Veteran Broker Sees Values, Need for Patience in Slump

Wall Street West

by Benjamin Mark Cole

Earl Feldhorn has seen more than a few market cycles in his 40 years in the securities business, but he admits that this time is a lot different from his early years as a broker.

“So many more people are investors today and the trading volumes are so much higher,” Feldhorn, senior vice president of Los Angeles-based Wedbush Morgan Securities Inc. “And back then, we barely had a financial media. Now everything is on television all the time.”

In the ’60s, it was a big deal when 10 million shares traded in a day. Now 3 billion share days are routine. The heavy trading volume and 24/7 news coverage creates more volatility in this downturn than previous down cycles.

Some things do remain the same, said Feldhorn, such as looking for buys when things look bad. He especially likes the fundamentals of blue-chip drug stocks, which have been beaten down on accounting and regulatory fears. “I tend to be a contrarian,” he said.

But like many market veterans, he cautions that bear markets can endure, and that buying cheap still requires patience. “The market went sour in 1974,” he recalled and didn’t start to really rally until the early 1980s.

Looking back, Feldman figures he was probably the “worst first-year stockbroker in the business.” Sales ability didn’t come naturally, and at one point he even walked door-to-door soliciting customers. Eventually, he discovered that many organizations enjoyed having stock market speakers, especially for free. “I would usually gain at least one client every time I talked to a group, often a civic organization,” he said.

Despite a conservative bent, Feldhorn is fan of “covered call options.” In this technique, a shareholder sells the right to a speculator to buy a share at a set price in the future, for a fee worth usually between 8 percent and 20 percent of the value of the share.

Thus, an owner of Microsoft, trading last week in the $46 range, might sell the right to buy shares at $50 in three months, for a fee of $5 a share. The speculator is hoping that Microsoft will go to, say, $60 a share, and the speculator will double his money. But the shareholder, notes Feldhorn, makes money whatever happens. He either sells the stock at $50, pocketing both the fee and the capital gain, or (if the stock stays flat) he just collects the fee. In any event, “earning just 8 percent a year can look pretty good now,” Feldhorn said.

Katz Sees Dogs

Less sanguine about stocks is Larry Katz, Westlake Village-based editor of the newsletter Market Summary and Forecast (marketsummaryandforecast.com).

When will this market see bottom? “Not when everybody is looking for the bottom,” said Katz. “The bottom will come when everybody is talking about other things to invest in besides stocks, that you should never buy stocks and that you should buy real estate and bonds.” Some might remember the famous 1979 Business Week cover, “The Death of Equities?” Of course, it was a great time to buy.

Even when the bottom is hit this time around, Katz expects a lengthy recovery. “This will probably be more of a process,” he says. Burned investors will not rush back quickly, he said.

Junk Is Not

Junk bonds have been hammered along with the stock market, and the declining perceived credit value of many corporations.

Notoriety has driven up yields on junk bonds, said Larry Post, president of MW Post Advisory Group of West Los Angeles, a junk bond management shop affiliated with Metropolitan West Asset Management. Recently, Post began managing the American AAdvantage High Yield Fund. The fund is part of a mutual fund group managed by the Fort Worth-based AMR Corp., a company better known for its ownership of American Airlines.

Post’s fund is up 3 percent on the year, after an 8 percent yield is counted in a lot better than stock market averages, which are off in the 20 percent to 30 percent range. And Post thinks the worst is over for the junk bond sector. “It seems like the market is down for emotional reasons. The economy is actually hanging in there,” he said. Junk bond fund investors could win capital gains while also earning more than 8 percent a year in interest, noted Post.

Water Roll-up?

Industry roll-ups were piping hot in the 1990s, when the promise of lower overhead and economies of scale induced investors to buy groups of companies in related fields. Such industries were referred to as “fragmented,” in need of consolidation. History has not been kind to roll-ups, and many have tanked by some estimates, perhaps nine out of 10. It’s easy to over-leverage or make other mistakes when investors buy heavily and steadily, as if on a schedule.

Don’t tell that to Greg Salvo, chief executive of Los Angeles-based Hydromaxx, a maker of residential and small commercial water treatment systems. Salvo last week announced he had secured the services of Cliff Wright as Hydromaxx chairman. Wright used to head Memphis, Tenn.-based American Residential Services, a roll-up of 95 plumbing and heating services and contractors nationwide. ARS was eventually folded into Downers Grove, Ill.-based ServiceMaster Inc.

With Hydromaxx, Salvo wants to do a water treatment roll-up in the ARS mold, and is looking for seed capital.

Will investors back a roll-up? “Wright has a proven track record,” Salvo said last week. “We know if we get large enough, we can buy more cheaply from manufacturers, and distribute less expensively.” Salvo said he plans $100 million in acquisitions initially, usually for 25 percent in cash, 25 percent in a note and 50 percent in stock of the acquiring company. He plans to buy a shell company (an inactive, publicly listed business) to serve as the vehicle for his acquisition campaign.

Initial Public Flogging

Pacific Energy Partners L.P. survived a precarious initial public offering last week that demonstrated the tenuous current state of capital markets (as if anyone still needed illumination). Long Beach-based Pacific Energy, controlled by Denver billionaire Phil Anschutz, had to reduce the size of the proposed offering by 500,000 units so its underwriters, led by Salomon Smith Barney, could maintain an offering price of $19.50 per partnership unit on the reduced, 8.6 million-unit offering. By the close of trading on July 23, the price of the oil and gas transport entity had dipped down to $19.

If it’s any consolation to Pacific Energy, several scheduled IPOs had to be pulled altogether, including Texas-based theater chain Cinemark Inc. and Graham Packaging Co.

Contributing columnist Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. He can be reached at

[email protected].