Packed as it is with a preponderance of smaller companies, the San Diego Business Journal Index of 91 public companies didn’t fare too badly last year, sustaining a 3 percent decline in 2007.
The index, compiled for the Business Journal by Spokane, Wash.-based Trade Trends, showed a net change of 47 points, or 3.2 percent, and reflected a trend of larger capitalized companies generally doing better than smaller capitalized firms, said Margot Crabtree, president of Market Trends, which provides financial data.
The index showed that the five biggest stocks in the index, as measured by market capitalization, or the number of shares multiplied by the stock price, were all gainers. These are Qualcomm Inc., Sempra Energy, Invitrogen Corp., Amylin Pharmaceuticals Inc. and ResMed Inc.
Crabtree said the weighted formula used by the index means gains by larger companies have a greater impact than losses sustained by a greater number of smaller companies. But in 2007, the declines by 61 companies against increases by 30 companies tipped the scales to an overall decrease in the entire index.
In contrast, the Dow Jones Industrial Average, the most common stock index quoted, had a net gain of 6.43 percent for all of 2007. The other most common stock index cited, the Standard and Poor’s 500 Index, had a net gain of 3.53 percent for the full year.
The findings coincided with similar data compiled by another local stock analyst who publishes a monthly newsletter focused on stocks in California.
“We’re seeing a flight to quality in the market,” said Bud Leedom, publisher of the California Stock Report. “The likelihood of a recession is now more than a 50-50 proposition. And in a recession, small cap stocks get hit harder than large caps.”
For the most part, San Diego is really a small cap town, Leedom said. Although the area is home to four Fortune 500 companies (Sempra, Qualcomm, SAIC Inc. and Jack in the Box Inc.) the vast majority of public companies have revenues and market caps far below $1 billion.
As measured in the Business Journal’s public stock index, only 15 companies had market caps above $1 billion, with the largest by far being Qualcomm at $64 billion.
Because of Qualcomm’s huge market cap, the provider of wireless telecom chips and technology has the largest influence on the index. For the year, its shares, traded on Nasdaq under QCOM, rose only 4 percent.
“As Qualcomm waxes and wanes, so goes the index,” Crabtree said.
The five largest gainers measured by the dollar increase on shares were led by Invitrogen, a local maker of tools used by drug research companies. Shares in the firm rose nearly $37 to more than $93 over the year. The next largest gainers by price were Illumina Inc., up $19.95; Cubic Corp., up $17.50; Nuvasive Inc., up $16.42; and PriceSmart Inc., up $12.15.
When measured by percentage increase of the stock price, the five largest gainers for the past year were Document Sciences Corp., up 116 percent; Sequenom Inc., up 104 percent; Cubic, up 81 percent; Nuvasive, up 71 percent; and PriceSmart, up 68 percent.
While several of the big winners came from the biotech industry, this sector also usually produces the most dramatic losers. That’s because these generally smaller startups’ values hinge so much on whether their drugs are successful in extensive clinical trial testing processes, said Leedom.
‘Pop Or A Plunge’
“Either their clinical trials went well or they didn’t go well,” he said. “It’s either a pop or a plunge.”
Falling the most in percentage terms during the past year was Anadys Pharmaceuticals Inc., which decreased 88 percent, and hit a new low on Dec. 31 at $1.61 after beginning the year just below $5. The stock was hurt by mid-year news that the company was halting early phase development of its hepatitis C drug.
Other stocks that lost the most value in percentage terms last year were Directed Electronics Inc., down 85 percent; Axesstel Inc., down 85 percent; Adventrx Pharmaceuticals Inc., down 85 percent; and Dalrada Financial Corp., down 83 percent.
When measured in dollar declines, the five biggest losers for the year included Imperial Capital Bancorp Inc., which fell $38.10 over the year after the commercial bank reported a higher number of problem loans and foreclosed real estate in the bank’s second quarter. Practically all financial services stocks were battered last year thanks to the subprime loan crisis and declining housing values across the nation.
Another local bank, First Community Bancorp, the Rancho Santa Fe-based parent of Pacific Western Bank, saw its shares decline by $11.03 over the year, the fourth largest decline. Just above First Community were Charlotte Russe Holding Co., which fell $14.60; and Leap Wireless International Inc., which plunged by $12.83.
The fifth largest decliner in dollar terms was AMN Healthcare Services Inc., the nurse staffing firm whose chairman and co-founder is Steve Francis, an unannounced candidate for mayor of San Diego. AMN Healthcare Services’ stock dropped $10.37 over the year.
Leap Was Volatile
Leap Wireless, in particular, was one of the most volatile stocks in the index, having risen in July to $99 from about $60 at the beginning of the year. In the second half of the year, shares began declining but really went into a fall after the company announced it would need to restate past financial results, and rejected a bid to be acquired by a competing flat-rate wireless telecom carrier.
At year-end, Leap’s shares were down to $46.64, but kept falling as 2008 began, and stood at $37.84 as of Jan. 7.
While many local high-technology companies’ stocks were getting hammered in recent weeks, a few deserved some consideration as possible investment targets this year, Leedom said.
Some outstanding investment opportunities exist in the medical device and health care sectors, driven mainly by the growing number of baby boomers entering retirement age who need a greater degree of health care, he said.
Within these categories, Leedom noted that prices for Gen Probe Inc. and ResMed were attractive given their potential upsides.
Another area where investors may find quality stocks that may be undervalued is home building, a sector battered terribly because of the national downturn in residential construction, Leedom said. He cited two possible plays as Ryland and KB Home, both based in the state, but not local.
Yet thanks to the size of most San Diego companies, and the overall trend to the national economy, investors should be wary of pumping too much of their nest eggs into stocks for the first part of the year, Leedom said.
“There are a lot of questions pertaining to every sector,” he said. “The first six months of 2008 are going to be very tough.”