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Thursday, Jul 7, 2022

Wall Street West—Overlooked Small-Caps Get Noticed by Money Manager

Fred Astman, who began running money for the old Eastman Dil brokerage about the time John F. Kennedy was getting inaugurated as president, last week joked, “I am finally getting the hang of it.”

Putting Astman in high spirits was an audited return of 41.2 percent for the year 2000, for his Pasadena-based First Wilshire Securities Management Inc., an independent money manager which mines Wall Street for overlooked small-cap stocks. With only $43 million under management, Astman has the ability some would say the luxury to assume positions in small-caps, and then wait for the fundamentals and the market to go his way.

As oft-noted, the behemoth mutual funds rarely buy small-caps too much due diligence involved, per investment and such funds are under pressure to perform every quarter, or suffer outflows.

The result has been a proliferation of “orphan” stocks and overlooked quality companies on Wall Street, says Astman.]

Right now, Astman likes three Los Angeles stocks, all Korean banks Hanmi Bank, California Center Bank and Nara Bank. As a group, these banks got hurt in the mid-1990s’ state economic slowdown, and the fallout from the 1992 riots.

“A lot of businesses folded after the riots, but not for several years. Their owners were not the type to just quit and walk away,” said Scott Hood, portfolio manager for Astman.

Still, the three banks in 2000 showed big earnings growth, and have long enjoyed low default rates, said Hood. All had good runups in their stock prices in the last year. (Hanmi on Jan. 29 became listed on the Nasdaq. Nara Bank is also Nasdaq-listed, while California Center trades as a bulletin board stock.)

But because the three banks are small-caps, and had a couple rough years, they are cheap, said Astman. “These banks are trading at under 10 times earnings, when other similar regional banks are trading for 15 times earnings, on average,” he says.

By way of comparison, the S & P; 500, the blue-chip index, trades at about 25 times earnings.

As a rule, Astman likes to only buy companies that have an earnings growth rate above their price-earnings ratio. “In other words, if a company has earnings growth of 20 percent a year, but a P/E under 20, we call that a ‘one,’ and you might want to look at it,” he says.

Astman expects the three Korean bank stocks to show earnings growth of 20 percent annually or above for the next several years, but at 10 times earnings or less, they are cheap, by the Astman measure.

Another difference between Astman and the big funds is that he places serious bets on Wall Street. Typically, his portfolio is heavily invested in just 10 stocks or less, with lighter positions in perhaps another five stocks. In contrast, most large funds own dozens of stocks, often more than 50, and sometimes more than 100 positions.

Some money managers scoff that most mutual funds are really just expensive index funds, they become so diversified.

Astman also likes the three bank stocks as all have upgraded public relations efforts, to get their names out on the street. All three have decided to attend an upcoming bank stock conference in Palm Springs held by brokerage Sandler O’Neill, something such outfits were loath to do even just a few years ago, noted Astman.

Another Astman favorite is an Antwerp, Belgium-based company named ALCN Ltd., whose stock trades on the Nasdaq under the symbol ACLNF. The company freight-forwards automobiles to 12 different nations in Africa, where demand is booming as oil prices rise. It’s also a very political situation not anyone is allowed to bring a ship of cars into Africa and unload.

“They have the relationships,” said Astman, who flew to Europe to visit ACLN officials. “If you want to sell cars in Africa, they are someone to know.”

Web Transactions

Speaking of Europe, some continental outfits are showing up in Los Angeles seeking growth capital with the dollar strong, and the local venture community relatively well developed compared to Europe, hunting in Los Angeles is not so far abroad for foreigners as it may seem, said Andy Olsen, El Segundo-based financier.

And not every Web-based enterprise is a dud, Olsen added.

One such enterprise is Stockholm-based Netgiro.com, a financial application service provider with U.S. offices in Redondo Beach. In a nutshell, Netgiro handles international transactions for businesses online (including small transactions), making it easy for consumers and sellers to negotiate the vagaries of exchange rates and credit authorization.

Two of Sweden’s major enterprises, the telecom outfit Ericsson and the Swedish national railway system, use Netgiro to handle payments. Netgiro is expanding to the United States, where it now has 15 clients, but wants more, said Olsen.

According to Netgiro, transnational consumers often balk at clicking the “yes” button on purchases, unsure about what a product will cost in their own currency. Netgiro steps in online, by showing buyers and sellers the exchange rate in more than 130 currencies, and handling administrative details, whether the purchase is made by credit or debit card, or bank transfer or check, said Klas Baeck, president of the U.S. subsidiary of Netgiro.com.

In general, Netgiro charges a 3 percent to 4 percent fee to handle a transaction. Purchases much above $5,000 usually involve a letter of credit, and Netgiro does not handle such deals, said Baeck.

But why a U.S. headquarters in Redondo Beach, and not on the more Eurocentric East Coast?

“Have you seen the weather in Stockholm?” asked Olsen.

Buying a Stake

Byron Roth is at it again: Last week the chairman of Roth Capital Partners agreed to sell 24.5 percent of his Newport Beach-based brokerage to bank holding company Zions Bancorporation of Salt Lake City for $16.5 million. Roth said that Zions wants him to continue to operate independently.

Zions, which was thwarted in an effort to buy the San Francisco-based First Security Van Kasper brokerage last year (banking giant Wells Fargo snagged it) is expected to funnel business to Roth Capital. Typically, even medium-sized banks have hundreds, and even thousands, of commercial banking clients who could avail themselves of investment banking services, if so desired.

Roth maintains an active office in West Los Angeles, headed up by branch manager John Marrone.

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

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