An eclectic mix of small and medium-sized companies helped inflate overall returns for L.A.-based stocks in 2004, and many investors are placing bets that equities will continue to post solid gains in 2005.
The LABJ 200 Index of local stocks was up 16.3 percent for the year (as of the close of trading last Wednesday). By comparison, the broad-based Standard & Poor’s 500 Index was up 9.1 percent, the tech-laden Nasdaq Composite Index rose 8.7 percent and the blue-chip Dow Jones Industrial Average rose just 3.6 percent through Dec. 29.
A number of investment themes played well for stocks in the region: the continued strength of the housing market and low interest rates, booming trade with Asia, a generally improving economy and a resurgent market for initial public offerings, to name a few.
Asian-themed banks continued to perform well, after a decade or more of outperforming the broader markets.
In 2004, it was Korean-American banks that took the lead. Five Korean-themed banks were among the region’s best-performing stocks in 2004, a reflection of their heavy involvement with both the local real estate market and booming trade with Asia.
Four of the banks are headquartered within a mile-long stretch of Wilshire Boulevard between Vermont and Western avenues: Hanmi Financial Corp. (up 83.7 percent year-to-date), Wilshire Bancorp Inc. (up 73.2 percent), Nara Bancorp Inc. (up 56.9 percent) and Center Financial Inc. (up 44.5 percent).
Another Korean-American bank, Century City-based First Regional Bancorp, rose 84.3 percent.
Despite the increases, analysts believe some of these stocks might be undervalued because they don’t necessarily reflect the surging value of the banks’ real estate holdings in Los Angeles.
Chinese-American banks, long the leaders of the ethnic banking pack, continued to do well. East-West Bancorp Inc., based in San Marino, jumped 55.4 percent, to $41.70. Los Angeles-based Cathay General Bancorp rose 37 percent, to $38.36.
Trade, energy
Other strong showings were put in by companies involved in the energy and trade sectors. These included logistics giant UTI Worldwide Inc., up 78.5 percent, utility Edison International, up 46.7 percent, and oil and gas explorer Occidental Petroleum Corp. Its stock gained 38.4 percent.
The rebounding economy was another theme that carried along a number of local companies. Recruiting firm Korn/Ferry International, which has been retooling and restructuring for several years, posted a 56.7 percent increase in its stock price to $20.90, after snatching the No. 1 position in the executive search industry back from Heidrick & Struggles International Inc.
Toy maker Jakks Pacific Inc. managed to churn out a 74.1 percent return despite being saddled with a fraud lawsuit by partner World Wrestling Entertainment. And shoemaker Skechers USA Inc., of Manhattan Beach, saw its stock rebound nearly 60 percent.
Despite trending in a narrow trading range for most of the year, the major market indexes all got a big boost after the November presidential election. Last week, the Nasdaq Composite, the S & P; 500 and the Dow Jones all set new multi-year highs.
“It was a fourth-quarter phenomenon,” said Tom Taulli, co-founder of IPO research firm Currentofferings.com in Newport Beach. “Investors who bought after the election had a very good Christmas, and I think the momentum definitely will carry through into 2005.”
The positive outlook comes on the heels of strong merger and acquisition activity in mid-December with $85 billion in announced deals on Wall Street for the week ended Dec. 17 the highest weekly total since January 2000.
The return of initial public offerings, led by Google Inc. in August, attracted many investors back to Internet content providers expected to be one of the hottest sectors in 2005. This time, though, there appears to be significant financial strength supporting a resurgence of Internet stocks.
Media analyst Jack Myers, who publishes the Jack Myers Report, anticipates a 30 percent jump in online advertising spending in 2005, to $10.2 billion.
A host of local companies went public in the wake of Google’s debut, including tech companies Cogent Inc. and Jamdat Mobile Inc. Both are trading above their IPO prices, although Jamdat shares have wilted since reporting disappointing results in November. Cogent shares, which rose as high as $38.25 in early December, were trading at $33.07 on Dec. 29, nearly triple their IPO price of $12.
Non-tech names Ares Capital Corp., CB Richard Ellis Group Inc., Thomas Properties Group and DreamWorks Animation SKG also made use of the reopened IPO window.
Waiting in the wings are several Southern California start-ups that remain in private hands, including Santa Barbara-based Fastclick.com Inc., an online direct marketer, and Pasadena-based eHarmony.com Inc., an Internet dating service. Fastclick.com raised $75 million from two venture capital firms in November and filed a registration statement on Dec. 22 to sell shares to the public. eHarmony also is gearing up for an IPO this year after raising $110 million from two venture firms in December.
Turnaround plays
Analysts caution that an expected slowdown in corporate earnings growth and rising interest rates are the biggest factors that could dampen market enthusiasm in the new year. Corporations in the S & P; 500 churned out an average 19 percent earnings growth in 2004, while forecasts call for 10 percent earnings growth, on average, in 2005.
Kenneth Tang, an institutional sales representative at B. Riley & Co., said the market’s rise in recent months reflects the increased influence of hedge funds, which are trying to “play catch-up” after losing ground in early 2004.
He also noted that the so-called January effect the tendency for small-cap stocks to outperform their larger counterparts in the first month of the year has been pushed into the last two weeks of December. January tends to be the best month of the year for the stock market because institutional investors make changes to portfolios at the year’s end.
“We’re still generally bullish on small-cap stocks and we tend to focus on situations that are undervalued or uncovered,” Tang said.
He likes Magnetek Inc., a Los Angeles provider of digital power products that traded at $6.65 a share. Magnetek won a $5 million contract in December to develop auxiliary power units for new subway cars in Milan, Italy. The company is a turnaround play, he said.
One turnaround play that took place in 2004: Intermix Media Inc., the Web site operator formerly known as eUniverse.com, which underwent financial restatements and a boardroom coup, and was one of 2003’s biggest losers. In 2004, though, it was the LABJ 200’s biggest winner, gaining 257.5 percent to a close of $5.72 on Dec. 29.
Analysts remain pessimistic about a turnaround at teen-age mall retailer Hot Topic Inc., which is struggling with a slump in its core products accessories, music-inspired T-shirts and dark clothing that pushed shares down 41.7 percent last year to $17.17 a share.
Deep discounter 99 Cents Only Stores also saw a 40.7 percent drop in its stock last year, to $16.15 a share. The yearlong slide was the result of problems at a distribution warehouse in Los Angeles and a rash of bad earnings reports. But investors may start taking another look: To stop the bleeding, the company hired James Ritter, former chief financial officer at high-end supermarket chain Bristol Farms, as its executive vice president and chief financial officer.
