Venture capital veteran Frank Kline, founder of Kline Hawkes LLC, has chased some bad pitches, like even the best investors, but on the recent GoTo.com initial public offering he blasted a Ruthian shot to the bleachers. Two of Klines’ funds own a combined 4.7 percent stake in GoTo.com, the Pasadena-based Web outfit that operates an advertiser-paid search-referral Internet service.
Public market investors who bought into GoTo.com’s IPO did well enough, with the stock jumping from $15 at open to the low $20s as of last week, roughly a 50 percent return. Kline, however, bought his equity pre-IPO at $2.52 a share. His investment is up 912 percent, as of last week. For his stake, now worth about $47 million, Kline paid a little more than $5 million.
Kline got in on the ground floor by knowing Tim Tappin, GoTo.com’s chief financial officer. Like many professional money managers, Kline is in awe of the Web’s money-making ability, at least for investors who get in and get out the right way.
“This is what the market seems to want right now,” said Kline. “So here it is.”
Red-cent equities
The second annual “Walker’s Manual of Penny Stocks” has been released by Lafayette-based Walker’s Manual LLC, under the tutelage of publisher-editor Harry Eisenberg. An unabashed fan of stocks trading under $5 is Eisenberg, who hunts for overlooked value in Wall Street’s nooks and crannies. He also authors manuals on unlisted stocks and community bank stocks.
Many money managers eschew penny stocks, or small companies in general, because there isn’t enough float. That means the fast buck is hard to find, warns Eisenberg.
“Investing in undervalued penny stocks is almost always of long-term nature. If the value is there, it will get recognized, but you don’t know when,” he said. Indeed, Eisenberg conceded that 1998 was a so-so year for penny stocks. The 500 issues he selected for last year’s manual Eisenberg tried to cull out the obvious chaff did not beat the market.
True, 75 of the 500 penny stocks rose more than 50 percent in 1998, and 22 were taken over, all at premiums. But, overall, “small caps and value stocks did not do well in 1998, and as many of them went down as up,” said Eisenberg.
Five stocks went bankrupt. However, Eisenberg did not compute the average gain or loss for stock in the compendium last year.
This year’s list of 500 is about half repeats from last year, and half stocks new to the manual. Eisenberg said this year he winnowed out stocks that haven’t achieved 20 percent annually compounded revenue growth for the last three years, among other selection criteria.
Among Los Angeles-area companies in this year’s manual are Sports Club Co., the L.A.-based gym operator; Sherman Oaks-based HemaCare Corp., a private blood bank; and Sun Valley-based Hawker Pacific Aerospace Inc., an airplane and helicopter parts and repair service. Perhaps the most unusual Los Angeles penny stock is Beverly Hills-based Westminster Capital Inc., owned and controlled by the Belzberg family of Canada. The company, successor firm to the defunct Far West Savings & Loan (it was seized by the old Resolution Trust Corp.), received more than $23 million in 1993 through 1998, from lawsuits brought against the also-defunct Drexel Burnham Lambert brokerage house.
Besides the Belzbergs, the board of Westminster includes Monty “Let’s Make a Deal” Hall, 77, and Barbara George, 63, professor of business law and associate dean at Cal State Long Beach.
Only last week, Westminster jumped off the over-the-counter bulletin board and joined the Amex, where it was trading last week at $3 plus change.
Westminster today bills itself as a mini-conglomerate, and through subsidiaries sells services to auto dealers, runs a packaging business, and offers long-distance phone service to U.S Navy sailors.
Good-bye or good buy?
Of late, there’s a been a spate of publicly traded real estate investment trusts changing out of the REIT format becoming either privately held, such as Donald Bren’s Irvine Apartments, or changing over to corporate status, such as IndyMac Mortgage Holdings Inc. in Pasadena.
REITs are legally required to funnel 95 percent of profits to shareholders, in order to hold tax-free REIT status. Some corporate managers prefer to retain that cash for growth.
Wall Street has dismissed REITs in 1998 and most of 1999, and many sell below the value of their holdings. But Craig Silvers, REIT analyst with Sutro & Co. Inc. in Los Angeles, doesn’t expect a wave of REIT corporate makeovers.
“In a few selected cases, it will happen,” predicted Silvers. Hotel REITs, in particular, want to keep operating income to fuel growth. Bren saw an opportunity to buy back Irvine Apartments for less than its value. And IndyMac is going into the thrift business, with an online emphasis.
Nevertheless, the public REIT industry remains huge, and not likely to go away. Though currently out of favor, REITs have seen their aggregate market capitalization soar to $145.5 billion as of the start of June, compared with just $8.7 billion at year-end 1990, according to the National Association of Real Estate Trusts.
Besides, REITs may be coming back, meaning they could issue new stock and start on the growth path again. Though REITs as a group sank 18.9 percent on Wall Street in 1998, they are up 5.2 percent this year, on a recent rally.
“If a few REITs can successfully issue stock and invest the money, then I think we’ll see more investor interest,” said Silver.
If nothing else, REIT owners can sit on an average dividend of 7.25 percent, while awaiting better days.
Contributing Reporter Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. He can be reached at [email protected].
