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Local Shares Dodge Down Economy

The stock market nearly always defies expectations, but this year it seemed to defy gravity. In a time of bad economic news, natural disasters and political disruption, public companies turned in positive performances – and Valley companies were among the most surprising. From Walt Disney Co.’s acquisition of LucasFilm, to a nearly $10 billion stock buyback at Amgen Inc., to a rebound in home-building that gave Ryland Group Inc. triple-digit gains, local companies with large market capitalizations showed how to successfully navigate in a slow-growth economy. Robert Katch, chief executive at wealth management firm Manchester Financial Inc. in Westlake Village, said 2012 was a volatile ride but apparently it will end well. “This year certainly turned out better than anyone thought on Jan. 1,” he said. “We had a surge in the first three months, then the market peaked in April and fell. Since the summer it has slowly ground back up to those April highs.” As of Dec. 19 closing prices, the San Fernando Valley 50 Index had gained 15.1percent for the year. That performance was significantly better than the Dow Jones Industrial Index, which had gains of 11.5 percent, but slightly below the Standard & Poor’s 500, which had gains of 16.7 percent. Katch thinks that in a strange way, investors’ skepticism and caution have fueled the upswing in stock prices. When people expect bad events to occur and they don’t, they interpret it as good news even though nothing happened. Investors spent much of 2012 waiting for the Greek debt crisis to explode or the announcement of a double-dip recession. When those cataclysms failed to materialize, non-events sent the market higher. “We are slowly climbing the wall of worry,” Katch said. “There is a lot of fear, but few of things people fear come to pass. So the market moves higher, despite the fear and worry.” Among the largest capitalized companies on the Valley 50 Index, Burbank-based Disney provided some high-profile surprises this year. In June, the movie “The Avengers” reached nearly $1.4 billion in global box office, far surpassing even optimistic projections. In October the company purchased LucasFilm and its Star War franchise for $4 billion. Finally, it returned to its cultural roots with the November release of “Wreck-It Ralph,” an animated comedy about a video-game character. Analysts were caught off-guard by the LucasFilm acquisition, but generally reacted positively. “As was the case for Disney’s Pixar and Marvel acquisitions, although near-term financial returns will be difficult to justify, long-term strategic benefits may crystallize over time,” Barclays Capital analyst Anthony DiClemente wrote in a note to investors. “(The LucasFilm purchase) continues Disney’s well-worn strategy of acquiring valuable intellectual property and monetizing it better through its global, multi-product distribution engine.” Disney stock gained 35 percent during the year, closing at $49.94 on Dec. 19, and it announced a 25 percent boost in its dividend for the fourth quarter. Biotech gains In the biotech industry, Amgen gained more than 40 percent despite no new drugs in its portfolio. The reason? In the last 14 months, the Thousand Oaks company has spent $9.5 billion to buy back its stock. And earlier this month, the company’s board authorized another $2 billion, enough to fund the program until 2014. The surprise for investors is that Amgen borrowed some of the money to buy back shares, calling it a show of confidence in the company’s future. The program is part of a larger strategy to return value to shareholders. As part of that effort, earlier this month Amgen announced a 31 percent increase for its dividend for first-quarter 2013. But some clouds have appeared on Amgen’s horizon for next year. Last week the company agreed to pay $762 million to resolve federal charges about improperly high dosage recommendations for its anemia drug Aranesp. And in December 2013, the patent for its drug Neupogen will expire. Chris Raymond, an analyst at Robert W. Baird & Co. in Chicago, believes Amgen’s upward run has ended. In particular, he believes the company’s experimental cholesterol drug AMG145 will lose the marketing race against a competing treatment from Tarrytown, N.Y.-based Regeneron Pharmaceuticals Inc. “Risks for Amgen include clinical and regulatory risk for key pipeline drugs, continues pressure on Amgen’s (anemia) franchise; and competition for Amgen’s legacy franchises,” he wrote in a note to investors on Nov. 7. Raymond rates the company “neutral” and sets a price target of $86, slightly below its close on Dec. 19 of $88.49. Westlake Village-based homebuilder Ryland more than doubled its stock price this year with an acquisition strategy in the recovering housing sector. In June, the company bought Timberstone Homes in Charlotte and Raleigh, N.C. And earlier this month it acquired Trend Homes in Phoenix. The company’s stock has gained 137 percent this year to close on Dec. 19 at $37.19. Other major gainers on the Valley 50 included sensor manufacturer Interlink Electronics Inc., which rose 125 percent; Christian broadcaster and publisher Salem Communications Inc., which added 108 percent; tech staffing firm On Assignment Inc., which gained 76 percent; and bank PennyMac Mortgage Investment with an increase of 64 percent. In decline Among the Valley 50 stocks that lost the most value this year THQ stands out for its quick decline. The video game publisher, which traded above $4 a share in September, declared bankruptcy last week. It closed on Dec. 19 at 36 cents, having lost 95 percent of its value since the start of the year. Michael Pachter, managing director of equity research at Wedbush Securities in downtown Los Angeles, said the company’s problems started last year when several big games failed to sell. He named WWE, UFC and uDraw as the big flops. “Several of their bread-and-butter franchises performed poorly and they essentially ran low on cash,” Pachter said. “That caused them to make bigger bets — on Homefront, for example – that didn’t work.” Other big losers included on the Valley 50 were BNK Petroleum, which lost 67 percent of its value; apparel maker Talon International Inc., which dropped 55 percent; audio technology maker DTS Inc., which lost 37 percent; and semiconductor testing firm Trio-Tech with a decline of 28 percent. Katch at Manchester Financial said that large capital stocks, especially that pay large dividends, were investors’ top choice this year, but he expects smaller growth companies will outperform them in 2013. “While (large-caps) worked well in 2011, and worked decently well this year, it can pay off more to look at other areas of the market, such as growth stocks and cyclicals,” he said.

Joel Russel
Joel Russel
Joel Russell joined the Los Angeles Business Journal in 2006 as a reporter. He transferred to sister publication San Fernando Valley Business Journal in 2012 as managing editor. Since he assumed the position of editor in 2015, the Business Journal has been recognized four times as the best small-circulation tabloid business publication in the country by the Alliance of Area Business Publishers. Previously, he worked as senior editor at Hispanic Business magazine and editor of Business Mexico.
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