This is one of the most confused stock markets in years. While some money managers are chirping that the S & P; 500 is still up nearly 11.5 percent for the year, others are sulking about a bear market, and repeating a statistic of uncertain origin that the average stock is down 30 percent from its high.
The reality: Perhaps more than ever, there is an abyss between small-cap and blue-chip investors.
That’s proven by a quick peek at some indexes. The S & P; 100, an index of the very biggest U.S. stocks, is up 16.1 percent for the year (as of last week). The well-known S & P; 500 is up 11.41 percent. But the S & P; Midcap 400 is down 1.86 percent for the year. The Russell 2000, which is an index of 2,000 stocks below the 1,000 largest, is down 9.47 percent.
One of the old stock market shibboleths was that small caps, because they were individually more risky, should as a group outperform large-cap stocks. Higher returns, in the investment world, are usually associated with higher risks.
“Not true anymore, and probably never was,” said Bryan Taylor, Cal State Los Angeles business professor who also runs a Web site (www.globalfindata.com) devoted to historical stock market, currency and economic data. “Except for brief periods, the blue chips outperform the small caps.”
Much of the academic underpinnings for the small-cap supremacy theory came from a study by Ibbotson & Associates that since has been eclipsed by later studies, including a book by James O’Shaughnessy entitled, “What Works on Wall Street.”
Over the longer haul, the different indexes make a case for blue chips that’s hard to refute.
Since 1990, for example, the S & P; 100 index is up 244 percent. But the Russell 2000 is up only 212 percent.
It only gets more striking with time. Since 1980, the S & P; 100 is up 676 percent. The Russell 2000 is up only 451 percent, according to Taylor.
Robert Nichols, founder of West Los Angeles-based money manager Windward Capital Management and a veteran of more than three decades in the investment game, scoffed at the notion that small caps, however entrepreneurial or brave, could ever outperform the big boys.
“Blue chips can borrow money for less, they can have multiple products on the market, they can pay dividends, they have recognizable franchises,” said Nichols. He added that large companies can export or import as need be, and have the marketing heft needed to gain consumer awareness. “It’s been this way as long as I can remember,” said Nichols, who began managing money during the Kennedy administration.
Search by acquisition
Analysts may question Century City-based Korn/Ferry International Inc.’s decision to go public and issue $230 million in common stock there’s talk about “earnings variability” but the executive search firm certainly hired blue-chip legal advice.
James Ukropina, former Pacific Enterprises Inc. chairman and chief executive and now a partner at downtown legal giant O’Melveny & Myers, advised Korn/Ferry on the underwriting. Meanwhile, Alison Ressler, of the Century City offices of blueblood New York law firm Sullivan & Cromwell, handled matters for the underwriters, led by Credit Suisse First Boston and Donaldson, Lufkin & Jenrette Securities Corp. (Ressler is the sister of Tony Ressler, of the investor group Apollo Advisers.)
The involvement of Ukropina and Ressler is of interest because even 10 years ago, this deal probably would have been lawyered out of New York.
By the way, Korn/Ferry reported in its IPO papers that the executive search business is growing at an annually compounded rate of 20 percent, buoyed in part by demand for workers in the financial-services industry.
The big question about Korn/Ferry is probably not earnings variability, but what it has in mind when company officials discuss an “industry roll-up.” The executive search business is dominated by little outfits, with the 10 largest firms capturing only 11 percent of the market.
The Korn/Ferry IPO states, “As the largest global executive search firm, the company believes it has the resources to lead consolidation within the highly fragmented search industry.” Company officials, in their quiet period, declined to talk last week.
Look for the executive search firm to go an acquisition warpath meaning lots of work for investment bankers. One other note on the Korn/Ferry filing: The initial papers sent to the SEC, which will have to be amended, did not detail the salaries or stock holdings of senior Korn/Ferry officials, including founder Richard Ferry.
In the rough
David Herman, senior vice president with investment banking shop Houlihan Lokey Howard & Zukin in Century City, has successfully battled a case of the Asian flu.
Herman completed a deal to sell San Diego-based Grafalloy Inc., a private maker of graphite golf clubs, to Cornerstone Equity Investors LLC, a private, New York-based investment group. Cornerstone will merge Grafalloy into True Temper Sports, a division of Black & Decker Inc. that Cornerstone has agreed to acquire. Terms on the Grafalloy deal were not disclosed.
It wasn’t easy to make par on the Grafalloy deal, said Herman. “The golf equipment market has gone to hell,” he said, noting that the stocks of some publicly traded golf equipment houses, such as Carlsbad-based Callaway Golf Inc., are down 67 percent from their highs.
Only two years ago, analysts were whooping it up for golf, noting demographics the aging baby boomers and the increasing popularity of golf in Asia. “Now, all the rosy predictions have turned out not so rosy,” said Herman. The Asian consumer is not buying equipment, and Asian manufacturers are selling cheaply here, in cheaper yen and other Far East currencies.
“There is a lot of discounting going on,” said Herman. “If you want to buy clubs, now is the time.”
Contributing reporter Benjamin Mark Cole writes about the Los Angeles investment community for the Los Angeles Business Journal. He can be reached via e-mail at [email protected].
