L.A. small companies' stocks rise slightly.

But national index outperforms local, state indexes

There's good news and bad news in the winter quarter performance of the Los Angeles Business Journal Small Cap 100 stock index.

The good news is that the index was up 1.38 percent, a small but significant gain considering it was down 1.69 percent in the fall quarter. The rebound might indicate that the Southern California economy is slowly but surely pulling itself into the recovery that analysts have been predicting for the past year.

The bad news is that Los Angeles County-based small cap stocks, and those based elsewhere in California, still lagged well behind the national average. The culprit, according to stock analysts, was Mother Nature.

The news out of California in recent months and years has been a cavalcade of disaster, from earthquakes to fires to floods. A series of devastating storms that caused severe flooding throughout the state this winter might have caused many out-of-state investors to think twice before putting their money into local firms.

"The only reasons I can think of are environmental," said Joe Di Lillo, president of Drake Capital Securities Inc. in Santa Monica. "The weather and economic news coming out of California has been very negative."

The LABJ Small Cap 100 is an index of 100 publicly traded companies based in Los Angeles County with market capitalizations between $7 million and $70 million. The index, compiled by the Santa Monica-based securities research firm Wilshire Associates Inc., can be compared with broader indices to show how the local economy iS faring compared to the rest of the state and the nation.

In the winter quarter ended Feb. 28, the LABJ index was almost identical to the California small cap index, which tracks 384 small public companies based all over the state. The comparison shows that there is probably little difference in stock performance between Northern and Southern California companies.

National index rises

But the national picture was considerably rosier than California's. The S&P 500 was up a very healthy 8.14 percent, and the Wilshire small cap, an index of small public companies around the country, was up 5.10 percent.

While many analysts pointed to the weather as a major factor in the differing stock performances, a number of other possible explanations presented themselves as well. In early March, the state Employment Development Department revised its wage and employment data for the years 1994 and 1993, showing that the state had actually been performing considerably better than the department had previously reported. Many investors use these figures to assess the strength of a state's overall economy.

"We have been done a disservice by the EDD," said Jack Kyser, chief economist at the Economic Development Corp. of Los Angeles County.

Kyser and other economists also blamed the peso crisis in Mexico for sending a shock wave through the California business community. Many firms in the state manufacture exports for the Mexican market, and the plunging peso poses a serious threat to their economic health. By the same token, though, California companies are also heavily involved in trade with the Pacific Rim, where strong currencies, such as the yen, are making American exports increasingly attractive. Ultimately, these ups and downs might offset each other, analysts said.

East Coast bias

Kyser blamed the East Coast media for some of California's woes, saying the economic impact of our natural disasters has been exaggerated in the rest of the country. The uproar over Orange County's financial problems has also led to a perception that the state is in trouble.

"A lot of the Eastern analysts who are following these stocks might not understand what's going on out here," Kyser said. "We're still kind of struggling with the image issue."

Fortune magazine's year-end review advised investors to stay out of California firms' stocks because the state's economy is still in the tank, ignoring gains in retail sales, personal income and housing that show a steady recovery, Kyser said.

On the plus side, the LABJ Small Cap 100's winter performance was a marked improvement over that of the fall quarter. At that time, rising interest rates were blamed for motivating investors to pull money out of the stock market and sink it into high-yield bonds. Many economists believe interest rates have now stabilized, which is widely perceived to be a positive sign for the stock market overall.

Several analysts said they expect the slow gains in Southern California stocks to continue through the spring quarter. Few were surprised that local stocks still lagged behind the rest of the country.

"It's probably just the simple fact that California is just now coming out of the recession, while the rest of the country has been expanding for the last four years," said Norm Williams, an economist at First Interstate Bank.