Predicting Success Is an Inexact Science
Even Nostradamus couldn’t have predicted the stock market reaching record levels at the turn of the second millennium.
In 2000, the Dow Jones Industrial Average topped 10,000 points, the Nasdaq Composite Index soared over 4,000 points, and even the San Diego Stocks Index hit record levels closing near 2,000 points.
In the San Diego Business Journal’s List of the Largest Area Public Companies, higher profile public companies such as Gateway Inc., No. 1 on The List, Sempra Energy, No. 2, and Qualcomm Inc., No. 3, lead the pack.
The top 50 public companies in San Diego have combined revenues of more than $29 billion and with aggregate market value above $175 billion as of March 21. Public companies on The List are ranked by their 1999 fiscal year revenues.
“We’re in a very unique time period of which the turn of the century has been a factor,” said Russell Sedat, research analyst with San Diego-based Torrey Pines Securities. “The need for technologies are increasing every day and the stocks are reflecting this trend.”
– High-Tech Stocks Contribute To Success
Sedat credited high-tech stocks locally as contributing to San Diego’s success.
“These companies are generating a lot of enthusiasm with their innovations,” Sedat said.
He noted companies like Cymer, Inc., No. 18; Qualcomm; Titan Corp., No. 11, and Wireless Facilities, No. 38, are part of San Diego’s high-tech enthusiasm.
Robert Chopping, investment representative at Edward Jones in San Diego, agreed San Diego has readjusted its reputation as a defense town a decade ago.
“Since Gateway’s move to San Diego a couple of years ago, more focus is now turning toward San Diego’s stocks,” Chopping said. “Previously, most investors and analysts didn’t follow San Diego stocks, but the economic boom made everyone open their eyes here in San Diego.”
With outstanding valuations from the stock market, many analysts look for different ways to judge the worth of a public company.
“San Diego has a diverse group of industries and they all have different ways to value them,” Sedat said. “If one is using traditional methods, stocks here are really expensive.”
– Measuring The Potential Of A Public Company
Sedat’s method is to judge the company by its future cash flows and enterprise value or hidden value in determining the potential of a public company.
In one example, Sedat compared Gateway’s price-to-earning ratio (P/E) and growth analysis to Texas-based Dell Computer Corp.’s ratio and analysis. Gateway has a P/E ratio around $41 per share and Dell is around $92 per share. Sedat maintained it is best to compare the facts and figures within its own industries.
Chopping agreed traditional methods of looking at P/E ratios and earnings are less likely to be used today.
“Some people toss these methods out of the window,” Chopping said. “Most people are willing to pay money to a company for a potential of future earnings five years in the future.”
Chopping offered one theory of why a lot of stocks in these public companies are rising significantly.
“The baby boom generation began turning to the age of 49 in 1995 and our stock market has jumped significantly since then,” Chopping said. “The stock market trend goes up and down according to the number of people turning 49.”
– Millions In The U.S. Count As Baby Boomers
According to Ann Arbor, Mich.-based boomernet.com, an Internet site dedicated to baby boomers, individuals born after the end of World War II to 1964 are part of this generation. Currently, there are 76 million people in the United States who are part of the baby boom generation.
“These people are investing into the stock market preparing for their retirements,” Chopping said.
None of the well-known Internet stocks in San Diego are part of the 50 largest companies despite its high stock prices and market valuations.
Companies like MP3.com, NTN Communications Inc. and InterVU Inc. generate a lot of news but have little revenues and are currently unprofitable.
“There’s a lot of uncertainty surrounding these Internet companies,” Sedat warned. “One has to be cautious about them if they’re not generating any cash for the company.”
– Non-Internet Stocks May Be A Safe Bet
Sedat said it is better to invest in non-Internet stocks because they are earning money and also performing well in the stock market.
“One doesn’t want to be an investor left holding the bag if the Internet company fails,” Sedat said.
Chopping said the overall stock market would still have another good decade of financial performance. He even predicted the Dow Jones Industrial Average would possibly reach 40,000 points by 2010.
“I personally doubt anyone expected that the stock market was going to go this far,” Chopping said.
Sedat agreed the stock market can continue to climb despite the large valuations.
“Some people call this a mania or the greater fool theory,” Sedat said. “But, it’s a great time period for all of us.”