| BUSINESSWEEK ONLINE : AUGUST 9, 1999 ISSUE | ||||||||
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| FINANCE
Inside Wall Street: A Report Card Featured stocks usually surged at first, but lagged later on Last year was a nightmare for stock market pros. The indexes were strong, but the gains were concentrated in a narrow band of high-profile megacap stocks like Microsoft (MSFT), General Electric (GE), and Wal-Mart Stores (WMT). That kind of environment was brutal for stockpickers who sought opportunity in what the crowd was overlooking, just the sort of situations reported in BUSINESS WEEK's Inside Wall Street column. In that light, the results of our analysis of the performance of the 183 stocks featured in the column last year is not surprising. But it is disappointing. The stocks of the companies, on average, swamped the gains in the Standard & Poor's 500-stock index and the Dow Jones Industrial average on the first day the column appeared, usually a Friday (table). One month later, the Inside Wall Street stocks were still way ahead of indexes, up an average of 3.8%. At the three-month mark, the average Inside Wall Street stock was slightly negative and well behind the market--and after six months, the average stock was down 2.2%, vs. the S&P's 11.2% gain. In 1997, the first year for which we undertook this analysis, the column's stocks drubbed the S&P and the Dow overwhelmingly in one-day and one-month periods. The column also topped the S&P and Dow in the three-month period, and beat the Dow and only slightly trailed the S&P over six months. Since Inside Wall Street reports more often on small companies, we also measure performance against the Russell 2000 index, a broad gauge of small caps. Here, the column's returns were better, nosing out the Russell index during the three- and six-month periods, and beating it handily over the shorter periods. Of course, Inside Wall Street is not a managed portfolio. Written by veteran Wall Street journalist Gene G. Marcial since 1981, the column reports the latest information and market talk--usually not yet widely known--that could affect the fortunes of companies and, of course, the prices of stocks. It's about potential mergers or takeovers; exciting new products, changes in earnings, for better and for worse; and corporate developments such as restructuring, spin-offs and asset sales. The inside line can come from big investors, money managers, securities analysts, or company executives. To measure the column's performance, we use Thursday closing prices. The magazine is available online Thursday nights and begins to reach subscribers and newsstands on Friday. That Thursday close is the base for all other measurements. The one-month, three-month, and six-month figures are simply the stock-price percentage change between the stock's pre-publication price and the other dates. When one of those dates falls on a weekend or holiday, we use the previous trading day's closing price. When stocks split, we adjust prices accordingly. CALCULATIONS. We also adjust prices for takeovers. If a company has been acquired in a stock swap during the measurement period, we calculate the return based on the price of the new stock that the shareholder of the old stock will now own. So the three- and six-month calculation of Chrysler's gains--13.2% and 12.8%, respectively--was based on the 0.6235 shares of Daimler Benz AG that the U.S. auto maker's shareholders received. For cash deals, we assume the cash received as the stock's price at the next measurement date. The biggest impact from a mention in BUSINESS WEEK is on Friday, the first opportunity investors have to act on the information. The first-day price action is overwhelmingly positive, up an average 4.9% from the Thursday close. Indeed, of the 183 stocks reported on, 135 were up on Friday. That's the ''announcement effect'' of the column, which often happens in other situations such as a piece of significant news from a company or a strong recommendation from a well-followed analyst. Depending on the company and the story behind it, the stock can really jump that first day. Look at Biomira, a biotechnology company in Edmonton, Alberta, which trades in the U.S. on the over-the-counter market. The stock, mentioned in the Dec. 7 column, had closed at $2 (U.S.) per share on Nov. 25 (a Wednesday, since because of Thanksgiving the magazine went to press a day early.) The company, the column reported, was developing a vaccine to battle breast cancer, and had a marketing pact with Chiron Corp., a larger biotech company, to produce and market the vaccine. The news was electric: On the Friday after Thanksgiving, a day with a short trading session and low volume, nearly 5.5 million shares of the stock traded, more than 10 times the company's average, and the stock jumped to 4 13/16, up 140.6% for the day. In mid-May, the stock traded as high as 5 1/2, but was at 3 3/4 on May 25, six months after publication. Biomira's enormous gain is atypical. The next-best one-day performances came from EarthLink Network Inc., up 37.2%, and WavePhore, up 35.4%. Analyst Joel H. Krasner of First Albany Corp. had forecast that WavePhore, a developer of high-speed systems for distributing programming to TVs and PCs, would go to 20 from 11 within a year. Instead, the stock headed south. After six months, the company, since renamed Wavo Corp., was selling at 8 7/16. Inside Wall Street had better luck with other Net plays such as Network Event Theater, Network Solutions, and Security Dynamics Technologies. All three were big winners in the three-month time period. The column also reported on Net stars Lycos, Infoseek, and Excite back in April, 1998, but as short-sale recommendations from Mike Murphy, editor of the Overpriced Stock Service. The fundamental advice may have been sound, but the timing was not. An Infoseek short would have produced a 10.6% profit in three months, but six months after the first mention, all three stocks were higher. That would have produced losses for short-sellers. Long before investors ever heard of the Internet, they were talking about takeovers--and Inside Wall Street has always tuned its readers in to that chatter. Some of the stocks with the biggest gains were takeovers. Fingerhut Cos. (FD), a direct-mail marketer with a growing Internet presence, was bought out for $25 a share by Federated Department Stores Inc. (FD) about three months after it was highlighted in the magazine as a Net play, not as a takeover. In the Sept. 21 issue, retailing analyst Alan M. Rifkin of U.S. Bancorp. Piper Jaffray also predicted that Lowe's Cos. (LOW), the nation's No. 2 home-improvement chain, would acquire Eagle Hardware & Garden. That very deal was announced on Nov. 22. And a column that closed Feb. 25, 1998, reported takeover whispers about Intelligent Electronics and its 80%-owned subsidiary, XLConnect Solutions. Eight days later, Xerox Corp. (XRX) agreed to acquire them. But alas, FPA Medical Management Inc. (FPAMQ), a would-be takeover featured in the Jan. 26, 1998, issue, never happened. In fact, the company, which managed physician groups, was already ailing, and many thought it would be resuscitated by a stronger partner. The stock rose 29% after a month, but no acquirer stepped in and the company went into bankruptcy. The stock was down 95.3% six months later. But the second item in that Inside Wall Street column was a hearty recommendation of pharmaceutical giant Pfizer Inc. (PFE) by Lew Rabinowitz of R. Lewis Securities. He bet that the Food & Drug Administration would approve the impotence drug Viagra in the spring, and the stock, at 77, would be above 100 in a year. He was right on the FDA and wrong about the stock, which was over 100 within three months and has split 3-for-1 since. Preliminary indications for 1999 so far are that the column is beating the averages. We plan to report on this year's performance this time next year. By Jeffrey M. Laderman, with B. Kite, in New York _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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