THE TIMES 100 : VIEW FROM THE STREET : Growth Stocks of the ‘80s Become Falling Stars

As a mileage chart for the distance California has traveled from its economic heyday, the Market Value 100 list says bundles this year.

Many of the growth stocks that symbolized the Golden State’s boundless consumption mania of the 1980s--from fashion trendsetter Gap Inc. to technology wizard Apple Computer--are fading in importance in the market’s cold eye.

What Wall Street is glorifying instead these days are conservative, almost plodding companies that offer a decent dividend return and a low probability of sudden product irrelevance--electric utilities, for example, and, oddly enough, some defense companies.

The shift shows up in two elements of the market value chart: the actual rise or decline in each company’s market value, which is simply current stock price times number of shares outstanding; and market value as a percentage of “book,” or asset, value.

Some examples to illustrate:

* Hurt by slowing sales and earnings as consumer spending has ebbed, Gap has seen its market value tumble from $5.65 billion a year ago to $4.65 billion now, an 18% drop, as its share price has skidded with its outlook.

Meanwhile, the market value of steady-as-she-goes SCEcorp., parent of Southern California Edison, has zoomed 21%--from $9.16 billion to $11.05 billion.

* Drug maker Syntex Co.’s market value was 965% of its book value a year ago, meaning the firm was priced in the market at a lofty 9.65 times the theoretical liquidation value of its assets.

Today, Syntex’s market-to-book ratio has been hacked to 3.61--indicating a much less rosy view of the firm’s potential as the federal government threatens price controls on drugs.

At the other end of the spectrum, the market’s improved opinion of oil giant Chevron Corp.’s future has boosted its market-to-book ratio from 1.54 a year ago to 1.90 now.

Of course, the shift in perception of these California companies merely tracks what has gone on at the national level: Consumer stocks of all types have been trounced over the last year as many of those companies have lost pricing power in a slow economy.

At the same time, investors have increasingly sought so-called value stocks--industrial firms, banks and utilities whose growth prospects are predictable if relatively unexciting. To boot, these companies often pay high dividends, which have become even more attractive in an era of low interest rates.

Naturally, this market shift hasn’t been absolute, in California or elsewhere. Investors can still get excited about a growth stock, if the growth is real. Computer software firm Oracle Systems, for example, has seen its market value rocket from $1.83 billion to $5.24 billion over the last year, more than doubling its market-to-book ratio as well.

And John Skeen, director of research at Montgomery Securities in San Francisco, notes that many of the fastest-growing California companies are too small to make the $620 million cutoff of our Market Value 100 list this year. Logically, larger companies are more likely to be classified as value stocks than growth stocks, simply because fast growth is harder to achieve when a company already is of significant size.

Despite all the talk about a return to conservative investing, Skeen notes, “There are still a lot of emerging growth companies that are working their way up the valuation ladder.”

He cites such hot 1992 new-stock issues as Calabasas-based restaurateur Cheesecake Factory, which his firm brought public at $20 a share, and which now trades around $27 in the NASDAQ market (for a market value of $167 million); and Carlsbad-based golf club maker Callaway Golf, which has rocketed from a $10 offering price to about $33 now on the New York Stock Exchange, giving it a market value of $470 million.

Nonetheless, there is no mistaking the market’s overwhelming desire for value over growth today. Of the 65 companies on our list that show a higher market-to-book ratio than a year ago (versus 35 whose ratios have declined), most of the big gainers are value stocks.

They include utilities such as SCEcorp. (now priced at 1.86 times its book value, compared with 1.47 a year ago) and Pacific Gas & Electric, banks such as Wells Fargo (1.83 versus 1.02) and BankAmerica, and defense contractors such as Northrop and Lockheed (1.88 versus 1.13).

*

Meanwhile, most of the state’s best-known growth stocks--including biotech leader Amgen Inc., toy giant Mattel and HMO Pacificare Health--have registered major declines in their market-to-book ratios. Amgen was priced at a whopping 1,465% of its book value a year ago; that figure now is 505%.

Could this market shift from growth to value be little more than a temporary affair?

Doubtful, says Geraldine Weiss, whose La Jolla-based newsletter Investment Quality Trends has been monitoring the market for 27 years. Stock prices overall are far ahead of the economy’s fundamentals, Weiss argues. The average blue chip stock’s market-to-book ratio of 2.78 is near the all-time high, she notes.

