Some Companies Hit Hardest by Crash Picked Up the Pieces, Came Out Ahead

On Friday, the last trading day of 1988, the Dow Jones Industrial Average briefly climbed above the level it had enjoyed before the October, 1987, market collapse. It was a fitting end to a year that proved stronger than expected, with the Dow increasing 12%.

It was equally fitting that the best performing Orange County stocks of 1988 were among those hardest hit by the crash.

Orange County’s star performers managed to rescue themselves from the rubble to either approach or surpass their pre-crash highs. In most cases, analysts said, they are solid companies that enjoyed healthy returns.

ICN Biomedicals, a Costa Mesa medical instruments and chemicals company, led the pack on a percentage basis. The stock rose 331%, starting the year at $3.25 and finishing at $14.

For the first 9 months of its current fiscal year, ICN Biomedicals has enjoyed a 35% increase in earnings. Its third-quarter performance was even stronger, with profits up 59%.

Gradco Corp., an Irvine manufacturer of office copier and printer products, placed second, appreciating 126% for the year. Gradco stock, which began the year at $5.875, closed at $13.25.

In the fiscal year ended March, 1988, Gradco reported net income of $4.1 million on sales of $90.9 million, and the company continued to post strong numbers over the latter part of the year.

During the past 12 months, most investors steered clear of small companies. Many had been burned badly by the crash.

“A lot of the smaller Orange County companies are not very liquid, and they just got hammered in the crash, as people fell over themselves to get out of them,” said Larry Selwitz, director of research at Cruttenden & Co., a Newport Beach brokerage.

Many investors who got back into the market in 1988 initially chose to buy stocks in larger, more established companies.

But as the year wore on and many Orange County companies began to report strong earnings, investors started funneling money into such companies as ICN Biomedicals, Ropak and Gradco.

“The stock of some of these companies had become so oversold that people realized these prices offered unusually good value,” Selwitz said. “It was an opportunity for people to make a lot of money.”

Meanwhile, the county’s biggest market losers generally reflected unspectacular corporate performance.

Resdel Industries, a Newport Beach electronics firm, lost the most ground in 1988. Its stock began the year at $5.25 a share and crashed to $1.4375, a 73% decline.

The company posted an $8.3-million loss for the year ended June 30 and disclosed in October that it had laid off 130 people, or more than a third of its work force. The firm’s problems were attributed primarily to unsuccessful efforts to expand through acquisitions.

Another bomb was Diceon Electronics, which began the year trading at $30.50 but declined to $12.50 at year end, losing 59% of its value.

Diceon had sales of $147 million and earned $9.8 million in the fiscal year ended in September. But most of its profits were realized in the first 6 months of the year, while the second half was a dud. Analysts are projecting that the company will have flat earnings for the first half of 1989.

As a result, Diceon, which for several years has been one of Orange County’s top performing growth companies, was snubbed by analysts and investors.

Preston Athey, a growth fund manager for T. Rowe Price in Baltimore, said he continues to hold Diceon and several other Orange County stocks because of what he believes are bright prospects for small growth companies in 1989.

T. Rowe Price has about $1.3 billion invested in emerging growth funds. The investment firm’s Orange County holdings include National Education of Irvine, Silicon Systems of Tustin and Archive Corp.

Athey said a statistical indicator used by T. Rowe Price recently signaled that many, small growth companies “are grossly undervalued” relative to historic norms.

“If the past is any indication, 1989 is the year that these stocks will do very well relative to the rest of the market,” Athey said.

He said he is particularly bullish about small growth companies because many economists and analysts are projecting that their earnings growth will outpace larger companies in 1989.

WINNERS AND LOSERS AMONG COUNTY STOCKS

The top 10 percentage gainers and losers in 1988 among stocks of Orange County companies trading at $3 or more a share.

Greatest Percentage Gains % Greatest Percentage Losses % 1.ICN Biomedicals +331 1.Resdel Industries -73 2.Gradco Systems +126 2.American Pacesetter -82 3.Ropak Corp. +122 3.Diceon Electronics -59 4.Nichols Institute +113 4.Silvercrest -45 5.Trimedyne +100 5.MAI Basic 4 -40 6.Laser Precision +100 6.US Facilities -36 7.Newport Electronics + 97 7.National Lumber -35 8.FHP +90 8.Computer Automation -34 9.J M Peters +86 9.Filenet -33 10.Micro D +77 10.EIP Microwave -31

Source: Newport Securities Corp.