THE BRIGHTEST STARS AND BIGGEST FLOPSBehind the year's best and worst performances was usually the hand of technology
Still need proof that the New Economy is already upon us? A look at this year's roster of stock market rulers and rejects and the evidence is indisputable: Technology is driving the market. Indeed, tech investors sampled both the best and worst the market had to offer. And while technological change has spurred growth in an assortment of industries from personal computers to oil, it has also hurt sectors such as broadcasting and cable that must invest heavily in costly new products. Below, we trace the rise and fall of the best and worst stocks--as of Dec. 17--that began the year with a share price of $5 or more.
WORST NYSE STOCK: FoxMeyer Health Corp. is a classic story of great expectations that were dashed. Based on speculation that the company would sell its core asset--FoxMeyer Drug Co., the nation's fourth-largest drug wholesaler--for a tidy profit, the stock started the year with an inflated price of around $22 a share, says A.G. Edwards & Sons analyst Donald Spindel. Instead, the drug company filed for Chapter 11 and was snapped up for a song by McKesson Corp., its largest competitor. The stock is now trading at just over $1 a share. ''FoxMeyer Drug made big bets on their ability to find new customers and drive down costs--and lost,'' says Larry Marsh, research director at Salomon Brothers Inc. A group of creditors is now suing FoxMeyer for $198 million, claiming that the company illegally transferred assets out of the drug division before the bankruptcy filing. Although FoxMeyer Drug insiders continue to buy back stock, outside shareholders may not be quite as optimistic.
BEST AMEX STOCK: UTI Energy Corp. While most of its competitors drill offshore, this Wayne (Pa.) oil service company is a leader on land. Increased drilling activity coupled with a limited supply of workers and rigs have caused share prices to skyrocket: The stock began the year around $6 and is currently trading close to $34, an increase of more than 502%. With only 1,500 land rigs in the U.S., major oil companies are turning for assistance to UTI, the third-largest owner of rigs in the country. Several strategic acquisitions and insider ownership of close to 55% has piqued investor interest, says analyst Paul Chambers at Howard, Weil, Labouisse, Friedrichs Inc. Although UTI's current p-e ratio of 28 is high based on estimated 1997 earnings, Chambers believes that earnings per share may exceed $2 in 1998, vs. $1.32 in 1997.
WORST AMEX STOCK: Datametrics Corp.'s main products, high-speed color printers, are designed to withstand even a nuclear war. Unfortunately for investors, it was Datametrics' share price--currently $1--that got nuked. The company tried and failed to develop a commercial version of the printers it has been selling to the U.S. Defense Dept. for more than 30 years, says Seth H. Feinstein, a senior analyst and partner at Crowell, Weedon & Co. Although Datametrics continues to expand its defense-related contracts and reduce expenditures, it may turn out to be too little too late.
BEST NASDAQ STOCK: The main product of software developer Viasoft Inc., the Existing Systems Workbench, is in high demand as Corporate America scrambles to update its computer systems before the millennium, when all systems must change from a two- to four-digit date. If the correction isn't made, the consequences could be disastrous. For instance, a phone call that began just before midnight on Dec. 31, 1999, and extended into Jan. 1, 2000, would show up on the bill as a 99-year call; prisoners would be released early; and driver's licenses and Social Security numbers would be invalidated. As concern grows about the year 2000 dilemma, so does Viasoft's share price, up 742% this year. Chief Financial Officer Mark Schonau anticipates additional growth as European banks convert their systems to accommodate a common currency. The current p-e of 111 is lofty, but increased corporate spending in 1997 should help earnings catch up in the second half of the year, says Tarun Chandra, vice-president for technology research at Laidlaw Equities Inc.
WORST NASDAQ STOCK: Starved for capital, SC&T International Inc., a multimedia components manufacturer, called on Sovereign Equity Management Corp. to manage its December, 1995, initial public offering. Unbeknownst to SC&T, the Boca Raton (Fla.) brokerage had ties to organized crime, according to BUSINESS WEEK (Dec. 16). Five months after the IPO, Sovereign--which had been executing more than 60% of SC&T's trades--cut back its support of the stock and sent the price into a downward spiral that hasn't stopped. With shares now selling for mere pennies, it's going to take more than just a few securities regulators to turn this company around.
BEST STOCK GROUP: For oil and gas drilling companies, it was a year to remember. Up more than 100% on average, these companies benefited from an increase in drilling activity and a shortage of the rigs needed to do it, says Arvind Sanger, vice-president at Donaldson, Lufkin & Jenrette Securities Corp. Interest in both offshore and land drilling has picked up since the advent of three-dimensional seismic technology, which allows companies actually to see where and what they are drilling. And over the past 12 to 18 months, a dramatic increase in commodity prices and day rates--the daily rental fees drillers charge oil companies--have made companies such as Global Marine, Rowan & Falcon Drilling standout performers.
WORST STOCK GROUP: The Telecommunications Reform Act of 1996 has irrevocably changed the broadcast and media industry, which was down 19.24%. Now that long-distance and local telephone carriers and cable operators have access to each other's markets, competition is fierce. Because of deregulation and pricey new fiber-optic technology, much of the cable industry remains in the red. But with lots of new products in the pipeline and future consolidation likely, investors may want to stay tuned.
WORST STOCK FUND MANAGER: G. Paul Matthews, manager of the Matthews Korea Fund, says disastrous corporate earnings contributed to his fund's poor performance--down 26% through Dec. 13. Although South Korea's economy has grown 6% this year, a prolonged slowdown in key export sectors--semiconductors, steel, and petrochemicals--has meant two consecutive years of weak stock market returns. South Korea may still be the cheapest equity market in Asia, Matthews says. But in order for stocks to reach their full potential, the government must get serious about deregulation. With a presidential election scheduled for 1997, change may be on the horizon.
BEST COMMODITIES FUND MANAGER: Richard J. Dennis became a legend in the Chicago futures pits in the 1980s as he built an estimated $200 million fortune. Then his luck turned sour with losses in high-profile public funds. Now, the $60 million fund managed by his Chicago-based Dennis Trading Group is up 119.4% through October, according to Barclay Trading Group Ltd. The key to his renewed success? Mechanization. Every one of his trading decisions is computer-driven. Whereas in the past Dennis would override computer-generated trades that seemed too risky, his current system allows for no such human interference. The latest results have left Dennis content to ride the electronic tide.
BEST OVERSEAS MARKET: Until Dec. 16, China's Shenzen B share market was up 126%, thanks to falling interest rates and lax market oversight. Most of the gain came in mid-November, when locals, who are technically banned from buying B shares, plunged into the market anyway. Alarmed, Communist Party officials put a stop to the boomlet by declaring a crackdown on speculation. The market promptly plummeted more than 20%. Daredevil investors take notice.
By Kerry Capell, with William Glasgall in New York, Greg Burns in Chicago, and Geoffrey Smith in Boston
Updated June 13, 1997 by bwwebmaster
Copyright 1996, Bloomberg L.P.