“Sponsorship”
It’s a word being heard more and more on Wall Street West lately, although, of course, the idea has been around for generations.
You hear the word this way: “This stock is great, but it doesn’t have sponsorship.”
In the old days, sponsorship referred primarily to a brokerage that was backing a stock through “buy” recommendations. The recommendations were supported by research, of course, but sometimes the objectivity of that research was open to question.
These days, however, the term sponsorship is more likely to be used in reference to support for a stock by the all-powerful institutional investors: the mutual funds, pension funds and money managers.
There’s just one problem those big funds steer clear of small cap stocks, the kind that brokerages would occasionally take a gamble on.
“There is a huge population of companies that have been orphaned, largely concentrated among small cap stocks,” said Fred Roberts, a Westside investment banker who sometimes organizes mergers for small- or medium-sized companies.
The key problem, from the viewpoint of those who like small-cap stocks, is that the “big boys” are buying blue chip, big-cap stocks.
That explains, in part, why Coca-Cola Co. trades at 46 times trailing earnings, while a growing, profitable, high-tech company, such as Burbank-based Align Rite International Inc., trades at 11 times trailing earnings.
Align Rite, which makes equipment used in the manufacturer of semiconductors, sports five straight years of growing net income and revenues.
On a per share basis, its earnings rose to $1.20 in 1996 from 7 cents in 1992. This year looks better.
But still the stock trades at one-quarter Coca Cola’s value, based on earnings.
The problem may be getting worse: “More and more pension funds are getting indexed,” complained one local stockbroker, who for years has done his own research on local small cap companies.
An index fund, to state the obvious, does not go off and buy a particular small cap stock. Instead, its purchases are limited to a common index, such as the stocks which make up the Standard & Poor’s 500.
Fed up with money management fees, but not much in the way of results, such giant outfits as the $200 billion California Public Employees Retirement System (Calpers) have put large chunks of their hards into index funds.
Roberts said that the mania for blue chips also reflects the very high stock market. The S & P; 500 is trading at 22 times earnings, way above historical norms.
At that level, there is a retreat to the familiar, said Roberts, chairman of F.M. Roberts & Co. Inc. And what could be more familiar than Coke?
Of course, the problem of sponsorship resonates loudly in Los Angeles we are, more than ever, a small-cap town.
If there is a market trend toward big-cap companies, that makes it harder for small caps to be recognized, for their stock to go up and it even makes it harder for small caps to issue new stocks, raise capital and expand.
The good news is that, since May, small caps have been hot again, as evidenced by the Nasdaq hitting new record highs last week.
But with more than 8,000 companies traded on the major exchanges or the Nasdaq it’s always going to be tough for small-cap companies to get recognized by the big boys.
If it’s on the Net…
Like everybody else, I had an aunt in Brooklyn who said things like “Don’t believe everything you read is true just because it’s in black and white.”
Well, nowadays, people read things on the Internet and the same advice applies.
Public companies are moving to influence what is on the Internet and are looking for ways to get a good mention here and there.
For example, Santa Fe Springs-based Vans Inc., the sneaker and mountain-sports shoe-maker, has purchased a minority interest in The Zone Network Inc., an on-line company that produces a net magazine, “The Mountain Zone,” geared to 10- to 24-year-old customers.
Company officials are not shy about their reasons for buying into The Mountain Zone. “We sell and distribute snowboard boots and shoes for mountain bikers. We are active in alternative sports. We get special treatment (in The Mountain Zone) in placement (of ads), and in hyperlinking to our Website,” said Kyle Wescoat, chief financial officer.
Wescoat said control over editorial is not part of the plan but he does refer to the partnership as an “alliance.” Vans sponsors more than 100 athletes and the partnership will likely result in many of them being featured in the on-line magazine.
“The Mountain Zone view is that to be able to have access to those athletes would be very interesting,” he said. “It is an interesting alliance.”
National newspaper USA Today ranked The Mountain Zone as the No. 1 Website for snow ski-related events. Cable news outfit CNN also called the Mountain Zone the “primary source” for recent coverage of a Mt. Everest climb.
Journalists may quiver about non-publishing corporate ownership of media. But you have to recognize the business reasoning behind product companies buying up on-line magazines.
No doubt, someday I’ll have a niece in Portland who’ll say things like, “If it’s on the ‘Net, it must be true.”
Too much on the Net
Jeff Rollert, managing director of the Pasadena-based bond shop ALM Advisers Inc., last week said he is looking to hire some recent college graduates to help “cull” information he pulls up on the Web.
“I have maybe 50 Websites bookmarked, probably more. I have Fed (Federal Reserve) reports, brokerage analyst reports, regional and national newspapers, trade publications, even the EPA (Environmental Protection Agency) bookmarked. There is no way I can check all that every day,” said Rollert.
Part of the job of the new hires will be to go through and flag interesting information, Rollert said.
Meanwhile, in the wake of no less than six straight monthly federal reports that prices at the producer level are falling, Rollert said he has heard three other money managers two bond, one stock use the “D” word: “D” for deflation.
That, and very tame commodity and labor prices, mean the Fed doesn’t really have to raise rates for quite some time that seems to be the current buzz among bond traders.
Senior Reporter Benjamin Mark Cole covers the investment community for the Los Angeles Business Journal.
