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Monday, Jun 5, 2023

Vibrant Economy, Trade Worries Tug on Stocks

If one word could describe the stock market this year, it’s “volatile.” Take, for instance, Walt Disney Co., the No. 1 company on the Business Journal’s Public Companies List ranked by market capitalization starting on page 10. Since the beginning of the year, the company has seen its share price go from adjusted close high of $111.57 on Jan. 12 to an adjusted close low of $97.75 two months later. Disney is featured in a series of profiles on notable companies from the list, starting on page 14. That same volatility has knocked around the stocks of Public Storage, No. 3 on the list. It’s share price has gone from $177.03 on the low end to $232.71 on the high end and all points in between. Jeff Mortimer, director of investment strategy in the Boston office of BNY Mellon Wealth Management, described this as a rocking horse market – a lot of back-and-forth movement but otherwise stationary. Still, Mortimer said that investors who can put up with the volatility will be rewarded. “The underlying fundamentals remain incredibly strong economically,” he said. “Companies’ returns are in good shape and valuations are not stretched. That is a decent backdrop if you can get through the trade and tariff issues.” President Donald Trump has set the stage for a trade war of sorts with China, Europe, Canada and Mexico over tariffs on imported aluminum, steel, solar panels, washing machines and other products. Those trading partners in turn have set their own retaliatory tariffs on U.S. products. At least one company on the list, No. 19 Wesco Aircraft Holdings Inc., an aerospace supply chain management firm in Valencia, may have cause for concern. Last year, Wesco earned 35 percent of its revenue from overseas customers, with a substantial amount from China. Since Trump announced the aluminum and steel tariffs on June 1, Wesco’s share price has gone up 2.5 percent, as of July 18. Of all the issues facing the markets, tariffs and trade are the big ones, Mortimer said. “That one has the ability to be inflationary and to harm the overall economy with slow growth,” he added. See Also – List Profiles: Public Companies Company turnover To a large extent, the Public Companies List includes the same names as the Valley 50, an index that appears in each issue so readers can follow the strength of the local economy as reflected in publicly traded stocks. And during the course of the year, change has occurred to the companies on the list. Coming on was Sienna Biopharmaceuticals Inc. at No. 26. The Westlake Village drug maker had its initial public offering in late July last year and has raised a market cap of $315 million since then. Dropped from the list was Monster Digital, a Simi Valley distributor of action sports cameras and accessories that ranked No. 48 last year. Early this year, Monster completed a reverse merger with Innovate Biopharmaceuticals Inc., a North Carolina drug developer and took on the name of that company and its stock symbol. While the San Fernando and Conjeo valley areas has its share of large companies on the list, most are small to medium sized enterprises. And overall, it is the smaller companies that are doing well financially, Mortimer said. Looking at the Russell 3000 index, the bottom 2,000 companies have outperformed the top 1,000 companies, the exact opposite of what happened last year, he added. Russell Indexes are a benchmarking tool for institutional investors developed by FTSE Russell, a subsidiary of the London Stock Exchange Group. Much attention by investors goes toward large companies, especially the FANG companies of Facebook Inc., Amazon.com Inc., Netflix Inc. and Google parent Alphabet Inc., all of which are up this year, Mortimer continued. “But in broad brushstrokes, small cap stocks have done better as a group,” he added. That small cap companies are doing well is illustrated by the Most Profitable Public Companies list (page 13) ranked by return on equity for three years. No. 1 on the list is HemaCare with a 48 percent return on equity; the company ranks No. 32 on the Public Companies list. Tix Corp., which was No. 49 on the Public Companies list, was No. 2 among most profitable public companies with a nearly 36 percent return on equity over three years. Return on equity is the amount of net income returned as a percentage of shareholders equity. It measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested. Mortimer said that while BNY Mellon Wealth Management is reducing its exposure to small cap stocks, the firm sees a more balanced market going forward with both large and small companies doing equally well on average. This year will be a good year, but not a great year like 2017, when the markets had returns in the 20 percent range, he explained. Strong earnings support will help the year along and there will not be a lot of valuation expansion or price-to-earnings ratio either, Mortimer said, adding that there has been price-to-earnings contraction this year. “The market is cheaper today than it was at the beginning of the year when you compare underlying earnings to the overall price of the market,” he noted. “That trend will continue.”

Mark Madler
Mark Madler
Mark R. Madler covers aviation & aerospace, manufacturing, technology, automotive & transportation, media & entertainment and the Antelope Valley. He joined the company in February 2006. Madler previously worked as a reporter for the Burbank Leader. Before that, he was a reporter for the City News Bureau of Chicago and several daily newspapers in the suburban Chicago area. He has a bachelor’s of science degree in journalism from the University of Illinois, Urbana-Champaign.

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