BUSINESSWEEK ONLINE : MAY 29, 2000 ISSUE
COVER STORY What Happened to the Class of '98? With their stock up more than 1,000% in the past two years to a recent 69, the managers of Powerwave Technologies Inc. (PWAV) are heroes today. But it was only a year and a half ago that the company was posting losses and the stock was trading at $6 a share. Such is life in the volatile world of small but fast-growing companies. Powerwave, which makes amplifiers that clarify cellular calls, rocketed onto Business Week's Hot Growth list in 1998 thanks to a booming business selling its technology to Korean mobile-phone makers. The company, located in Irvine, Calif., had grown from just $23 million in sales in 1994 to $119.7 million in 1997, with 83% of sales coming from that one market. But then the Korean economy went into a tailspin, and orders dried up. From $100 million in 1997, sales to Korea dropped to $30 million in 1998, helping to drag net income down from $16 million in 1997 to a $3 million 1998 loss. NO LAYOFFS. Many would have taken this moment to scale back, but CEO Bruce Edwards didn't. Heartened by a few new North American customers, including Nortel Networks Corp., he dug in. He pledged no layoffs, maintained heavy research spending, and even paid $59 million for a rival. The moves paid off as new clients such as Ericsson and Nokia Corp. signed on and cellular-phone use got a boost from new services like e-mail. Last year, sales were rising. ''If you really believe in what you have, stick with it.'' says Edwards. ''It does pay off.'' Well, not for everybody. Of the 82 stocks of the Hot Growth class of 1998 that have not merged or stopped trading for other reasons, 24 have a positive total return. Some 58 are in negative territory. But for those that had the magic combination of good products, good management, and good luck, the payoff was big. As a whole, the class of 1998 turned in a 149% market-weighted total return over the past two years. That bests both the Standard & Poor's 500-stock index' 34% rise and the small-cap Russell 2000's 8% for the same period. The companies that fumbled did so for different reasons. For some, like Omni Energy Services Corp., based in Carencro, La., it was a question of timing. Omni, an oil-field services company specializing in seismic drilling, missed out on this year's boom in energy stocks, its CEO says, because its clients had a backlog of seismic studies to pursue. That has left its stock hovering at a little over $1 a share, down 67% this year. Others fell fast after pursuing faddish business models, which in the end proved unwise. A couple of years ago the stocks of companies that rolled up medical practices, such as PhyCor Inc. (PHYC) and MedPartners (MDX) (now part of Caremark Rx Inc.), were hot. They promised to make the practices efficient and profitable by operating on a large scale. But some companies expanded too quickly, and that strategy has fallen out of favor. Tampa-based Coast Dental Services Inc. (CDEN) is a good example. It's no longer buying up dental practices. Instead it's building them from the ground up, having discovered that buying a practice for $800,000 on average is not as good a business as building one for $250,000. Since April, 1998, its stock has lost 92% of its value and recently traded at just over $2 per share. ''It's been a tough time,'' says CEO Terek Diasti, who remains optimistic that things will improve this year as newer offices become more profitable. By contrast, having the right idea at the right time has been the key to the success of our top-performing stock, Veritas Software Corp. (VRTS) Although down from a high of $168 reached in March, Veritas is trading at about $100 a share and is up 1,222% for the two years ending Apr. 28, 2000. Veritas, which makes software that backs up vital data, has benefited enormously from the explosion in dot-coms. And this is the second time the company, which appeared on the Hot Growth list in 1997 as well, has topped our best performers. But now the Mountain View (Calif.) company, which hit $596 million in sales last year, has outgrown our Hot Growth list. On a pace to reach $1 billion this year, CEO Mark Leslie says Veritas is in a new competitive realm, one dominated by big names like Microsoft Corp. and Computer Associates International Inc. Pretty good for a company that was just another upstart a few years ago. By NANETTE BYRNES _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS Hot Growth Companies TABLE: The Revenge of Brick and Mortar WWF: One Rock-'Em, Sock-'Em Company Direct Focus: Flexing Its Marketing Muscle Meade Instruments: Back from a Black Hole Diamond Technology: Attack of the Killer Apps Children's Place: Hey, Good-Looking Albany Molecular Research: All R&D, All the Time SERENA Software: Keeping All Systems Go U.S. Concrete: Breaking the Cement Mold What Happened to the Class of '98? TABLE: The 1998 Winners...and the Losers TABLE: Hot Growth Companies, 2000 (.pdf) ONLINE ORIGINAL: Somera: Top-Notch Profits from Old Tech Gear INTERACT E-Mail to Business Week Online

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