Regional brokerages do well with companies close by
Finding treasure in your own backyard is a prospect that many shrug off.
But regional brokerage houses around the country have realized substantial portfolio gains by doing just that -- specializing in companies that are headquartered in their own environs.
In fact, according to a six-month-old service called Rating the Stock Selectors, regional brokerage firms outperformed all Wall Street brokerage houses in the three-month period through Oct. 31. And while Mannie Webb, the editor, admits that the poor year-end market reduced the performance of all brokerage model portfolios in the three months through Jan. 31, on the average regionals still outperformed Wall Street firms.
Mr. Webb says: ''The market has been so bad that almost all the 250 portfolios we follow were negative at the end of January. Still, the market leader was an advisory letter in Salem, Mass., not in New York.
Webb is not the first to recognize the shrewd stock picking done by regional firms. The Scottish trusts -- large investment organizations in Scotland that invest heavily in US markets -- have leapfrogged Wall Street brokerage houses for years, preferring to get more firsthand information. They attributed their satisfactory portfolio performance in US markets this difficult year to their adherence to recommendations by regionals, which are in closer touch with the growth companies in their areas.
For example, the Charlotte, N.C.-based Interstate Securities achieved a 23 percent gain on its model portfolio last year. Quite a feat in a market in which the Dow Jones industrial average fell 9.25 percent.
William Staton, Interstate's senior vice-president and director of research, says, ''We follow more companies in the two Carolinas and medium and small companies in the Southeast than any other brokerage house.''
Right now, Interstate is recommending three local stocks. In the financial area it likes NCNB Corporation, the holding company for North Carolina National Bank. NCNB is the largest bank in the South and is one of the most aggressive regional banks in the country. ''It just made an acquisition that gave it entry into the north Florida area when it bought the First National Bank of Lake City, Fla.,'' Mr. Staton says. ''There was a special grandfather clause (in federal bank holding company legislation) that permitted it to do this, and that gives it a jump on everyone else in interstate banking and allows it to expand its market significantly.''
Another Interstate pick is Piedmont Aviation. ''I read the other day that some airline expert announced 1981 was the worst year in airline history,'' Staton says. ''But Piedmont had a record year. They have a very low break-even factor.'' (Some airlines need to fly at 60 percent or 65 percent capacity just to break even, while Piedmont needs only 50 percent capacity.) Further, Staton maintains, ''Piedmont is bypassing major congested hubs like Atlanta and flying directly from Charlotte to places like Tampa. They have a modern fuel-efficient fleet geared to short hops, and the area they fly in the South is growing.''
A final Interstate choice, Collins & Aikman, is headquartered in New York, but operates most of its plants in Interstate's region, giving it a good opportunity to investigate operations. A textile manufacturer, the company has sound fundamentals and a good technical chart despite its exposure to the auto and housing businesses. ''Despite January's down market,'' Staton says, ''the stock has held firm in the $11 area. If the stock is not going down in this bad market, we are happy with it.''
Like most regionals, Interstate doesn't recommend companies only in its own region. One of its major winners last year was Mallinckrodt, a St. Louis-based company recently acquired by Avon.
In Chicago, William Blair & Co. was another good performer, according to Mannie Webb. During the three months from July to October it posted a 21 percent gain on an annualized basis.
Blair, which also follows firms in other regions, has two area companies it is especially keen on these days. Both are in electrical equipment: first, W. W. Grainger, a Skokie, Ill.-based company that manufactures and distributes electrical motors, fans, blowers, pumps, and air compressors and wholesales other electrical supplies. ''It is a national company with major Midwestern sales,'' Blair research director Ned Hoban says. ''It has already been heavily (affected) by what has happened in housing, autos, and farming.'' Still, Hoban says, the company ''had an up year despite an adverse environment,'' in good part because of what he terms ''a very strong distribution franchise.'' ''This is the time to buy a company like this,'' he says, ''not when the company is robust and experiencing major earnings growth but in periods of adversity where it is having only small earnings gains.''
A second electrical company that Blair is partial to right now is Molex, an over-the-counter stock with some $143 million in sales during its last fiscal year. The company, which makes electrical connectors and associated products, ''is superbly managed,'' according to Hoban.
The stock sells at about $41, or 13 times earnings. But the high price/earnings ratio is acceptable to Hoban, ''when you have the kind of growth Molex has. It was an $11 million company 10 years ago.''
He contends Wall Street is ''just beginning to follow Molex, but they try to get involved after the company starts getting significant visibility. We have worked closely with these people for years and we have a better understanding of the company. We have been with them in bad times and good, and remember past behavior.''
Referring to his Wall Street counterparts, Hoban says: ''You can't understand a company and a management by going out and visiting just once.''
Despite rising interest rates and continued concern over the federal budget deficit, the stock market did little more than churn last week. The Dow Jones industrial average closed at 824.30 for the week.