrophic event that sends financial markets into a tailspin, this year is likely to be similarly healthy for growth.
“You also saw a lot of turnarounds that had been in the works for a couple of years, especially post-dot-com bubble, that are showing results this year,” said Ken Tang, director of institutional sales for B. Riley & Co. “As long as that continues and the M & A; activity keeps up we should have a good year next year too.”
In addition to a thriving mergers-and-acquisition environment that helped drive the markets’ growth, companies based in Los Angeles’ diverse regional economy benefited last year from increased defense and homeland security spending, record import-export business at the ports and a hot commercial real estate market.
Shares of busy Torrance aerospace contractor Hi-Shear Technology Corp. tripled the best performance of any local company trading above $5 a share. Hi-Shear’s stock reached as high as $18.90 before falling victim to profit-takers, ending the year at around $9.
More typical of the top gainers was Los Angeles-based PeopleSupport Inc., which was only a few years old when the market crashed. It struggled in the early part of the decade before turning around its global outsourcing service business.
The company, which provides a variety of business services such as accounts receivable, made two January acquisitions that enabled the company to gain more than 150 percent this year to trade at $21.62. It separately acquired companies providing fast-turnaround transcription and captioning services in 15 languages.
PeopleSupport, with its $483 million market cap, is among the lucky small- to mid-sized companies to attract the attention of Wall Street analysts; 11 firms cover it. That attention helps support enough trading volume for a reasonably healthy market in its shares.
New blood in the executive suite also paid off in exciting investors. A revitalized Walt Disney Co. ended the year up more than 44 percent to $34.54. The smooth transition from the Michael Eisner era to his hand-picked successor Robert Iger led to accelerated new media initiatives. And Iger’s success in mending fences with longtime creative partners such as Steve Jobs enabled Disney to juice up its flagship animation division with the acquisition of Job’s Pixar.
Sector struggles
Meanwhile, the diverging fortunes of the residential and commercial real estate markets could easily be seen in performance of local public companies in those sectors.
The weakening home sales market contributed to 29 percent and 25 percent declines respectively for homebuilders KB Home and Ryland Group Inc. That was largely responsible for a 13 percent decline in the construction-engineering sector that not even a 22 percent jump in the shares of Jacobs Engineering Group Inc. could counter. Jacobs, like Hi-Shear announced a succession of government contracts during the year.
It was a far different story in the local commercial real estate sector, dominated by real estate investment trusts, property management companies and brokers. That sector saw 65 percent appreciation for the year. Typical was CB Richard Ellis Group. Inc., which capped a string of acquisitions by swallowing Houston institution Trammel Crow Co., and saw its stock rise more than 70 percent over the year.
Even the county’s largest companies saw strong share appreciation this year, with only Amgen and energy utility Edison International among the 10 largest by market cap not to see double-digit gains for the year.
In fact, Amgen lost ground and that made the biotech-pharmaceutical sector the area’s biggest loser, shedding 16 percent. It joined only five sectors among the 18 different industry categories that comprise the LABJ 200 Index to post negative returns.
Amgen, whose stock gained 24 percent in 2005, was on track to end 2006 down 13 percent. Amgen suffered because it could not meet Wall Street expectations for returns more in line with a small, fast-growing tech than the mid-size pharmaceutical company it has become.
A similar drag on the sector was Abraxis Bioscience Inc., the area’s second largest biotech, whose stock was down 28 percent for the year as the market showed impatience at lagging sales growth for its lead cancer drug.
Only two of 12 companies in the sector drug developer MannKind Corp. and nutritional supplement maker Natrol Inc. saw their stock appreciate during the year. MannKind’s gains this year have largely been driven by heightened expectations for an inhaled insulin system that has yet to receive FDA approval.
Energy and utilities was in the middle of the pack among the sectors, showing a 21 percent growth as a whole.
Occidental Petroleum Corp. was in line with that average, riding the wave of record-high oil prices to end the year just under $50 a share, a 24 percent gain. But energy utility Edison, whose shares rose 34 percent in 2005, saw only 5 percent appreciation in 2006, now trading at around $46.
Edison, the parent of electric utility Southern California Edison, has seen lackluster earnings and faces a variety of risks from rising natural gas prices, a vulnerable regional power grid and potentially costly state regulation of greenhouse gas emissions.
