Investors’ patience was rewarded

If one stock could sum up the year consider Health Net Inc. The Woodland Hills health insurer started 2014 on an optimistic note with the company seemingly poised to benefit from national health reform. By mid-March, the stock had gained nearly 18 percent. But with the announcement of an extra $113 million in administrative costs associated with reform and sharply lower first-quarter earnings, the stock nearly gave back all its gains by early April. From that point on, though, it became apparent to investors that the company’s full embrace of health reform would pay off and the stock surged, closing Dec. 10 with more than 70 percent gain year-to-date. For many other Valley companies, Health Net’s topsy turvy experience typified the market in 2014. Many experts expected a pullback this year, but they were wrong – ultimately to the benefit of investors and public company managers. The Valley 50 index, which tracks local stocks, has increased 9.4 percent year-to-date, compared to 6.6 percent for the Dow Jones Industrial index and a 10.6 percent gain for the S&P 500. “I think the market surprised 90 percent of the professional money managers,” said Lon Morton, chief executive of Morton Capital Management in Calabasas. “The performance has taken a lot of smart people by surprise and continues to have a life of its own. Investors have done extremely well.” Three of the most prominent sectors of the Valley economy – entertainment, biotech and health insurance – each have companies that experienced large upticks in the past year, as well those that have disappointed investors and been punished by the market. On the upside, the largest-cap companies in each sector have done well with Walt Disney Co. gaining 21.6 percent and Amgen Inc. up 48.5 percent, as well as Health Net’s 71.5 percent increase. On the downside, DreamWorks Animation SKG Inc. lost 38.6 percent of its value as the studio had a string of poor performing movies and doctors group manager IPC The Hospitalist Co. Inc. declined 22.5 percent after the Justice Department joined a lawsuit against the company last December. James Hillman, managing director of portfolio management at investment bank BNY Mellon Corp. in Century City, which compiles the Valley 50, said that his team predicted a high single-digit gain for the market this year. After the bull run for the last several years conditions are stabilizing. “Our approach at this time is that investors are becoming much more selective,” he explained. “Fundamentals matter. If companies in a sector are beating revenue and earnings expecations, they are being rewarded. A number of companies in the San Fernando Valley reflect that.” Insurance up The launch of national health reform injected volatility for insurance stocks this year. In addition to Health Net’s gains, Anthem Inc., the Indianapolis-based corporate parent of Anthem Blue Cross in Thousand Oaks, is up more than 40 percent for the year. Kevin Fischbeck, an analyst at Bank of America Corp., increased his target price for Health Net to $61 in a Nov. 18 note to investors. The premium price “is justified by Health Net’s rapid revenue growth, which we expect to grow at 19 percent compounded annually,” he wrote. Hillman at BNY Mellon said in his conversations with business owners, health insurance for employees and associated costs and regulatory compliance are priority concerns right now. That heightened awareness of the sector should help stock prices into next year, he believes. “Given the higher-level priority, it’s likely that the upside potential will continue to be higher,” he said. The Valley’s biotech sector had a banner year, ranging from Amgen’s 48.5 percent gain to an IPO from Second Sight Medical Products Inc., the latest company from billionaire entrepreneur Al Mann. Another Mann company, MannKind Corp., finally received government approval for its inhalable insulin Afrezza, its flagship product. Shares have gained 5.2 percent year-to-date. During the year, Amgen secured fast-track approval for a leukemia drug, opened a new plant in Singapore and began the regulatory approval process for a promising cholesterol drug. Hillman at BNY Mellon noted that Amgen exemplifies the tendency of companies that exceed investor expectations getting rewarded with a premium price. After Amgen beat third-quarter estimates on Nov. 18, Piper Jaffray analyst Joshua Schimmer said the Thousand Oaks biotech had “hands down, the best large cap pipeline around.” Its next big opportunity lies in biosimilar drugs, which are similar, but not identical, to blockbuster drugs that have lost patent protection. Schimmer estimated Amgen biosimilar launches between 2017 and 2019 could bring in $3 billion in additional revenues to the company. “Very little of this opportunity is reflected in shares,” he wrote. In entertainment, most analysts don’t see Disney shares skyrocketing next year, but with its Star Wars and Marvel franchises producing hits – illustrated by this year’s “Guardians of the Galaxy” film – there is still an upside. “We see several reasons why Disney is the one stock most likely to attract the incremental investor,” Marci Ryvicker, an analyst at Wells Fargo & Co., said in a note. “Our underlying premise rests with the fact that Disney’s global brand should ultimately warrant a comparison to other companies of the same stature rather than the ‘black-and-white’ comparison to Viacom, CBS, News Corp. and Time Warner.” Other large-cap media companies with a strong Valley presence saw their valuations increase this year. Time Warner Inc., owner of Warner Bros., has appreciated 25 percent, and shares of Comcast Corp., which owns NBCUniversal in Universal City, have gained 6.9 percent. In contrast, shares of DreamWorks have declined 38.5 percent this year. The studio has produced a parade of box-office disappointments, going back to last year’s “Turbo” about garden snail that wins the Indy 500 race. Earlier this year the company announced an $87 million write-down for the holiday movie “Rise of the Guardians” and $57 million for the retro cartoon film “Mr. Peabody & Sherman.” “DreamWorks is in a tough situation,” said Eric Wold, senior analyst for media and entertainment at brokerage B. Riley Financial Inc. “Assuming ‘Penguins of Madagascar’ performs badly, it will mean four of the last six movies didn’t make money. There are only so many times you can fall back on Shrek.” Despite the slump this year, the Glendale studio had three potential buyout suitors – media giant News Corp., Japanese investment firm Softbank, and toymaker Hasbro Inc. – but none completed an acquisition. The word is that Chief Executive Jeffrey Katzenberg wants $35 a share but so far there are no takers at that price. “Deep-pocketed overseas buyers are looking to get into Hollywood, and it’s easier to get a standalone studio, rather than a conglomerate,” Wold said. “DreamWorks has had guys come kick the tires, and it’s no secret Katzenberg wants to sell. He thinks it’s worth north of $30 a share. … There could be a buyer, but not at the level he wants.”