Investors are recognizing the market’s overpriced status, she adds, by increasingly looking for safety in cheaper, higher-dividend stocks. Once the bear market arrives--Weiss expects it’s not very far off--nearly everybody will be a value investor again, she opines. That will be Doomsday for the remaining high-fliers among growth stocks, she predicts.

So if you must buy a stock (California or otherwise), Weiss says, buy only true value--something where the dividend yield is high enough to keep the share price from going down much in a bear market.

Ironically, her short list of buys now includes some former growth stocks, including beaten-down Syntex, which sports an annualized dividend yield of about 5.5%.

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Some pros, however, believe it may still be too early to argue that the old growth stocks have become the new value stocks.

Allan Rudnick, money manager at Kayne, Anderson & Co. in Los Angeles, says both Gap and Syntex pass his value “screens” at their current depressed levels. But he worries that there’s nothing on the horizon to get these former California darlings moving again soon.

Noting that Gap, for example, is being squeezed by surging competition from copycat retail chains, Rudnick says, “We’re waiting for more evidence that the imitators aren’t going to eat away more market share.”

A metaphor for the Golden State?

The Market Value 100

Companies ranked by market value as of March 31, 1993

3/31/93 1991 Market Value Book Value Rank Rank Company ($ Millions) ($ Millions) 1 1 Chevron Corp. 27,612.9 14,530.0 2 8 Intel Corp. 24,014.3 5,444.6 3 2 Walt Disney Co. 22,996.7 5,108.7 4 5 Pacific Telesis Group 19,915.7 8,251.0 5 4 Atlantic Richfield Co. 18,897.2 6,720.0 6 3 Hewlett-Packard Co. 18,686.1 7,718.0 7 10 BankAmerica Corp. 17,406.2 12,509.0 8 6 Pacific Gas & Electric 14,707.4 8,192.4 9 9 SCE Corp. 11,052.0 5,953.7 10 16 Unocal Corp. 7,061.1 2,618.0 11 14 Occidental Petroleum 6,849.0 3,440.0 12 15 Rockwell International 6,548.4 2,746.4 13 12 Apple Computer Inc. 6,479.1 2,282.8 14 18 Wells Fargo & Co. 5,816.2 3,170.0 15 28 Cisco Systems 5,484.2 344.4 16 39 Oracle Systems Corp. 5,236.3 457.5 17 11 Amgen Inc. 4,715.8 933.7 18 13 Gap Inc. 4,645.6 887.8 19 17 Times Mirror Co. 4,386.8 1,911.5 20 33 First Interstate Bancorp 4,160.3 2,634.2 21 7 Syntex Corp. 4,102.0 1,135.2 22 19 Transamerica Corp. 3,979.3 2,875.1 23 23 Lockheed Corp. 3,829.2 2,042.0 24 22 Genentech Inc. 3,825.5 1,007.3 25 21 Fluor Corp. 3,493.0 880.8 26 35 Franklin Resources Inc. 3,087.1 575.0 27 26 Golden West Financial 3,012.3 1,727.4 28 24 Sun Microsystems 2,989.1 1,595.1 29 27 San Diego Gas & Electric 2,943.7 1,449.1 30 25 Clorox Co. 2,757.8 834.0 31 Wellpoint Health Networks 2,512.4 507.0 32 34 Great Western Financial 2,452.9 2,155.4 33 20 ALZA Corp. 2,420.6 407.5 34 32 Hilton Hotels Corp. 2,268.6 1,002.5 35 36 H.F. Ahmanson & Co. 2,266.5 2,745.6 36 38 Litton Industries 2,115.1 1,395.6 37 29 Mattel Inc. 2,070.8 526.0 38 37 Dole Food Co. 2,049.3 1,095.6 39 47 Advanced Micro Devices 2,026.5 1,046.7 40 56 Homestake Mining 1,896.9 501.9 41 45 Pacific Enterprises 1,823.4 894.0 42 51 McKesson Corp. 1,804.1 475.3 43 68 Silicon Graphics Inc. 1,790.9 501.5 44 Countrywide Credit Indus. 