Markets are quirky things.
They sail along for a while and then wham, turbulence arrives.
Twice in the past six months we’ve seen two market meltdowns — the latest put the U.S. indices deep into correction territory.
My own takeaway is that we are not in the middle of a full-blown financial crisis; there’s been too much capital in the banking system, there is not a big debt bubble and the economy is too strong to fold like it did in 2008.
But the rules of the game suddenly shifted and they are not likely to shift back anytime soon.
Here’s a closer look:
First, profits are coming back into vogue. The prices of AppFolio of Goleta and MindBody of San Luis Obispo — our two highly successful IPOs — are well below their initial public offering prices.
Both are really late-stage startups that have been burning cash to build out their market positions. My guess is their managements are going to now have to drive their businesses materially in the direction of profits to put investors back in the black.
Our speculative public companies, like biofuels maker Ceres, are going to face huge amounts of dilution if they have to raise capital right now — there’s just not the same enthusiasm for startups that there was a few years ago.
Second, value investors will soon start kicking the tires if they have not already.
Deckers Outdoor, whose stock is trading just a few dollars above its 52-week low of $40, is coming into 2016 with very lean inventories, particularly for its hot-selling UGG brand, having learned some lessons a few years back. The subject of a favorable article in Barron’s on Jan. 11, it also is rolling out new styles and it can count on fans like Oprah Winfrey to keep pushing the brand.
The region’s middle market rank of public companies is chock full of possible value plays.
Heritage Oaks Bancorp, the largest publicly-traded bank in the region, has solid earnings, seasoned management and could make an acquisition or two if it gets out from its regulatory order. There are several larger competitors who would covet its franchise.
Limoneira, based in Santa Paula, disappointed the Street with a recent earnings miss. But it has been gradually monetizing the value of its agricultural land holdings and it is riding a surge of culinary interest in lemons. Also based in Santa Paula is fresh food distributor Calavo, which has a large stake in Limoneira. It has been outperforming the dismal stock market early in the year.
Teledyne Technologies has assembled a profitable portfolio of technologies built around remote sensing. It has some exposure to the undersea oil-and-gas industry, which will hurt as long as energy prices are depressed. But it is going to benefit from any increase in defense spending and advances in drones, autonomous vehicles and the Internet of Things.
Third, there is the question of whether being a public company makes sense in a globalized, computerized, exchanged-traded funds world. Private companies like family-owned Patagonia or Sonos, which sold a chunk of equity but remain closely held, have the freedom to invest and grow without having to worry about what the Fed and China are doing to their stock price.
Finally, there may be a bit of a bubble in residential real estate. Supply-constrained markets such as Santa Barbara, Westlake Village and parts of San Luis Obispo County are dependent on extremely wealthy people buying on the theory they can sell later for a higher price. Luxury markets have rebounded, though unevenly in recent years. What happens when buyers have less cash or less confidence that prices will rise indefinitely?
We are going to find out.
• Reach Editor Henry Dubroff at [email protected]