When Hot Growth Goes Cold

Just because a company receives high marks from business experts doesn't mean it won't fall victim to any of seven notorious factors

by Steve McKee

You've heard of Intel and AMD, leaders in the semiconductor industry. But you may not have heard of Agere Systems (AGR) -- and if you're an investor in this chipmaker, you may wish you never had.

Agere holds the distinction of being the worst performer in the 2005 Shareholder Scoreboard published by The Wall Street Journal. An investment of $1,000 in 2003 would have dwindled to less than $500 just one year later. Ouch.

SINGING THE BLUES.

What happened to the company investment analyst Charles Glavin now calls the "Rodney Dangerfield of semiconductor stocks"? Agere certainly can't claim it's in a declining industry. Far from it. The company makes chips for PDAs, mobile phones, and even the iPod mini (AAPL). Agere can instead chalk up its troubles to poor execution in the face of intense competition.

Agere's story is not unique. In fact, of the 100 companies listed in BusinessWeek's 2002 rankings of Hot Growth Companies, 37 suffered negative returns over the following two-year period.

Singing Machine rode the karaoke wave all the way to No. 1 that year, only to see its shares drop more than 90% in the next 24 months. Like Agere, it met up with killer competition. Another company once at the top of the Hot Growth list, oil-rig builder Friede Goldman Halter, saw such a turn of events that it filed for bankruptcy two years later.

OUTSIDE CAUSES.

Over the past several months in this column, I've examined companies whose once high-flying growth had fallen back down to earth, sometimes with a thud. Lucent (LU). Kodak (EK). Zippo. Burger King. Krispy Kreme (KKD). Volkswagen. Boston Market. Staples (SPLS). Home Depot (HD). Pier 1 (PIR). Wendy's (WEN).

Even though most of these companies belong in the business hall of fame, their ups and downs demonstrate that no company has immunity against the factors my firm's study identified as growth killers. We surveyed 400 companies once recognized for monster growth and learned that nearly 2 in 10 subsequently saw their revenue growth go flat or even turn negative.

We identified seven key factors that commonly cause companies to stumble. Competition, like that faced by Agere and Singing Machine, is one of three external factors.

A second factor, an economic upheaval, struck JDS Uniphase (JDSU). It saw the total market for its fiber-optic components shrink from $15.5 billion to $1.5 billion in four short years because of the dot-com implosion.

A third external factor, changing industry dynamics, caused Rite Aid (RAD) to suffer. The nation's third-largest pharmacy chain, it has had difficulty adjusting to the advent of mail-order prescriptions. Rite Aid has averaged a negative 10% return for the past 10 years.

INTERNAL MENACES.

Of course, every company has to deal with economic downturns, environmental changes, and fierce competition over the course of its existence. While the timing of these events may not be predictable, the inevitability of them happening is.

Indeed, businesses can blame the remaining four factors, more subtle and subversive than the others, for really putting a kink in things. Like roaches that scatter when the light comes on, these characteristics hide inside companies, leaving evidence of their existence even as they go unrecognized.