1,733.1 646.6 45 SynOptics Communications 1,727.5 203.0 46 Applied Materials 1,724.7 484.9 47 50 Raychem Corp. 1,671.7 714.5 48 57 Northrop Corp. 1,651.3 1,208.5 49 42 Avery Dennison Corp. 1,648.4 802.6 50 20th Century Industries 1,581.2 558.9 51 40 Price Co. 1,570.8 841.4 52 31 National Medical Enterprises 1,471.3 1,730.6 53 43 Allergan Inc. 1,471.2 499.8 54 54 Chiron Corp. 1,464.0 490.0 55 49 Potlatch Corp. 1,463.3 955.6 56 30 National Health Labs 1,447.2 270.1 57 48 Tandem Computers Inc. 1,428.8 1,257.7 58 62 National Semiconductor 1,388.8 791.5 59 Electronic Arts Inc. 1,378.5 94.0 60 55 Charles Schwab Co. 1,372.6 235.8 61 44 Safeway Inc. 1,356.7 259.5 62 59 Computer Sciences Corp. 1,305.3 665.8 63 Sybase Inc. 1,272.8 118.3 64 73 Union Bank 1,232.0 968.5 65 52 Teledyne Inc. 1,225.7 441.1 66 Sunamerica 1,164.2 503.5 67 63 Caesars World 1,081.8 427.0 68 60 Fleetwood Enterprises 1,055.7 492.4 69 53 Vons Cos. 1,021.6 493.2 70 66 Seagate Technology 1,015.6 961.8 71 3Com Corp. 1,014.0 210.1 72 Informix Corp. 1,004.3 93.8 73 67 Autodesk Inc. 1,002.4 285.2 74 65 Adobe Systems Inc. 996.7 224.6 75 QUALCOMM Inc. 944.1 68.0 76 76 PacifiCare Health Systems 885.3 271.6 77 Mercury General Corp. 880.1 352.9 78 Magma Power 868.7 253.5 79 71 Argonaut Group Inc. 864.0 653.6 80 84 Linear Technology Corp. 849.6 141.9 81 Solectron Corp. 830.8 111.1 82 72 Varian Associates 816.2 422.3 83 92 Read-Rite Corp. 789.4 359.9 84 81 Foundation Health Corp. 779.0 253.0 85 Superior Industries Int’l. 776.8 136.7 86 58 Conner Peripherals 761.0 594.1 87 Pyxis Corp. 755.5 85.6 88 89 Xilinx Inc. 752.1 112.1 89 41 Amdahl Corp. 732.4 1,370.4 90 75 Longs Drug Stores 724.0 443.0 91 FHP International Corp. 703.1 329.9 92 87 Beckman Instruments 663.8 357.4 93 74 Jacobs Engineering Group 659.7 145.6 94 100 American President Cos. 656.6 419.9 95 69 Bergen Brunswig Corp. 649.2 403.7 96 Adaptec Inc. 646.9 205.4 97 86 McClatchy Newspapers 634.9 350.5 98 79 Kaufman & Broad Home 627.1 317.9 99 Cirrus Logic Inc. 626.1 130.2 100 97 Wesco Financial 620.3 421.5

Market as Rank % of Book 1 190 2 441 3 450 4 241 5 281 6 242 7 139 8 180 9 186 10 270 11 199 12 238 13 284 14 183 15 1,592 16 1,145 17 505 18 523 19 229 20 158 21 361 22 138 23 188 24 380 25 397 26 537 27 174 28 187 29 203 30 331 31 496 32 114 33 594 34 226 35 83 36 152 37 394 38 187 39 194 40 378 41 204 42 380 43 357 44 268 45 851 46 356 47 234 48 137 49 205 50 283 51 187 52 85 53 294 54 299 55 153 56 536 57 114 58 175 59 1,466 60 582 61 523 62 196 63 1,076 64 127 65 278 66 231 67 253 68 214 69 207 70 106 71 483 72 1,071 73 352 74 444 75 1,388 76 326 77 249 78 343 79 132 80 599 81 748 82 193 83 219 84 308 85 568 86 128 87 883 88 671 89 53 90 163 91 213 92 186 93 453 94 156 95 161 96 315 97 181 98 197 99 481 100 147

Source: STAR Services. Certain historical data is from Standard & Poor’s Compustat Inc.