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Outlook '88 : Area Stocks / Institutional Investors See Potential in Off-Beaten-Path County

OUTLOOK '88: Last of a series exploring the outlook for county businesses and the economy this year.

January 03, 1988|JOHN CHARLES TIGHE | Times Staff Writer

Institutional investors cast long shadows on Wall Street, but they have traditionally steered clear of smaller public companies, such as those common in Orange County.

But their presence in the county increased significantly in 1987, and market analysts predicted that institutions will exert even more influence on local corporations in 1988 and future years.

An even bigger influence will be the direction of the overall market, but analysts are divided in their forecasts. Several are mildly optimistic to downright bullish, while others foresee further declines in the aftermath of October's unprecedented market crash.

In any case, the expected increase in institutional ownership is likely to be a mixed blessing for county companies, analysts said.

The presence of these market heavyweights signals that many local companies have moved out of the shadows and into the spotlight of the investment world, which could result in increased demand--and higher prices--for county stocks.

On the other hand, the frequent buying and selling of stock by institutions--and their emphasis on short-term returns--could have a destabilizing effect on companies accustomed to more loyal, long-term shareholders.

But for better or for worse, market observers believe Wall Street's big boys are here to stay, and their increasing involvement is just one more factor to be reckoned with in an increasingly volatile market.

"Institutions' role in the market can't be underestimated. And it's only growing," said Jeff Kilpatrick, president of Newport Securities, a stock brokerage firm in Costa Mesa.

Institutional investors include pension funds, banks, insurance companies, labor unions, profit-sharing plans and college endowments.

Although institutional investors own less than 50% of the shares listed on the New York Stock Exchange, they account for as much as 75% of daily trading volume in Big Board stocks.

When institutions begin buying a company's stock, the large number of shares purchased can quickly pump up its price and lead to a chain-reaction of buying by other institutions.

Traditionally, institutions have placed most of their equity investments in the stocks of America's largest corporations. They have tended to shun "secondary" stocks issued by smaller companies.

The reason, analysts said, is that investing in secondary issues requires expanded and time-consuming investment research. In addition, it is difficult for an institution to buy or sell large positions in secondary stocks without causing sharp price swings.

County stocks have tended to be even more overlooked than other secondary issues, because of the location of the companies.

"Geographically, Orange County is remote. It's off the beaten path," said James Reynolds, director of research at Cruttenden & Co., an investment banking firm in Newport Beach.

Investing in small companies is made more difficult because the companies have fewer shares available for purchase.

Further, larger, blue-chip companies have tended to have more established and stable track records, and their more steady market performance provides institutional investors with an additional measure of comfort.

Smaller companies, in contrast, have tended to be relatively young and unproven; their more erratic performance often means dramatic market swings.

But as large-capitalization stocks reached record price levels in early 1987, institutions began looking for values elsewhere. And when the blue chips tumbled in October and remained volatile the rest of the year, institutions realized that their traditional investment choices were not as stable as they had assumed.

"Their blue chips had been going straight up (in value) for three years, and they didn't want to be bothered by other stocks," Kilpatrick said. "That's not true anymore."

Another factor behind the increase in institutional investment in the county is that the nature of business here has been changing for several years.

"The companies here are growing. They're not going to stay secondary companies any longer," said Brian Callahan, an account executive at the Anaheim office of Prudential-Bache Securities.

"Orange County has been slower to develop, but it is now where Santa Clara County was a few years ago," said Reynolds, who joined Cruttenden last summer after working at the brokerage firm of Crowell, Weedon & Co. in Los Angeles. "There were lots of good companies there five to 10 years ago, and now there are lots of good companies here."

Reynolds' move is an example of the changing nature of the county's investment community. Before he became research chief at Cruttenden, the firm had no formal research department and was content to publish only an occasional report about county businesses.

Reynolds said he plans to publish regular research reports on local companies and send them to investment bankers and brokers in New York and Boston, where most institutional investment decisions are made.

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