| BUSINESSWEEK ONLINE : DECEMBER 27, 1999 ISSUE | ||||||||
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| WHERE TO INVEST -- STRATEGIES FOR STOCKS
1999: The Triumphs and the Turkeys Even in a boom year, the calls weren't easy What a way to end a millennium. The economy's booming, everyone who wants a job can get one, and if you can't pull down a million bucks with your Internet startup, you've got a shot at it on TV. For investors, the big-stock bull kept running right through what should be the fifth straight year of double-digit gains in the Standard & Poor's 500-stock index. Peace, prosperity--everyone's a winner, right? Well, not quite. The market's huge gains continued to be lopsided, concentrated among the biggest stocks. Anyone who bet the portfolio on hopes for the long-delayed revival of small-cap stocks reaped only a 10% gain in 1999. You thought tech stocks were overvalued a year ago? If you left the eight biggest tech and telecom stocks out of your portfolio, you missed half the growth in the S&P 500, says Alan Skrainka, chief market strategist for brokers Edward Jones & Co. Overall, tech stocks are up 58% for the year. The fact is, even the biggest boom has its mix of winners and losers, of investment triumphs and business blunders. Some score big: Take the initial public offering of stock in UNITED PARCEL SERVICE INC. (UPS) The biggest IPO in U.S. history grossed $5.47 billion, and insiders and investors who got in on the ground floor enjoyed a dot.com-style first-day bump of 35% above the $50 offer price on their shares. CEO JAMES P. KELLY saw his UPS stock holdings soar to $28.2 million after the offer. But he wasn't the only one smiling: 123,000 UPS employees and retirees are shareholders, too. And JAMES A. RUNDE, a vice-chairman at Morgan Stanley Dean Witter, won kudos for making a cold call in 1996 that led to the lead-underwriter role in a deal likely to garner fees of $191.5 million. But it's more fun to review the year's mistakes. For sheer arrogance in a high-stakes challenge, the Blooper of the Year award would have to go to MICROSOFT CORP. (MSFT) and its lawyers. Facing antitrust charges brought by the U.S. Justice Dept., the software giant mounted a defense that was ham-fisted and high-handed. Microsoft ''had this 'We could do no wrong' defense that undermined their credibility,'' says Albert A. Foer, president of the American Antitrust Institute, a legal-research group. It's hard to single out the worst moment in the trial. Microsoft's case started to crumble in opening arguments, when snippets of videotape showed an argumentative CEO WILLIAM H. GATES III disputing facts from his own memos. But savvy trial-watchers agree the low point came when Justice Dept. lawyers discovered that a Microsoft tape--purporting to show that the Windows 98 operating system couldn't function without Microsoft's Internet Explorer Web browser--was a pastiche of several different experiments. An angry District Judge Thomas Penfield Jackson said he questioned the ''entire reliability'' of the demonstration. Little wonder that Jackson eventually handed Justice a stinging critique of Microsoft's business tactics--sending the company scrambling into mediation. At least Microsoft's investors--whose shares are up 31% for the year--haven't suffered. The same can't be said for stockholders in Bank One Corp. (ONE) CEO JOHN B. McCOY has seen little but trouble since he uprooted the nation's fourth-largest bank from its humble home in Columbus, Ohio, when it bought First Chicago NBD Corp. in 1998. Bank One's credit-card unit, First USA, couldn't deliver the 20% profit gains McCoy promised while it was also laboring to launch Wingspanbank.com, a new Internet-only bank. Bank One's stock, which peaked at $63 in May, is now trading around $31. That's bad news for shareholders of Mutual Series funds, where portfolio manager RAY GAREA was promising Bank One would turn out to be one of his best picks. Overpromising is rife in the Internet world. E*TRADE GROUP INC. (EGRP), EBAY INC. (EBAY), and other e-commerce companies suffered black eyes in 1999 for massive service outages. Customers had to wonder whether funds flowing into slick ads shouldn't be spent beefing up networks instead. But vaporware is one New Economy product that has taken root in the old. Take the sparring between those feisty welterweights of the bourses, New York Stock Exchange Chairman RICHARD A. GRASSO and Nasdaq CEO FRANK G. ZARB. In May, Grasso tried to one-up Zarb in the race to be first to extend trading into the evening. Then, after Zarb scheduled a July board meeting to discuss converting Nasdaq to a for-profit, shareholder-owned market, Grasso leaked his own claim that the NYSE would sell shares in an IPO ''by Thanksgiving.'' The Securities & Exchange Commission, figuring that such hasty moves would turn out turkeys, put on the brakes. The NYSE also lost face when it mishandled one of the most publicized IPOs of the year, the Oct. 19 offering of MARTHA STEWART LIVING OMNIMEDIA INC. (MSO) As the exchange struggled with a huge flow of first-hour orders, the price on the NYSE floor lagged far behind the price among brokers who trade elsewhere--letting the brokers buy shares at $37 and sell them for up to $52. The specialist firm that handled the Stewart shares contributed to the enormous spread through clerical mistakes with order data. Indeed, 1999 was a year where bad numbers came back to bite. Just ask MARTIN L. GRASS, former CEO of Rite-Aid Corp. (RAD), ousted after an overly aggressive store construction and acquisition binge battered the bottom line and two earnings restatements led to an SEC investigation. Executives at CENDANT (CD) and WASTE MANAGEMENT (WMI), embroiled in turmoil over their accounting, would concur: Don't bet against the number-crunchers. Another lesson: Don't bet on interest rates staying low in the ninth year of an economic expansion. Three rate hikes by the Federal Reserve made losers of those who put their money into bonds (off 11% in 1999) and real estate investment trusts (off 18%). Those investors shouldn't feel too chagrined: Most economists didn't anticipate the strong economy that precipitated the Fed's moves. This time last year, the 55 economists polled by BUSINESS WEEK predicted the economy would grow just 1.9% in 1999. Final numbers aren't in, but it looks like 1999 will turn in a far healthier 3.9%. Last year was the fourth in a row that the forecasters lowballed the economy's prospects. Have they learned their lesson? This year's panel is considerably more optimistic, projecting 3.1% growth, 2.4% inflation, and low unemployment for 2000 (page 84). That's great news for the economy--unless, of course, it's destined to become the first blooper of the 21st Century. By MIKE MCNAMEE With bureau reports _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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