Investment orphans

Herb Greenberg jHC wFB

May 10, 1991|By Herb Greenberg | Herb Greenberg,Chronicle Features

Wall Street is littered with stocks that went public years ago, became big hits, and then fell apart when the company's strategy didn't pan out.

Such stocks become Wall Street orphans.

Analysts stop following them. Institutional investors stop owning them. Brokers stop pushing them. Many wind up wallowing at low levels for years until they go out of business, are acquired, or rediscovered.

If small-cap stocks become the rage of the '90s, as many analysts predict, the orphans could provide the fury, and Paul Stephens of San Francisco-based Robertson Stephens & Co. doesn't want to miss the excitement. A year ago he started the private Robertson Stephens Orphan Fund (minimum investment: $500,000) that invests exclusively in orphans.

To qualify, stocks have to have the equivalent of a venture-capital valuation, that is, be very cheap, and have little following by investors. The key, however, is that there must be some kind of catalyst in place for change, such as a new management team, a new product, or a significant new shareholder. The goal is to produce a late-stage venture-capital-like return of three to five times the initial investment over two or three years.

"It's like being a venture capitalist in a public market," Stephens says.

Venture capitalists, in fact, are where Stephens gets many of his ideas, since they're often the only investors who still pay attention to stocks after they sink.

But orphan-investing involves the equivalent of discovering new companies, since the orphans usually undergo a sharp transformation, and such "discovery" research hasn't been popular on Wall Street since the 1960s.

New-company investing today usually means investing in initial public offerings, not an existing public company that has been forgotten or is unknown. "I spend full-time researching in the backwater, where there isn't anybody," Stephens says.

He looks at about 100 companies a month, but the fund, which is up 30 percent so far this year, currently has only 22 holdings.

Stephens' favorites (most of which were IPOs in 1983) include Nashville-based Comdata; Minneapolis-based Apertus Technologies; Burbank, Calif.-based Summit Health; Pleasant Hill, Calif.-based Giga-Tronics, Novato; Calif.-based Wordstar International; and New York-based Ameriscribe.

WEARY WALL STREET: The other day I called a broker who is usually good for some juicy tidbits, and his first words were, "You woke me up!"

He was kidding, of course, but his message was clear: The information pipeline has been shut down. It's not just that the longtime lack of takeovers has muffled the arbitragers, or that the rally has silenced short-sellers. Even everyday chatter, a staple of the market, seems to have stopped. The only thing people seem to be speculating about is which new stock issues will be the hottest.

So, why the information drought? Fear and confusion. Fear that sooner or later the market will collapse. "A lot of people are looking for a correction in May," the broker says. And confusion because "while it looks tired now, in 15 minutes it could be looking like a million bucks."

But what may be a snore-a-second for the fast-money folks is creating long-term profit opportunities for the nuts-and-bolts crowd. Scott Hoopes, a senior broker with Shearson Lehman in San Francisco, has been busy trying to "stretch maturities" on bonds to lock in higher yields. He's also attracted to such smashed blue chips as General Motors, Ford and IBM, which he stresses aren't short-term plays. Once the economy improves, all three will do better, and could stage 30 to 50 percent gains if they merely return to old highs. So what if all three are out of favor! Says Hoopes, "You buy straw hats in the wintertime."

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