HOT GROWTH COMPANIES
Last year was arguably the worst year in history for the American automobile industry. The Big Three carmakers racked up $7.5 billion in losses, and they announced plans to lay off thousands of workers. But 100 miles outside of Detroit, Spartan MotorsCo., a tiny auto-parts manufacturer, was running at breakneck speed. From June to December alone, the Charlotte (Mich.) company nearly doubled its 1990 salesof $51 million. The reason: Manufacturers of large vehicles, such as mobile homes and fire engines, just couldn'tget enough of Spartan's innovative customized chassis. "While other people were standing still, complaining about the recession, we were out there leav-ing them in the dust," says Executive Vice-President John Sztykiel.
Spartan wasn't the only one. BUSINESS WEEK's Hot Growth list is home to 99 more such exceptions--companies whose sales streaked heavenward while much of the rest of Corporate America languished. Sales at these high-flying businesses grew 48.3%, vs. 6.2% for the Standard & Poor's industrial-stock index. Earnings advanced 100.9%, compared with a decline of 14.3% for the industrials. And return on invested capital at the Hot Growth companies jumped 24.8%, vs. 10.1%.
LOOSER LENDERS. Now, as the nation appears to be inching out of its funk, companies of every size are looking forward to even brighter days. Business and consumer spending are up, and banks seem more willing to lend to small and midsize companies than they have been in years. But that doesn't guarantee great results for growth companies. Because they tend to chase specialized markets with little competition, these small companies often don't follow broader economic or industry trends, notes David L. Birch, president of Cognetics Inc., a Cambridge (Mass.) economic research firm.
Stockholders had better hang on to their seats. Investors have already started to funnel their money away from growth stocks into blue chips. Shares in the Hot Growth 100 are trading at an average of 27% below their 52-week highs. "We've seen a shift in the marketplace from growth stocks to value," says Thomas D. Stevens, chief investment officer at Wilshire Asset Management, a pension-fund manager. "The best performers in 1991 are going to be some of the worst in 1992" (page 96).
Whatever their fate in the recovery, BUSINESS WEEK's Hot Growth companies will look back fondly on 1991. Many rode out the recession by being in the right place at the right time. The software business, represented by 10 companies, continues to see strong demand for systems to improve order processing, customer service, and product delivery. A prime example: Software maker Artisoft Inc., this year's No. 1 Hot Growth company, has saved customers millions by linking personal computers and making them mimic a costly mainframe.
CHIPS AHOY. In the semiconductor industry, orders keep pouring in from an ever-broader range of manufacturers. Three of the five Hot Growth chipmakers--Xilinx, Sierra Semiconductor, and Integrated Circuit Systems--averaged 100% or better annual profit gains over the past three years.
Another Hot Growth favorite is the health care industry. Insurers and employers are continuing to hunt for ways to cut medical costs, and that bodes particularly well for companies that offer solutions, such as managed mental health care provider American Biodyne Inc., No. 14.
The end of the recession should translate into major gains for hard-hit cyclical industries. And that could mean even better results for Hot Growth companies such as Insituform Mid-America Inc., which is in the messy business of repairing underground pipes and sewers.
A hallmark of successful growth companies is the ability to react quickly. Responding to intense competition in the low-margin photo-finishing business, Seattle FilmWorks Inc. has rolled out a new service: It has joined up with Federal Express Corp., which will pick up customers' film, fly it to Seattle for processing, and return the pictures to customers' doors the next day. SFW has also branched into several new businesses, such as printing illustrated brochures for real estate brokers and packaging private-label film for retailers such as Sears, Roebuck & Co.
COMPLACENCY FACTOR. When a small company is slow to react, the results can be ugly. Autodesk Inc., BUSINESS WEEK's No. 1 Hot Growth company for 1986 and 1987, controls some 70% of the worldwide market for PC-based computer-aided design software. But it hasn't introduced any successful new products in several years. Earnings are estimated to be off 31% this year, costs are climbing fast, and competitors are circling. "When a company stops innovating, it's on the road to failure," says Birch. Autodesk recently replaced its CEO and introduced a host of new products and upgrades that it hopes will stem the slide. Len Rand, vice-president of Autodesk's AutoCAD Div., says the company "has recognized the need for change."
Important as it is to be nimble, you can't ignore the value of capital. In the past couple of years, small companies have had a tough time luring bank financing and venture capital. No one expects much of an upturn in venture capital, which totaled $1.3 billion in the U.S. last year, down from a high of $4.2 billion in 1987. But now, banks that were burned by real estate investments and leveraged buyouts in the late 1980s may be more willing to lend to small businesses again. According to a recent survey of 591 banks by accounting firm Grant Thornton, 31% want to increase their small-business loans.
Even the private-placement arena may yield some surprises. Last year, after the introduction of a Securities & Exchange Commission rule allowing nonregistered securities to be traded among some institutional investors, the value of those placements surged 460%, to $21 billion. Many financiers expect such investments to become even more popular.
The stock market has been a favorite source of funds for growth companies. Thirty-six of BUSINESS WEEK's Hot Growth companies went public in the past 12 months. While the recent slide in small stocks may cool the market for initial public offerings this year, plenty of people insist that growth stocks are as appealing as ever. "Now that the growth-stock market is not so heated up, it's a much more reasonable environment," says Claudia Mott, director of small-cap research at Prudential Securities Inc. "People will be glad to pay less than $40 a share for a hot biotech company that doesn't have product yet."
Well, some people may. For those who prefer something a little more down-to-earth, there's always Spartan Motors and its customized chassis.Laurel Touby in New York