Buying the stocks of L.A.’s most profitable companies has not necessarily been a wise investment.
Forty-nine of the 100 public companies listed as the most profitable over the past five years saw their stocks underperform the S & P; 500 over that period some by a wide margin.
The stocks of seven of the 100 companies actually declined in value over the five-year period.
And while shares of companies with the highest returns on equity tended to perform better, some of the biggest L.A. winners on Wall Street had relatively low profitability.
The top stock-market gainer on the list, Westwood One Inc., was ranked No. 83 in terms of average ROE over the five-year period. The producer and distributor of radio programming saw its stock surge 1,110 percent, from $2.56 to $31, over the period. Earlier this year it had traded as high as $38.
Analysts said that while Westwood One’s profitability may not be spectacular, the Culver City-based company has made a strong turnaround over the last five years.
After consistently losing money through the early 1990s, the company has posted steadily increasing profits each year since 1995.
“Westwood One has been recognized as a very progressive radio distributor which has the pulse of what the public wants,” said George Riven, an analyst at Miller, Kaplan, Arase & Co., an accounting/consulting firm that specializes in the radio industry.
Riven said deregulation in recent years has led to a consolidation of small radio stations, which, in turn, has boosted demand for Westwood One’s products.
MacNeal-Schwendler Corp, which creates industrial computer software, provides further proof that ROE and stock price can move somewhat independently.
While MacNeal-Schwendler posted a reasonable ROE of 11.92 percent over the last five years, giving it a No. 55 ranking on the list, its stock has lost 21.5 percent of its value over the period, falling from $15.13 a share to $11.88 as of March 31, 1998.
Analysts said that while the company’s revenues and earnings have grown nicely in recent years, MacNeal-Schwendler has less growth potential than some of its competitors.
“A lot of growth is coming from servicing existing customers rather than selling new systems,” said analyst Monish Bahl at brokerage firm Parker/Hunter Inc. in Pittsburgh.
The stocks of some of the highest fliers on the profitability list have experienced gut-wrenching volatility.
Despite its ranking as the second most-profitable company in Los Angeles, Erly Industries Inc. has seen its shares plummet in the wake of a bitterly fought proxy battle in late 1997 and fears that the company may post a loss for its fiscal year ended March 31, 1998. The company had not yet reported those results as of last week.
Between the spring of 1993 and mid-1997, Erly’s stock appreciated almost 500 percent peaking at $11.59 a share. Since then, however, the stock has lost more than 50 percent of its value, closing at $5.69 a share on March 31.
That drop reduced its five-year stock value increase to 148 percent, right in line with the S & P; 500, but a far cry from its earlier peak.
A bigger stock market disappointment was 10th-ranked Superior Industries International Inc., which posted average return on equity of almost 25 percent over the last five years.
Its revenues have grown by about 13 percent per year over the last five years, and its net income rose 20 percent annually, on average. However, the stock is up only 14 percent over five years, and all that gain has come since the start of this year.
Superior has not been devoid of dramatic stock gains, however. An investor who bought the stock when the company went public in 1985, and held it until it peaked in 1993, would have seen an appreciation of more than 1,300 percent.
Brokers stressed that the mixed performance highlights the fact that ROE alone should not be used to gauge how a stock will perform over a long term.
By scrutinizing ROE figures, “you can get a pretty good feel for how a company is employing its capital, especially when you compare it with other companies in its field,” said Bryant Riley, president of Westside brokerage firm B. Riley and Co. “But it runs into trouble when you try to compare across different industries.”
Economists blamed the lackluster stock performance of many of L.A.’s most-profitable companies on the city’s delayed recovery from the recession, as well as New York analysts’ lingering negative perceptions about California.
“Some people back East still have not realized that this market has turned,” said Jack Kyser, chief economist at the Economic Development Corp. of Los Angeles County.
He also noted that key segments of the local economy, such as real estate and aerospace, were particularly hard-hit by the economic downturn.
