You can hire your investment bankers, your accountants, your lawyers, and get “fairness opinions” what a company is worth. Or you can call James Zukin, nameplate partner at Houlihan Lokey Howard & Zukin, and get an answer in one minute.
A few months back, we asked Zukin for an off-the-cuff evaluation on what the Dodgers would sell for.
After a few seconds of thought, the graybeard Zukin (well, he’s actually salt-and-peppery) whipped off a sketch, and faxed it to us, with the figure: $350 million.
Although the sale price has not been officially disclosed, $350 million has been widely quoted as the number.
Of course, the Century City-based HLHZ, a speciality investment bank, has a major practice in the corporate evaluation business. And they have an analyst in Chicago, Paul Much, who is a nationally recognized expert on sports team values. Still, a tip of the hat to Zukin for appearing to hit the bull’s eye from several months out.
The chronic complaint of smaller publicly held companies is that “no one will cover us.” That means analysts with larger or even medium-sized brokerage houses will not issue reports on the stocks with the much-sought “buy” recommendations.
In general, analysts at the larger brokerages like stocks that have a sufficient “float” enough shares outstanding so that a brokerage’s “buy” recommendation won’t overwhelm the stock.
Too, if a larger brokerage later decides to exit a smaller stock, its sell recommendation could crush the price before its own customers could get out. In short, brokerages cover large cap stocks.
A related complaint is that brokerages won’t research a stock unless the company also needs investment banking services (providing merger advisory work or underwriting stock, is a very lucrative end of the brokerage business).
Bryant Riley has heard all the complaints and he’s in agreement. Riley, founder of the West Los Angeles-based brokerage B. Riley & Company, calls it a classic “inefficient market” in which a quality stock can go unnoticed by the big boys and thus be undervalued.
Riley said he started his own firm this year because “I got frustrated. I got into this business to do good, pure research, not to do research only on companies that are cash-poor, so they need investment banking services, so a brokerage takes an interest in them.”
Previously, Riley had worked at L.H. Friend Weinress, Beverly Hills-based Dabney/Resnick/Imperial LLC, and the New York-based Gaines Berland.
Lately, Riley has been racking up the miles, driving to Southern California public companies for face-to-face meetings, to buttress his paper research. “The best time to reach me is in the mornings, because in the afternoons, I am usually trying to meet with a new company,” he said.
Riley admits that small caps have not performed as well as blue chips through the historic bull market of the 1990s (although 1997 is turning out well for small caps). “For the last five years, I have been the worst person in the world to ask about the Dow. My bias has been negative,” he said.
In Southern California, there are stocks Riley likes, such as the Los Angeles-based Mercury Air Inc., which supplies fuel and other services to airlines, and which is expanding its freight operations. He also likes Veterinary Centers Of America Inc., which is creating a nationwide chain of vet hospitals, in a consolidation play.
One company Riley really likes is Los Angeles-based Calmat Inc., the cement company. Calmat is not so little; it has a market cap of nearly $600 million. It also has a very strong position in Southern California gravel pits which is important, as heavy aggregate and cement cannot be transported too far. It has many cement plants dotting the region. The company was slammed in the 1990s construction downturn, but the industry is looking up.
“There are barriers to entry in this industry.It takes one or two years,and a couple million dollars, just to open a gravel pit, if you can get permits. If you believe the Southern California economy is coming back, then you believe in this stock,” said Riley.
Another aspect of Riley’s coverage is that he is willing to say “sell” a stock. Many analysts will either have a “buy” or “hold” out on a stock, or say “we no longer cover that stock.”
Riley has a “sell” out on the Van Nuys-based Intellicel Inc., a re-seller of cellular phones. “It’s a low-margin business,” said Riley. “The distributors have to bet what is the right phone to buy, and buy in large volume. A wrong guess can cost money. Tough business.” The stock is trading at 40 times current earnings.
A busy man has been Lloyd Greif, of the downtown Los Angeles-based Greif & Co., boutique investment bankers. In recent weeks, he not only represented brokerage Jon Douglas & Co. in its sale to NRT Inc.(a joint venture between New York-based Apollo Management L.P. and the Parsippany, N.J.-based brokerage consolidators HFS Inc., but he also represented publicly held Carson-based Westbrae Natural Inc., a natural foods manufacturer, in its sale to Uniondale, N.Y.-based Hain Food Group Inc., an entity that is 17 percent controlled by mega-investor George Soros.
By the way, on the Jon Douglas deal, Apollo Management is an arm of New York-based Apollo Group L.P., formed by Leon Black, the former investment banker from now-defunct Drexel Burnham Lambert. The deal was worked on locally by Apollo’s man in Los Angeles, John Kissick, formerly No. 2 in Beverly Hills for Drexel.
Playing it safe
If you are getting edgy about the stock market, and are not confident that bonds will hold their value, there’s Flaherty & Crumine Inc., a Pasadena shop with $1.2 billion under management.
Flaherty & Crumrine buys U.S. Treasury notes and bonds, and then buys put options on the same. (A put option is similar to shorting a stock the investor makes money when a bond value goes down.) That way, if interest rates go down, and bond values go up, Flaherty & Crumrine makes money on the bonds, but loses on the options. Vice-versa, if interest rates go up.
The point of all this is to get slightly better yields than just buying short-term Treasury notes, but taking on very little risk. “There is a cost to buying the put options, and you eat into your income a little bit, but the benefit is that risk is eliminated,” said Johns.
The bond market has been getting a little sexier of late, following news that Omaha-based Warren Buffett, of famed Berkshire Hathaway Inc., was buying Treasury “strips.”
These curious financial instruments are “stripped” of interest payments, and so appreciate or depreciate rapidly in the face of interest rate dips, or uprises. Buffett has been buying the strips, meaning he expects interest rates to come down, said Johns. “It might be that Buffett thinks the stock market has gone as far as it can go,” said Johns.
“And so he is looking to other areas to make gains.”
Contributing reporter Benjamin Mark Cole writes about the L.A. investment community for the Los Angeles Business Journal.