Small growth companies that’s the hot stuff, in the economy, and on Wall Street, right?

Well, not for the last 15 years, reports Tom Stevens, chief investment officer at Santa Monica-based Wilshire Asset Management, an $8 billion-in-assets money management shop.

“Small growth stocks have been frustrating to institutional investors … a lot of managers have dropped small growth funds from their offering of portfolios,” Stevens said.

In the 15-year period ended Dec. 31, 1996, blue chip stocks gained an average (annually compounded) of 16.7 percent a year.

That beat the S & P; 500 average, which is up 15.2 percent a year, in the same time frame.

Small growth companies are up 12.1 percent a year in the same period, according to Stevens.

The GMs, the Fords, the Procter & Gambles have thumped the highly touted red-hot small growth stocks of the world, said Stevens.

How to explain it? The big guys have a new religion: profits.

Changes in management incentives (to stock options), and more-aware institutional shareholders have altered the environment for blue-chip companies. The widespread corporate downsizing of recent years, while painful, has made blue-chip America much more efficient.

But now, Stevens expects the pendulum to swing back. Proper downsizing can only happen once. Managements are now largely incentivized.

“The majority of benefits have been digested,” said Stevens.

By the way, one of the best-performing categories in the last 15 years has been almost nobody’s favorite: small, quality companies, well-run, and usually low-tech, according to Stevens. Stock in such companies has returned an eye-popping 20.2 percent a year. “These are stocks that pay dividends, trade at an attractive p-e (price to earnings ratio), have high-quality earnings.”

No place like home

After a half-decade of slump, home prices and sales are perking up in California, and even Los Angeles County.

So it would seem the time to peek at West Los Angeles-based Kaufman & Broad Inc., the big homebuilder.

As might be expected, Wall Street is sniffing at the stock, which was crushed to its foundations in the mid-1990s, particularly 1995, when it hit a low of $10 a share, compared with an early 1990s high of $24.75.

In one of the great bull markets of all time, investors must have felt the company was building bear caves, not houses.

Talk about long and tough: In 1989, K & B; posted earnings of $2.36 a share. That sank to 78 cents in 1992, and even now is expected to post only $1.50 in 1997.

But lately, the stock is trading in the $17-a-share range. “We’ve been hitting new 52-week highs week after week,” Michael Henn, senior vice president and chief financial officer, said last week.

K & B; has changed its house building strategy from the old industry standard throw up a subdivision and hope the buyers will come towards one of building to fill orders.

“We are taking the cycle out of a cyclical industry,’ said a company spokeswoman last week.

Perhaps inspired by the de-cycled K & B;, Dillon Read & Co. a big New York brokerage, recently put out a “buy” on the stock. In its report, Dillon notes K & B; is moving towards building a majority of its homes to suit, and a minority “on spec.” That should even out profits, said Dillon Read.

Still, with the S & P; 500 trading at 21 times earnings, K & B; is trading at a relatively modest 12 times earnings (on a consensus estimate for 1997).

Why the gap?

“I suspect there are a couple reasons,” said Henn. “Homebuilders as a group are not exciting to Wall Street. Some say near the end of cycle (business expansion) is not the time to buy a homebuilder, who is going to get hit by the recession.”

But Henn added: “If you believe interest rates will remain stable, and the economy will be generally favorable in the next couple of years, then some are saying we are an opportunity. We have the (putative) recession factored into our stock price, but instead the economy is going to grow.”

Those Darn Yankees

It’s always interesting and sometimes unsettling to know how others see us, and so it was in reading portions of the K & B report by Dillon Read that pertained to the overall California economy.

Said the New Yorkers at Dillon Read: “California housing activity is not expected to return to the late-1980s level any time soon, with starts still more than 50 percent below those peaks, and 30 percent below the the 10-year average, but the economy there is on the mend. We anticipate modest growth in the context of a flat national market….”

That’s a slightly more dour take on the California “boom” talk that seems so prevalent locally.

Day traders

With the recent move towards posting prices on the Nasdaq in sixteenths, we wondered how “day traders” are doing.

Day traders are investors who typically buy and sell stocks in 1,000-share blocks, hoping for an eighth-point move. If they bet right, that eighth-point blip would result in a $125 profit on one thousand shares, minus about $40 for commission.

So if the market jiggles around in 16th increments, instead of eighths, do day traders suffer smaller profits?

“Everybody seems to be doing fine,” said Albert Bud” Kruger, president-owner of Westwood Stock Trading Inc., the largest day trading operation in Los Angeles.

Day traders can sell at the sixteenth move, or wait for the eighth, according to Kruger. And if they bet wrong, they can sell when a stock goes a sixteenth in the wrong direction, instead of at an eighth, he said. “That can limit losses,” he said.

Over at Go Trading Inc. in West Los Angeles, it’s pretty much the same story. “It’s not made a huge difference to anybody, or trading styles,” said Grace Shroeder, office manager.

And many stocks still don’t trade in sixteenths. “Some of the stocks trade in eighths, or the less liquid ones, in quarters,” she said.

Senior Reporter Benjamin Mark Cole covers the investment community for the Los Angeles Business Journal.