| BUSINESSWEEK ONLINE : MAY 31, 1999 ISSUE | ||||||||
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| SPECIAL REPORT
Hot Growth Companies Here's our ranking of 1999's best small corporations Wayne M. Mertes knows a thing or two about life on the road. The 63-year-old co-founder of motor home and trailer maker National RV Holdings Inc. left his tiny North Dakota hometown when he was just 15 and headed to California. Living in his car for the first few weeks, Mertes found work at a mobile-home manufacturer. ''I lived in a rented travel trailer, garages--any place I could find to hang my hat,'' he recalls of his early days. Mertes' sense of adventure has paid off handsomely. Eventually, he and his father started a company that became National RV NVH, an operation that today sells campers, mini-motor homes, and luxury motor homes. Thanks to a wave of retirees and older, prosperous baby boomers who have flocked to its innovative motor homes, National RV's performance has exploded of late: Over the past three years, its earnings climbed an average annual 91.1%, to $24 million in 1998, while its sales grew an average 62.1%, to $360 million. That phenomenal success drove the company straight into the No. 24 spot on BUSINESS WEEK's 1999 Hot Growth list of 100 fastest-growing small companies. As for his own retirement, Mertes says: ''I'm having too much fun.'' QUICK STUDIES. Resourcefulness and single-minded drive are two of the characteristics that pop up again and again among the 100 companies on our 15th annual Hot Growth list. Whether they are apparel makers or semiconductor manufacturers, this year's winners have an uncanny ability to spot what their customers want next and to bring those products to market quickly. And many, particularly those in the field of information technology, have mastered the art of profiting from the outsourcing needs of their giant brethren. These nimble operators racked up 44.5% average annual sales growth and 89.5% average annual earnings gains over the past three years. That left the Standard & Poor's Industrials companies in the dust, with 6.2% sales and 6.7% earnings growth. And these miniature dynamos squeeze a phenomenal return out of their capital: The Hot Growth 100 recorded an average annual 22% return on capital, vs. 11.6% for the S&P Industrials. To come up with this year's list of winners, we've cast a wider net. We recognized that the world has shifted in the 14 years since BUSINESS WEEK first started identifying Hot Growth companies. Small companies make up a far larger part of the American economy, even as the Internet and a roaring bull stock market have dramatically altered the rules of the game. That's why we raised the performance bar and significantly expanded the pool of competition. Under our old rules, revenues could be no more than $150 million. However, that meant some of the most stellar small companies around simply outgrew our rankings. To ensure we're not overlooking a fascinating cut of this vibrant universe, we've increased the sales maximum to $500 million. At the same time, we've tightened our performance standards. Companies now must have minimum sales of $25 million, up from the old $10 million. Market capitalization now can't fall below $25 million--before, the floor was $1 million. And to make sure companies can't coast on past laurels, we've added a requirement that return on capital in the most recent year be at least 90% of the previous year's level. What distinguishes those companies that did make the '99 list? High tech is certainly hot, but less glamorous businesses yield big payoffs, too: The No. 1 company this year is Friede Goldman International Inc. FGI, which builds and refurbishes--of all things--offshore oil rigs. Friede Goldman took advantage of the industry's woes to buy up contracts on the cheap and built a booming business converting shallow-water rigs to enable them to tap into petroleum reservoirs far out at sea. PLAY TIME. An ability to navigate the fast-shifting currents of fickle customers also paid off big. That goes double for the handful of companies we captured from the fashion business. This year's list could outfit an entire high school, with Generation Y-focused retailers like Buckle Inc. BKE (No. 50), and Wet Seal Inc. WTSLA (No. 76). Other savvy retailers cashed in by appealing to the rest of the family. Among them: bebe stores BEBE (No. 6), which targets young professional women; Kenneth Cole Productions KCP (No. 61), which designs and sells high-end shoes, handbags, and accessories; and, for the under-12 set, Children's Place Retail Stores PLCE (No. 35). Other companies have targeted the hobbies of all those relentlessly optimistic consumers out there. So Meade Instruments Corp. MEAD (No. 13) designs and sells telescopes for the serious astronomer as well as the amateur stargazer, while Action Performance Cos. ACTN (No. 59) is cashing in on the motor-sports craze, making die-cast collectible scale-model cars for NASCAR buffs. ''After building their personal balance sheets in the 1990s,'' says Ronald H. Muhlenkamp, portfolio manager of the Muhlenkamp Fund, ''baby-boomer America is starting to spend for toys.'' Not surprisingly, this year's list was again led by technology companies: Fully a third are in computer equipment, software, or services. But you won't find any flashy Internet startups on BUSINESS WEEK's list. That's because companies have to make money to land on it--something many cyber-upstarts haven't gotten around to quite yet. But if the best way to make money in a gold rush is to sell shovels, our list is studded with companies selling the tools that pave the way for the Internet economy. Among the winners are communications suppliers such as Vitesse Semiconductor Corp. VTSS (No. 56) and Applied Micro Circuits Corp. AMCC (No. 66). Service companies also remained hot: Syntel Inc. SYNT (No. 11) provides information-technology consulting services to customers such as insurer American International Group Inc. And as technology puts more information at one's fingertips, companies increasingly need help sorting it all out. That has meant booming sales growth for FactSet Research Systems Inc. FDS (No. 34), which provides a database of financial information to financial professionals. ''DIRT CHEAP.'' Even many of the hottest small companies find a cool reception on Wall Street these days, though. While the Standard & Poor's 500-stock index was up 21.4% for the year ended May 7, the Russell 2000 was down 9.1% for the same period. But the stars on our Hot Growth list saw their prices rise 20.3% through May 7, on the same cap-weighted basis. One reason small stocks are under siege is that the market volatility triggered by the economic turmoil last year in Russia and Latin America sent investors flocking to liquid, big-cap stocks. The result: ''Small-cap stocks are dirt cheap,'' says John H. Laporte, portfolio manager of the $4.7 billion T. Rowe Price New Horizons Fund. Laporte says the relative price-earnings ratio of his fund--that is, the p-e of his fund over the p-e of the S&P 500--hit 0.78 at the end of the first quarter, an all-time low. The bargains have started attracting corporate buyers. Still, most small-company fund managers don't expect small caps to catch fire anytime soon. Indeed, the average p-e of our Hot Growth 100 is 27.6, compared with 33.8 for the S&P 500. ''We need some shock to the system,'' says Jesus ''J.C.'' Cabrera, portfolio manager of State Street Research Emerging Growth Fund. That also means there are limited opportunities for small-company entrepreneurs to cash in on their success. While the market for initial public offerings has been explosive, much of the money is being loaded into larger companies or Internet stocks. Smaller companies that don't have a dot-com attached to their name face a tougher sell. Certainly the road ahead could remain bumpy for tiny growth companies. The biggest risk: a sudden upward spike in interest rates. That's because small-cap stocks tend to get hit harder than big-caps when interest rates head north. But barring that sort of blow, these small stars can keep hoping that their torrid growth is a sign of bigger things to come. By Amy Barrett in Philadelphia _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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RELATED ITEMS Hot Growth Companies TABLE: Hottest of the Hot Friede Goldman Intl.: A Gusher in a Drought bebe stores inc.: This Is No Fashion Victim Mastech Corp.: The Nabobs of Networking Action Performance Cos.: Hot-Rodding His Way to the Top Salton Inc.: Putting a Gizmo in Every Kitchen Maximus Inc.: Welfare Privatizer Where Are They Now? TABLE: The 1997 Winners...And the Losers TABLE: 1999's 100 Top Hot Growth Companies (.pdf) INTERACT E-Mail to Business Week Online | |||
