Y’all Street

Which Texas stocks beat the bull market—and which were simply full of bull?

August 1998By and Comments

IF IT HAS BEEN A GREAT YEAR FOR U.S. STOCKS, it’s been even better for Texas stocks: They were up more than 42 percent from May 1, 1997, to April 30, 1998, beating the Standard & Poor’s 500 even as America’s long-running bull market stampeded. Don’t believe it? Compare what might be called the Texas Index (TI)—the performance of the state’s 650 publicly traded stocks—to the S&P 500. Few other states—or even countries—can match our superior performance.

What’s behind this success? Big, booming stocks, and Texas has more of them than almost anyplace else. Different indexes are constructed using different criteria, but the TI—like the S&P 500—relies on “capitalization weighting.” Indexes like these determine a stock’s “market capitalization”—how much a company is worth—by multiplying a single share’s price by the number of shares outstanding. Each stock is weighted within the index by its capitalization, so that big stocks have more impact than small stocks; that’s where the dollars are.

But the TI differs from the S&P 500 in that it has more stocks: 650. The S&P 500 is an index of some but not all of the very largest U.S. stocks; it’s a specific list handpicked by Standard & Poor’s. Many important U.S. stocks aren’t in the S&P 500, including Berkshire Hathaway, America Online, and Safeway. By contrast, the TI is composed of all Texas stocks that are publicly traded—not only the largest ones, but the smallest ones too.

Safe Bets

Most Texas stocks rose over the past year, but these seven stood out. The first three were remarkable for their sheer size and impressive gains, the next two for their spectacular returns, and the last two for their potential.

Dell Computer Corporation (DELL NASDAQ)
Up 272 percent. Share price on April 30: 80 3⁄4.

Round Rock—based Dell has been as big a Texas success story as they come, outpacing monoliths Microsoft, Coca-Cola, and Intel. Its annual revenue—$12.3 billion last year—passed that of IBM, making it the world’s second-largest PC maker (Houston’s Compaq is the largest). Dell isn’t cheap, but its explosive international growth and pioneering strategy help justify the price. The assumption is that the company won’t just survive but thrive. For the Dell faithful, that confidence has been greatly rewarded.

Exxon Corporation (XON NYSE)
Up 34 percent. Share price on April 30: 73 1⁄16.

Irving’s Exxon is not just the largest Texas stock; it’s the fourth largest in the world. This $175 billion—plus corporation is considered the premier oil firm, which is why its performance has been so sound at a time when low oil prices have cut industry profits. Investors happily pay a premium for Exxon, contributing to the TI’s strong returns. They know that if oil prices rise substantially, so will the stock’s value.

SBC Communications (SBC NYSE)
Up 55 percent. Share price on April 30: 41 7⁄16.

“SBC is like Godzilla: It’s doing its best to assure that no one else gets into the local telephone business and will trample anything in its path,” says Regina Costa, a telecommunications research director at the Utility Reform Network in San Francisco, California. Actually, SBC is better than Godzilla, because it lives up to the hype. If its $56.18 billion purchase of Ameritech is approved, San Antonio—based SBC will control roughly one third of America’s phone lines and will finally have a presence abroad. Although the government is likely to impose conditions on the deal, SBC is already one of telecom’s few winners.

Pillowtex Corporation (PTX NYSE)
Up 189 percent. Share price on April 30: 50 3⁄16.

Pillowtex proves the maxim that everything’s bigger in Texas: The Dallas textile manufacturer is number one in market share for pillows, blankets, and down comforters; number two for towels and mattress pads; and number three for bedding. After its successful takeover of rival Fieldcrest Cannon last December, the company saw its sales jump by almost $1 billion. Pillowtex impressed analysts by cutting costs at Fieldcrest while still rolling out an attractive line of new products at April’s annual home fashion show in New York.

Zapata Corporation (ZAP NYSE)
Up 221 percent. Share price on April 30: 12 3⁄4.

Although this widely diversified holding company was originally into oil, it moved into commercial fishing during the bust of the late eighties and then into natural gas. In the past decade Houston-based Zapata has left oil and gas, expanded its fish-oil business, entered the world of restaurants and food service, purchased the NFL’s Tampa Bay Buccaneers, and attempted to buy Internet companies. Its stock rose mostly because it sold about 40 percent of its fish-processing unit, which many analysts thought was undervalued.

AMR Corporation (AMR NYSE)
Up 68 percent. Share price on April 30: 152 1⁄2 (the stock has since split).

