Best of Times?

For the stock market, this year was the very best of times, with both the Dow Jones industrial average and the Standard & Poor’s 500 index both hitting all-time highs. And, no, no, no, it was not the very worst of times in the Valley. Instead, the region’s high-profile companies managed to stand out even amid the nationwide stock surge. DreamWorks Animation SKG Inc. led the parade with a gain of more than 100 percent, while Walt Disney Co., the largest company in Los Angeles County by market capitalization, gained more than 40 percent. Amgen Inc., the second-largest company by market cap, was close behind at 33 percent. Those are huge gains for big companies, but that wasn’t all. The Business Journal’s Valley 50 list of the leading local public companies had an average stock-price increase of 26 percent. That exceeded the Dow’s 20 percent gain and a rise of 25 percent for the Standard & Poor’s index. Ian Corydon, director of research at brokerage firm B. Riley & Co. in Los Angeles, said it’s hard to find a sector of the economy that didn’t perform well in 2013. “This has been a great year for the markets,” he said. “It’s the case of a rising tide helping everyone.” Of course, whenever the stock market does well, especially given the booms and busts of the past few decades, concerns rise that a bubble might be forming. But while Corydon agreed that the stock market has grown faster than the underlying U.S. economy and easy money has contributed to stock price appreciation, he doesn’t expect the market to decline in the next year. “The economic data is encouraging, and because interest rates are so low, there is nowhere to put money to get a good return except the stock market,” he said. “That has helped the stock market, even with the economy’s slow growth.” James Hillman, managing director of portfolio management at BNY Mellon Wealth Management, the investment bank that compiles the Valley 50, said a lot of investors have waited on the sidelines during the recession and now want to invest. They usually re-enter the market by putting money into established, large-cap stocks. “This is a particular time in which large-cap companies do well,” he said. “They are the ones that are able to capitalize on the economy’s growing strength.” He added the Valley’s overall strong performance stems from the presence of technology, biotech and manufacturing in the area. “A lot of the Valley companies reflected the strongest sectors in 2013,” Hillman said. Entertainment, technology Disney, which has a $130 billion market capitalization, perfectly illustrates how the current economy favors large companies. The Burbank entertainment giant has used the brand-name recognition of its Marvel comic-book characters and Disney Channel teen idols to fuel growth. Hit films this year included “Thor: The Dark World,” which recorded nearly $200 million in box-office sales, and “Teen Beach Movie” on the Disney Channel, which had about 8.4 million viewers on the night it first aired. For next year, the company plans to release the “Star Wars Rebels” animated TV series and the “Muppets Most Wanted” movie. Also, the company is building the $4.4 billion Disneyland Shanghai resort, scheduled to open in 2015. “Modest but steady economic growth is allowing Disney to raise pricing for theme parks, network fees and advertising time, driving profit-margin expansion,” wrote Robin Diedrich, an analyst at Edward Jones & Co. in New York, in a Dec. 5 note. “The acquisitions of Pixar and Marvel, as well as increased investments in theme parks and resorts, have positively impacted profit margins and returns on invested capital.” However, with the stock trading at or near all-time highs above $70, David Miller, an analyst at B. Riley, believes Disney may be near the top of the market. “We are downgrading Walt Disney from buy to neutral for the simple reason that the stock has performed exactly in line with our buy rating, and the valuation appears full,” he wrote in a Dec. 3 note. By contrast, DreamWorks with a much smaller capitalization of $2.9 billion still has plenty of room to grow, according to a report from brokerage Stifel in New York. The Glendale company’s move into TV production, including distribution deals with Netflix Inc. and European cable TV programmer RTL, will provide a more consistent cash flow in the future, rather than the historical peaks and valleys of theatrical films. “We see this shift as the biggest driver to accelerate the consumer products business, much more so than relying on a theatrical hit,” wrote Ben Mogil, an analyst at Stifel, in a note to investors on Nov. 21. The stock performance stands in contrast to the company’s 2013 box-office returns, which shows how studios have diversified their revenue streams past conventional movie theaters. Last December’s “Return of the Guardians” proved a flop, resulting in an $87 million write-down and the announcement of 350 layoffs. The summer snail movie “Turbo” also failed to attract an audience, though Dreamworks management has stated in filings that eventually the film will earn a profit. Only the caveman movie “The Croods” reached hit status. Beyond entertainment, the Valley hosts of a number of public Internet companies, including ValueClick Inc., a Westlake Village online advertising company, which gained 15 percent for the year, and United Online Inc., which rose 85 percent. United sold off its FTD.com floral sales division, but the remaining company with its legacy Internet access business and social media sites is still a good investment, according to Michael Crawford, an analyst at B. Riley. The trimmed-down company has a new chief executive in Francis Lobo, a former AOL Corp. executive who specializes in turnarounds on struggling operations. “We find the company very attractive today,” Crawford said about United Online in a note on Dec. 11. “We reiterate our buy rating.” Corydon, the research manager at B. Riley, noted that while most sectors have performed well, one exception is retail. Sport Chalet Inc., the La Cañada Flintridge upscale sporting goods retailer, lost 29 percent of its value this year. A series of marketing strategies – including same-day delivery, a smaller store format and a credit-card points program – hasn’t brought in the cash-flush buyers that Sport Chalet needs. In response, the company has reshuffled its board, dropping the son of the company’s founder and bringing on fashion marketer Miki Berardelli. It also hired Santa Monica investment bank Cappello Capital Corp. to find strategic partners. Corydon believes the company is in disfavor with investors because of its large debt load and stagnant same-store sales, common symptoms among retailers. “Companies are chasing dollars, and you see a lot of disappointments,” Corydon said. “That’s more reflective of the underlying economy, where growth is not that strong.” Small-cappers Tom Kerr, founder of Rocky Peak Capital Management, a private investment firm in Calabasas, said that even with the markets setting records, some small-cap stocks outperformed large-caps in 2013. On the Valley 50, the top-performing company was Talon International Inc., with a 512 percent increase. The Van Nuys zipper maker settled a patent dispute and launched a buyback program this year. The stock trades over the counter in the 30-cent range. Other small-cappers with big gains include BNK Petroleum Inc., a Camarillo company with oil and gas leases in Europe and Oklahoma. The stock, which trades on the pink sheets, increased its value 192 percent this year and now trades in the $1.50 range after the company developed wells in the Tishomingo field in Oklahoma. Trio-Tech International, a Van Nuys tester and distributor of semiconductors, jumped 115 percent. The company discontinued a machine fabrication unit this year to concentrate on its core testing, manufacturing and distribution segments, which all had double-digit growth, especially in China. And Research Solutions Inc., an Encino company that locates and delivers technical articles to scientists and corporations, rose 116 percent after the company changed its name in March. Formerly called Derycz Scientific after founder and Chief Executive Peter Derycz, the new name is designed to communicate the company’s services. The stock trades over the counter in the $1.80 range. Kerr, the money manager, believes that since stock prices have grown faster than the economy, either the prices or the dividends will fall in 2014. “Based on the sluggish economy, high unemployment and political gridlock, the valuations are too big,” he said. “I don’t think the large-cap valuations are sustainable.” But Hillman at BNY Mellon thinks large caps will continue to perform well, and if the Federal Reserve Bank stops its $85-billion-a-month bond buying program, more money will move into the equity markets. “As interest rates go up, and quantitative easing ends, equities will continue to outperform bonds,” he said. “We see that for 2014. Interest rates will normalize in next few years and the relative performance of bonds will be flat or slightly negative. That will not be the place for strong returns.”