Somewhat OT--Todd and all small-micro cap fans: WSJ feels our pain :)
An interesting piece. I gave it to my wife and said, this is one reason your hubby hasn't been making us more $. ;)
Full article is at:
interactive.wsj.com
Here are some pertinent excerpts for non-subscribers.
Enjoy
April 9
Life Isn't Easy at the Firm
The Bull Market Passed Over
By TERZAH EWING and E.S. BROWNING
Staff Reporters of THE WALL STREET JOURNAL
LEONIA, N.J. -- For investors in U.S. stocks, Thursday was yet another day to remember in a decade of great memories...
Which was all the more depressing for Zach Lonstein, chairman and chief executive of Computer Outsourcing Services Inc., who practically ignored the market's latest big move.
"Who wants to look and see his stock flat when they're dancing on Wall Street?" he asks glumly, sitting in the corner office at his two-story headquarters in an industrial area of this New York suburb. His shares closed unchanged.
It wasn't the first Wall Street party he had sat out. So far this year, Computer Outsourcing's shares are down 23% -- compared with a 17% rise for the Nasdaq index -- even though the company recently reported solid sales and earnings gains for its fiscal first quarter ended Jan. 31.
Mr. Lonstein has plenty of company in corporate suites across America. While 26-year-olds at a few start-ups pocket stock options that turn them into almost instant millionaires, thousands of executives face the same frustrations as Mr. Lonstein. With about two-thirds of Nasdaq stocks down in the first quarter -- and that after more than 40% of them fell in the 1998 fourth quarter -- he and many others watch the market in wonder, and disgust.
Not Funny
"Before, I was laughing at it, but now it's starting to have an impact on me," he says. "People don't respect you. It denigrates all your accomplishments."
It isn't just Mr. Lonstein's stock and his ego that are suffering. His company, like many others, is finding it harder than ever to hire computer whiz kids, who prefer employers with soaring stocks. Moreover, highfliers can use their shares like Monopoly money to do takeovers, or they can easily raise money for expansion by issuing more shares. But Computer Outsourcing has trouble getting respect from either takeover targets or their investment banks.
What's wrong with little companies like Computer Outsourcing? By and large, nothing, other than being in the wrong place at the wrong time. Mr. Lonstein runs a small company when small-company stocks are utterly out of favor. Since 1993, when Computer Outsourcing went public at $5.25 a share, its revenues have tripled to last year's $30.4 million, and its earnings, not including special charges, have quadrupled. It has 310 employees, up from 129, and it manages some specialized computer operations for such big names as Kellogg Co. and Novartis AG.
Trailing the Indexes
But solid growth isn't enough any more. In the six years since Computer Outsourcing went public, its stock has risen 60% -- similar to the 77% gain in the Russell 2000 small-stock index but woefully inferior to the Nasdaq's 269% gain over the same period. "In my naivete, I thought if we just posted good numbers, people would find us," laments the 55-year-old Mr. Lonstein, a survivor of displaced-persons camps in Germany after World War II who grew up in Brooklyn, N.Y., and dreamed of founding a publicly traded company.
Investors instead are pouring cash into a small coterie of favored companies like Microsoft Corp. and America Online Inc. They prefer big-capitalization companies whose shares they can always buy and sell easily. Even being in technology isn't enough; nowadays, a company has to be in a trendy technology niche, such as the Internet.
So it was that at a Computer Outsourcing board meeting last week, Mr. Lonstein could only listen with a tinge of envy as Howard Waltman, a director who heads pharmacy-benefits firm Express Scripts Inc., described his own company's stock. The day before, it had jumped 24% on news of a plan to offer drug data and pharmacy services on the Internet.
"Your first thought is, 'Is there something I can do that will help my company?' " Mr. Lonstein says. "The next thing you realize is there is nothing you can do right away." Though he is hardly poor -- his 37% stake in Computer Outsourcing is worth about $14 million -- he doesn't want to sell, and couldn't without depressing the price.
Though he holds on, some shareholders are giving up, even though they see nothing wrong with the company. Robert Skelton, a 34-year-old lawyer in Coshocton, Ohio, recently sold 3,000 shares he had owned for about a year.
"It was frustrating, because every quarter they come out with seemingly record earnings and then the stock doesn't do anything," Mr. Skelton says. "I sit at my desk and watch CNBC every day and I see AOL up 18, CMGI up 30, and I see almost every Internet company, with no earnings, going through the roof. So finally I said, 'Get me out of these small stocks and get me into something that is going to move!' "
Mr. Skelton bought America Online and E*Trade Group Inc., and they went up more in a month than Computer Outsourcing had in a year.
Mr. Lonstein tries not to take it personally when investors bail out. But he can't avoid a different problem: the effect that stock investors' lack of interest ultimately has on his business.
...
Maybe Someday
Investment gurus often say that small stocks have to rebound at some point. And based purely on valuations, they seem overdue for a rally. Historically, small stocks have carried higher price-earnings ratios than large stocks. Now, small stocks' P/Es are sharply lower.
The Russell 2000 small-stock index trades at about 26 times earnings for the past 12 months, notes Claudia Mott, small-stock strategist at Prudential Securities, while the S&P 500 sells for 34 times trailing earnings. Computer Outsourcing has a lofty 34 P/E, but without the charge it took last year because of its Manhattan sublease, it would be 16.
Eventually, Ms. Mott says, the market "is going to shift." She notes that in the past, small stocks have tended to take off just when investors have abandoned them.
Until they do, Mr. Lonstein finds himself spending an inordinate amount of time trying to soothe investors. On March 31, after a morning board meeting, the CEO was driving to Manhattan for an appointment. Computer Outsourcing's stock was slipping, for no apparent reason. His cellular phone rang twice on the drive. Both calls were from investors.
"They had real panic in their voices," he says. "I said, 'What do you think I should do?' One of them said, 'Put out a press release saying there's nothing wrong with the company.' I said I had just done that, by putting out our earnings release two weeks ago." |