Fort Worth’s AMR Corporation, the parent company of American Airlines, is a bargain buy for investors looking to the future. The airline industry has the lowest price-to-earnings ratio of any major industry in the stock market, and although AMR is the dominant industry leader, it trades at just ten times its projected profits for 1998. So why is the stock so cheap? Some investors fear profits may be peaking. But the low oil prices that are bad news for oil companies are great news for airlines, which count jet fuel among their most expensive budget lines. Moreover, strong bookings for the peak summer travel season and high ticket prices should increase profits. And American is presently negotiating one of the biggest airline alliances in the world: a three-way deal with British Airways and US Airways that would entitle passengers to the services of each carrier.

Whole Foods Market (WFMI NASDAQ)
Up 174 percent. Share price on April 30: 61 7⁄8.

With nationwide sales expected to hit $1.4 billion this year, Austin’s Whole Foods Market is the big cheese of the natural foods industry, which is growing ten times faster than all other food-related categories. Criticized in the past for its high prices, the company has launched a less expensive store brand of items ranging from toilet paper to bottled water. Whole Foods is also acquiring other manufacturers and their products and has gobbled up rival natural foods chains (notably Fresh Fields, a smaller East Coast version of Whole Foods). Its newest stores are more spacious and will soon be equipped with a high-tech system to manage inventory. Risky Business Not every stock can soar—not even in Texas—and some had a tough time in the past year. A poor showing by the first two kept the TI from rising even higher, while the next two saw much of their value quickly erode. The final two rose to levels that are too high to last.

Union Pacific Corporation (UNP NYSE)
Down 11 percent. Share price on April 30: 54 3/4.

America’s largest railroad held down the TI’s performance. Since completing its $5.4 billion acquisition of Southern Pacific Railroad in 1997, Union Pacific’s 36,000 miles of tracks have been severely congested, costing the Dallas-based company $342 million in lost revenue.

NGC Corporation (NGL NYSE)
Down 16 percent. Share price on April 30: 14 3/4.

The Houston-based electricity and gas wholesaler, which recently changed its name to Dynegy, is second in size only to Enron, another Houston energy concern. Yet it reported a $164.3 million loss last year, partly as a result of its merger with Chevron’s natural gas liquids business, whose huge inventory was revalued at its low market price.

Harvest Restaurant Group (ROTI NASDAQ)
Down 91 percent. Share price on April 30: 23⁄32.

This two-year-old fast-food-restaurant franchiser raised more than $10 million in public offerings, and its share price hit as high as $8.25. But after losing $10.8 million, it dipped to below 75 cents. Founder William J. Gallagher insists the San Antonio—based company is on track to meet its goal of having 25 company-owned food courts by year’s end. His optimism aside, investors can take solace in the fact that things can’t get much worse.

GeneMedicine (GMED NASDAQ)
Down 60 percent. Share price on April 30: 2 3⁄4. 

This biotech company in the Woodlands develops gene medicines for cancer, neuromuscular disorders, and cardiovascular and pulmonary diseases—but it has lately been sick itself. Last fall, believing that GeneMedicine was undervalued, financier David Blech bought thousands of shares, pushing its price up. When it turned out that he couldn’t actually pay for those shares, the company’s stock fell hard.

7th Level (SEVL NASDAQ)
Up 182 percent. Share price on April 30: 6 7⁄8. 

Like many small technology firms, 7th Level has taken its shareholders on a roller-coaster ride. They should get off, and new investors ought to look elsewhere. The Richardson-based software developer’s net worth plunged from $24.7 million to $2.5 million about a year ago. 7th Level’s stock price rocketed up 261 percent in April with the announcement that its character-animation technology will be distributed by Internet data provider WavePhore. Yet that same month, in 7th Level’s 1998 annual report, independent auditor KPMG Peat Marwick LLP expressed concern that the company wouldn’t be able to stay in business.

Dave & Buster’s (DANB NASDAQ)
Up 91 percent. Share price on April 30: 26 1⁄8.

As this Dallas restaurant franchiser proves, it’s one thing to try to be the next McDonald’s and another thing to do it. Granted, its twelve restaurant-entertainment complexes offer a full menu along with an array of amusement attractions, but its stock is too expensive, and its price-to-earnings ratio is too high. Company officials assume they can maintain an aggressive growth rate through rapid expansion, but the possibility of cost overruns or delays is too great.

Stephen Brennan, Charles Else, and Bill Reed are investment advisers at Fisher Investments in San Antonio.

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