There is a “perfect storm” brewing for many Southland public companies, and investors better be thinking about battening down the hatches, said Russ Hagey, partner in the downtown Los Angeles offices of Bain & Co., the business consulting firm.

The first dark cloud on the horizon comes in the form of the very high price/earnings ratios seen on Wall Street. The S & P; 500 index is at about 25 times earnings, roughly double the long-term historical average of 11 to 16 times earnings. That means investors are expecting very good earnings growth. “It is the greatest level of expectations going into an economic slowdown ever,” said Hagey, citing the work of Chris Zook, a Bain partner who recently authored the book, “Profit From the Core.”

Unless profits keep rising, investors are going to be disappointed, said Hagey. And disappointment is almost certain, a second element of the storm.

Based on a 10-year Bain study, only about 10 percent of companies have been able to generate the sustained profitability that 85 percent of publicly held companies are now projecting, said Hagey.

The third element of the rainy outlook is that investors now dump stocks the way Liz Taylor loses husbands. The average holding period for stocks in general has fallen from 8 years at the start of the 1990s to 18 months now. Sell-a-thons follow perceived bad performance.

What should management of public companies do, given these realities? Stick to your knitting, said Hagey. In general, a company should stay with its core competency, and not seek growth outside its ken. The world is a competitive place. When a company wanders afield, it often engages other companies in combat but on the other outfit’s turf. That’s how to get hurt. How well would baseball player Alex Rodriguez do in trying to slam-dunk one over Shaquille O’Neal?

In Los Angeles, Hagey cites Van Nuys-based Superior Industries International Inc., the aluminum wheel maker, as a outfit that stuck to its core, with good results over the long haul. Superior’s stock, which traded for under $10 a share in the early 1990s, now commands $40 a share. El Segundo-based Mattel Inc.’s disastrous diversification into the Learning Co. (Mattel bought the online purveyor of educational games for $2 billion, and sold it for almost nothing) is an example of a company moving away from its core, Hagey said.

Yield Safari

If the stock market looks a bit dicey for the next several years, then what to do, in terms of financial investments? Those seeking yield might want to link arms with Kevin Akioka, portfolio manager of downtown Los Angeles-based Payden & Rygel’s High Income Fund, a mutual fund devoted to high-yield corporate bonds.

Though he manages a “junk bond” fund, Akioka said he limits his speculating to bonds rated “BB” or better by credit-rating agencies such as Moody’s Investor Service or Standard & Poor’s. “The average junk bond has a credit rating of a single “B,” said Akioka. “So you can see we are sticking to the better end of high-yield bonds.” On such a portfolio, investors can expect 9 percent to 10 percent annual interest, said Akioka.

With luck, the Federal Reserve will drive down interest rates further this year, providing a double benefit for junk bond funds. First, “we would see capital appreciation” in the portfolio, said Akioka. As interest rates come down, bond prices would appreciate. Secondly, a more robust economy would raise all ships, including those of companies that had issued the more-risky bonds. Credit quality would improve.

“You can easily see a scenario this year in which junk bonds give a total return of 13, 14 or 15 percent,” said Akioka. For investors made blase by annual returns of 20 percent or more by investing in stocks during the late 1990s, that number may seem a bit tame. But then, so far this year, the S & P; 500 is down by single digits. Any sort of double-digit gain might start looking pretty good by later this year, Akioka said.

Compared to the rest of the world of bonds, Akioka’s fund certainly looks like it is throwing off a lot of cash. For example, U.S. Treasury bonds are yielding about 450 to 500 basis points (100 basis points in a percent) less than the bonds that Akioka selects.

With $150 million under management, Akioka generally invests in about 100 issues. “We diversify, not only by the number of companies, but by industry,” he said. “We don’t want to get caught in any trip-ups.”

Fat Pipes

Constellation Ventures, a venture arm of national brokerage Bear Stearns & Co., has committed $100 million to a joint venture with telecom giant Global Crossing Ltd., on the premise that video feeds and other “high bandwidth” uses of the Internet are going to grow rapidly and that users of high bandwidth will pay good money for better access to and easy use of fat pipes.

“There are rich media companies aggressively exploring video-on-demand,” said Dennis Miller, Constellation Ventures partner in Century City. “The entertainment and media companies are increasingly digitizing their content.” However, it is not only couch potatoes watching shows at home that will drive the demand for fat pipes. Movie, television and other media companies will increasingly zap data-heavy files across the Internet instead of shuffling film and video by courier or messenger services, Miller predicted.

Much of the pre- and post-production editing work on a movie might be done online in the future, whereas today the need to physically move films and videos among locations often slows down production.

Global Crossing and Constellation Ventures hope to capture much of the new traffic by forming services and companies that make it easy to use the Web for such purposes. Software that makes downloading fast and easy, or hook-ups that are reliable, are two examples of what media companies need. Global Crossing, run by financier Gary Winnick out of Beverly Hills, is a global telecommunications cable company with wires running underneath both the Atlantic and Pacific oceans.

Debt Swap

Financially struggling Imperial Credit Industries Inc., the Torrance-based diversified business lender, last week commenced swapping newly issued stock, warrants and new bonds offering 12 percent interest for old, outstanding senior notes. The swap cuts Imperial Credit’s debt, thus improving the company’s bid for survival, but also dilutes existing shareholders.

Imperial, a high-flier in the 1990s, ran aground when it entered the consumer lending arena. It has since retreated back to its core, business lending.

Contributing columnist Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. His new book is “The Pied Pipers of Wall Street: How Analysts Sell You Down the River,” published by Bloomberg Press. He can be reached at [email protected].