Local company stocks have lackluster year; Asian meltdown hurt L.A. profits.

Wall Street may have soared to record heights in 1998, but that bullishness did not extend to many Los Angeles publicly traded companies, which, on average, had an off year.

Hit by a combination of negative sentiment against smaller-company stocks and Asian turmoil afflicting some larger L.A. companies, the LABJ 100 index, which represents a cross section of local public companies, closed the year down 2.9 percent.

By comparison, the Dow Jones Industrial Average posted a healthy 16.2 percent gain, the S&P 500 jumped 26.3 percent and the Nasdaq Composite Index soared 38 percent.

"The strength of the Los Angeles economy has not been reflected in the stock values of (L.A. public companies)," said Greg Range, a managing director at investment bank Duff & Phelps LLC, which compiles the LABJ 100. "The index held up in the first half of the year until it tanked in July and August with the rest of the market. But while the broader market recovered, the LABJ 100 did not."

That doesn't necessarily reflect the earnings growth of local publicly held companies. An analysis conducted for the Business Journal by Standard & Poor's Compustat shows that average income last year for L.A.'s 321 public companies was $33.9 million, up from 1993 when 319 public companies had average income of $16.5 million.

One problem, say analysts, is that because they are relatively small, many of L.A.'s public companies tend to have low visibility on a national scale - and therefore are not sought out by Wall Street. Adding to their anonymity is a steadily shrinking financial services sector.

Then there was the market's extreme volatility last year, as investors were quick to dump smaller companies - in Los Angeles and elsewhere - in favor of the perceived stability of larger-cap stocks. The Russell 2000 index of small-cap stocks ended the year down 2.5 percent.

"It was a tough year for small cap," said Jerry Winters, president of First Wilshire Asset Management in Pasadena, whose specialty is investing in smaller companies. "We've never seen that market as depressed as it is now."

Last year the biggest loser in the LABJ 100, down 68 percent, was Learning Tree International, which runs computer learning centers worldwide. The downturn came as the company posted fiat earnings despite rising revenues. Analysts attributed the flatness to wildly escalating costs.

Another big loser was Bank Plus Corp., parent of Fidelity Federal Bank. Bank Plus jumped into the business of issuing credit cards to high-risk borrowers and ended up with a massive portfolio of bad loans. As a result, the firm's CEO was forced to resign and its stock price fell 65 percent, making it the second-worst performer of the year.

In an era of skyrocketing Internet stocks, the best-performing local issue was decidedly low tech - Tarrant Apparel Group. Tarrant, which designs and manufactures private-label clothes, saw its share price rise more than 400 percent in 1998. The company has impressed investors with its vertically integrated manufacturing and distribution system based in Mexico.

A close second was Pasadena-based Internet company EarthLink Network Inc., up 342 percent amid a frenzy of investor interest in Internet stocks.

Despite its heavy weighting of smaller companies, the LABJ 100 could easily have been pulled into positive territory if a few of the local corporate giants had posted stronger performances. But L.A.'s strategic position on the Pacific Rim, which used to be one of the area's greatest strengths, has become a liability for some of the largest firms.

Hilton Hotels Corp.'s stock ended the year down 35 percent, as business at its Asian hotels continued to suffer from a downturn in corporate travel.

Walt Disney Co. also had a weak year, with its stock ending down 1 percent. Lower attendance at Disney theme parks, partly due to the Asian recession, was a factor. Disney is by far the most influential stock on the LABJ 100, accounting for 21 percent of the index's total capitalization.

Atlantic Richfield Co., the third-largest stock in the index, dropped 17 percent for the year, as oil prices fell to their lowest levels in more than a decade. The oil slump has resulted from a combination of the Asian crisis leading to reduced energy demands in that region, an unseasonably mild fall and early winter, and the Organization of Petroleum Exporting Countries producing far more oil than the global market is consuming.

So will 1999 be a better year for the LABJ 1007 So far the indicators are mixed.

Oil company stocks jumped last week as severe winter storms blanketed much of the United States, prompting a rally in oil prices. Going forward, continuing tensions in the Middle East and expectations that the Asian economies may show renewed signs of growth by the end of the year also could keep oil prices on an upward track. In addition, a merger involving one or more of L.A.'s three major oil companies - Arco, Unocal Corp. and Occidental Petroleum Corp. - could spark a stock rally.

On the other hand, the biggest aerospace company on the index, Century City-based Northrop Grumman Corp., saw its stock drop 7 percent last week after announcing it would take a $125 million charge in the fourth quarter.

Possibly the brightest prospect for 1999 is a growing sentiment that small caps will post a stronger performance.

"Any small cap that is growing fast will get attention this year," said Roger Engemann, president of Pasadena-based investment firm Roger Engemann & Associates Inc., which has traditionally focused on large-cap growth issues. "The intense focus on quality is gone."

RELATED ARTICLE: Improved LABJ 100 Index Debuts

A revised LABJ 100 index debuts this week on the facing page, with 17 new companies that better reflect the changing Los Angeles economy.

"The index includes a lot of small to mid-cap companies that are very strong - they display investor interest as demonstrated by their active trading," said James Heczko, managing director of Duff & Phelps LLC, which supplies the index to the Business Journal. "The new index also shows a shift toward tech and services, which broadly reflects the way the Southern California economy has been moving for years."

Newcomers to the LABJ 100 are: Activision Inc., Beckman Coulter Inc., Castle & Cooke Inc., Creative Computers Inc., First Consulting Group Inc., Firstfed Financial Corp., Foundation Health Systems, Imperial Credit Industries, Merisel Inc., MRV Communications, On Assignment Inc., OrthAlliance Inc., Tekelec, THQ Inc., Turbodyne Technologies, Xircom Inc. and Xylan Corp.

Companies that were deleted from the LABJ 100 index were those with low trading volume, a diminished market capitalization or low share price that put them in danger of being delisted, or those being merged out of existence.

Deletions were: Alexandria Real Estate Equities, Align-Rite International Inc., Arden Realty Group Inc., Bank Plus Corp., Bell industries Inc., Cohr Inc., Farr Co., Haskel International Inc., International Aluminum Co., Maxicare Health Plans Inc., Mercury Air Group Inc., Newhall Land & Farming Co., Panavision Inc., Petersen Cos. Inc., Summa Industries, SunAmerica Inc. and 3D Systems Corp.