L.A. Value Stocks Returning to Life.

An increasing number of solidly profitable but relatively mundane Los Angeles public companies are finally starting to see their long-suffering stocks come to life. The nascent revival of many of L.A.'s downtrodden value stocks is being fueled by a confluence of factors:

* The companies

* Money managers and private investors alike are taking some profits on their high-flying tech stocks and plowing the proceeds back into solid value stocks.

* So-called "lockup periods," during which Internet insiders are prohibited from exercising their stock options, are expiring. So insiders are exercising some of those options and diversifying some-what into value stocks.

* Professional buyout firms are joining with local public company managers and buying up all the outstanding shares to take certain public companies private.

"Value investing is not dead," said John Buckingham, chief portfolio manager for AI Frank Asset Management in Laguna Beach. "So many people have made so much money on tech stocks, either as insiders or otherwise, that they have taken some money and put it into (value) stocks. We have clients who have done that with us."

The firm's mutual fund invests largely in undervalued stocks, and is up 24 percent this year after rising 60 percent in 1999.

Buckingham has "buy" recommendations on such diverse local value stocks as Westlake Village-based K-Swiss Inc., which has a price/earnings ratio of 4.7; Santa Monica's FirstFed Financial Corp. (P/E ratio 7.1) and West L.A.'s Kaufman and Broad Home Corp. (P/E ratio 5.9). All three have stock-repurchasing programs underway.

"These are all stocks in sectors that have been ignored, but that can't last," he said.

Indeed, value stocks dominated the top gainers on the LABJ Stock Index of 100 local companies for the week ended March 22. Among the top gainers were stocks from some of the most-depressed sectors, like bank stock City National Corp., which jumped 16.9 percent for the week. K-Swiss was the index's second-largest gainer, with an 18.8 percent jump in share price for the week.

Given how K-Swiss stock has performed of late, however, it's probably too early to start celebrating. Despite its robust 1999 earnings per share of $2.99, the athletic-shoe maker has had a tough time getting noticed by Wall Street. But company executives profess unconcern.

"We have $53 million in cash and no debt," said CEO Steven Nichols. "If the stock is low, we welcome the opportunity to buy it back."

Indeed, K-Swiss has spent $37 million over the last two and a half years buying back about 3.3 million of its shares, and is committed to spending an additional $25 million in its current repurchase program.

A number of L.A. firms with undervalued stock are doing the same thing, and drawing analyst praise because of it.

Some investors are even taking the more-dramatic course of buying all the outstanding shares of companies with severely beaten-down stocks and taking them private.

Buying all shares

Earlier this month, for example, Westwood-based investment firm Leonard Green & Partners completed a $240 million acquisition of White Cap Industries Inc., a Costa Mesa tool seller. The investment group bought White Cap for $16.50 a share to take it private, and it is now in talks to take two other Southern California public companies private, said Peter Nolan, a partner at Leonard Green, who declined to name the companies.

"Every (beaten-down, profitable) company with half a brain is either talking with someone like us or buying a lot of its own stock," said Nolan. "You can waste your time trying to convert the heathen and go home and kick the dog every night, or realize this is a special time and purchase a lot of your own equity."

But betting on value stocks remains a risky proposition, especially with tech stocks continuing to skyrocket. After all, psychology, not fundamentals, is what creates stock market momentum, and as long as most people believe in the high-flying stocks, even those with price/earnings ratios over 1,000, money will continue to stay largely out of value stocks.

"The P/E ratio for all of Nasdaq is over 200," said Peter Eliades, publisher of Stockmarket Cycles, a market newsletter in Santa Rosa. "What is not going to happen, what people are not going to say is, 'I've made enough money in tech, I think I'll put it back in value stocks.' Psychology doesn't work that way. There needs to be a real washout (before investors return to value stocks)."

But several investment pros said there is money to be made in value stocks right now.

Argument for value

Companies with strong fundamentals and good earnings will always eventually attract the attention of the markets, they say.

Buckingham, for example, points out that a majority of stocks on the New York Stock Exchange are now trading below where they were trading two years ago. He argues that this has created a mini-bear market within the overall bull market, leaving lots of companies at attractive levels to buy. Two weeks ago, his buy list had a record 190 companies, falling to 150 last week only because some value stocks are finally starting to appreciate.

"Maybe it is a new economy, but there are so many opportunities to buy companies that are going to be around in three to five years, which is not something that you can be sure of with some of these (tech) companies," Buckingham said.

                     Depressed L.A. Stocks Bounce Back
              Local public companies with low price/earnings
                 ratios are showing some signs of revival.
                        P/E  Closing Price
Company                Ratio    3/15/00    3/22/00 % Increase
K-Swiss Inc.            4.7     $11.63     $13.81    18.8%
Vet. Centers of Am.    14.4      11.81      13.81    16.9
City National Corp.    14.3      28.06      32.81    16.9
Keystone Automotive     6.7       5.56       6.41    15.3
Superior Industries    10.9      25.19      28.56    13.4
Mercury General Corp.   9.7      22.69      25.00    10.2
Kaufman & Broad Home    5.9      18.94      20.81     9.9
K-2 Inc.                8.4       7.31       7.88     7.8
GBC Bancorp             9.8      21.63      23.25     7.5
Reliance Steel & Alum. 10.3      19.25      20.69     7.5
Company                    Core Business
K-Swiss Inc.              Athletic shoe mfr.
Vet. Centers of Am.    Veterinary hosptial chain
City National Corp.       Commercial bank
Keystone Automotive          Auto parts
Superior Industries    Automotive accessories
Mercury General Corp.        Insurance
Kaufman & Broad Home    Residential developer
K-2 Inc.                  Sporting goods
GBC Bancorp              Commercial bank
Reliance Steel & Alum.    Steel processor