THE CLASS 0F '95: WHERE ARE THEY NOW?
Not long ago, investors in Happiness Express Inc. were having a lovefest. Its first hit product, a flashlight decorated with Barney the dinosaur, put the toymaker on the fast track in 1994. When Barney-related products headed for extinction, Happiness came up with an even bigger smash: a line featuring the Mighty Morphin Power Rangers. With reported earnings of $7.1 million on sales of $60 million for the year ended March, 1995, the New York company topped BUSINESS WEEK's 1995 Hot Growth list.
Then the Distress Express pulled in. When Power Rangers sales began to sputter, founder Joseph A. Sutton and his brother, Isaac, ran out of steam. Says analyst Sean P. McGowan of Gerard Klauer Mattison & Co.: ''Nothing was there to bail it out.''
Soon, Happiness Express completely derailed. In May, 1996, Coopers & Lybrand withdrew their auditors report for fiscal 1995, citing the need for a revision of Happiness' financial statements. And according to company documents, the U.S. Attorney's office in Manhattan and the Securities & Exchange Commission have begun investigations of the company for financial irregularities. In September, Happiness filed for Chapter 11, although its case was later dismissed from bankruptcy court. The company no longer trades or has significant operations. The SEC, U.S. Attorney's office, Coopers & Lybrand, and the Suttons or their lawyers all refused public comment or didn't return repeated calls.
It's a sobering lesson. While many highfliers mature into healthy companies, some fizzle quickly. The rewards can be gargantuan--but so are the risks. That's even truer for investors. As a group, the Class of 1995's total return over the past two years was negative 4.5%, compared with the Russell 2000 index' 33%.
TOO MUCH WINE. Why the poor performance? Investor favorites must meet rocketing expectations while trying to grow off a larger base. One slipup brings a rapid sell-off, especially from momentum sellers who evaporate in a heartbeat.
Take direct-mail wine seller Geerlings & Wade Inc. Ranked No.7 in 1995, its stock has fallen 78%--from 16 to a recent 3 1/2. As sales took off, the company bought more wine than it could sell. It lost $677,000 in 1995, prompting co-founder and CEO Phillip D. Wade to step down. In the seven months since Jay L. Essa of E&J Gallo Winery assumed command, he has pared inventory and cut staff by 11%. ''The company will be running on all cylinders by late this year,'' says Essa.
A few bright spots emerged in the Class of '95. One was Apollo Group Inc., parent of the University of Phoenix, a chain of adult education programs that has seen a 341.8% total return. In 1976, John G. Sperling created the university in response to a lack of education programs for working adults. ''That niche is a big market,'' says analyst Peter P. Appert of Alex. Brown & Sons Inc. ''It's been woefully underserved.''
Part of the allure is the lack of hassles such as long registration lines. Lower costs help, too: Tuition is just over half that of the average private university. With Apollo's schools now in 11 states, profits rose 70% for the fiscal year ended last August, to $21.4 million.
Another winner is Safeskin Corp., which has posted a 251% total return. When a government agency announced in 1987 that health-care officials must wear gloves when handling bodily fluids, lots of companies jumped in. But Safeskin came out with a latex glove so much more comfortable than that of its rivals that it could charge twice the price. Safeskin now boasts 28% of the examination glove market in hospitals and is moving to diversify. Its goal, like other thriving companies: Avoid the fate of those whose scorching growth burned a hole in their business plan.
By Lori Bongiorno in New York
Updated June 15, 1997 by bwwebmaster
Copyright 1997, Bloomberg L.P.