Back in 2001, if you were searching for a company on our Hot Growth ranking that had a good chance of maintaining its pace for several years, you might well have been drawn to one of the 35 technology companies. After all, demand for all those gadgets and systems was only beginning to ramp up, wasn't it? Well, it's no secret today that the ramp was a short one, leading to a brick wall. And that heavy weighting of technology stocks is the biggest reason that the Hot Growth companies of 2001, on the whole, have not fared well.
Every spring, BusinessWeek takes a look back at the Hot Growth list from two years earlier. That's enough time, we feel, to account for any short-term anomalies in a given business and to compare companies fairly with the broad-based market indexes. The report card for the Class of '01 is in, and it's not pretty. Of 100 companies, only 26 had positive total returns on their stock in the past two years. If you had bought one share in each Hot Growth company on Apr. 30, 2001, your stake would be worth 22.4% less today. Larger companies generally did better: The group managed a 0.3% gain on a market-weighted basis. That compares with an 18.8% fall in weighted return for the small-cap Russell 2000 index and a 26.8% drop for the Standard & Poor's 500-stock index.
There were some strong performers on the 2001 list -- just not nearly enough of them to overcome the contracting tech sector. Six of the 10 worst-performing companies were in info tech. The No. 1 Hot Growth outfit in 2001, Optical Communication Products Inc., is now the biggest loser. Its total return was a humbling -88.8%. The Chatsworth (Calif.) company makes components for fiber-optic networks, a business devastated by overcapacity. "Our customers are the equipment companies, like Cisco, Nortel, and Lucent," says Optical's Chief Financial Officer Susie F. Nemeti. "When their customers [phone companies and data networks] reduced capital spending, they got hit, and it trickled down to us."
Of course, not all the losers were in tech. Skechers USA Inc., the maker of casual shoes, was a big winner in 2000. Soaring sales of its Energy line of athletic footwear helped the stock price more than double. That translated into the No. 9 ranking on our '01 Hot Growth list. But there was no follow-up, and Skechers suffered, with its total return off 81.2% since Apr. 30, 2001. CEO Robert Greenberg is now dealing with shareholder lawsuits concerning an unexpected drop in earnings after Skechers changed its distribution system overseas. The company declined to comment.
But when a growth star builds on its initial success, the results can be spectacular. Forest Laboratories Inc., based in New York, was once a pedestrian maker of generic drugs. Then came its first big antidepressant, Celexa, in 1998 -- a blockbuster that delivered sales of $1.1 billion in 2002. And last fall, Forest launched Lexapro, which is faster-acting and has fewer side effects. Those two drugs have helped Forest achieve two-year total returns of 69.2%. From 2001, profits soared 189%, to $622 million, and revenues rose 87.9%, to $2.2 billion. That propelled Forest from the Hot Growth list into the No. 1 spot on the BusinessWeek 50 this year, our annual ranking of the best-performing large companies.
As the saying goes, past performance is no guarantee of future success. But somewhere among this year's 100 up-and-comers, there may be another outfit ready to make that leap.
By Robert McNatt in New York
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