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Leaders And Laggards From The Class Of '91


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LEADERS AND LAGGARDS FROM THE CLASS OF '91

Back in the spring of 1991, Aldus Corp. was a highflier. A BUSINESS WEEK Hot Growth Company for four straight years, the Seattle-based computer software maker offered trailblazing desktop publishing software that seemed to be the answer to many small publishers' prayers. The company's sales growth in the four quarters that ended in March, 1991, was a remarkable 150%, while earnings grew by 26%.

Just as remarkable was Aldus' change in fortunes scarcely a year later. Aggressive competitors, such as Quark Inc., began to catch up with its products, and Aldus couldn't quite keep ahead. Indeed, a new Windows-compatible Aldus software package fizzled with customers, who found it hard to use. And while sales inched forward 4% in 1992, to $174.2 million, profits tumbled 70%, to $6.8 million, as Aldus spent heavily to develop new products and markets.

TOUGH LESSONS. Worse for investors, Aldus' stock fell apart. After hitting a high of almost 60 in April, 1991, Aldus shares have plummeted to around 15. Since 1991, Aldus has produced a negative total return of 66.7% (table). "The market is totally unforgiving. If you stumble, they go elsewhere," sighs Aldus Chief Executive Paul Brainerd. "There's no in-between."

That's a lesson investors would do well to bear in mind, too. True, emerging growth stocks are alluring to stock-pickers trying to divine which young company will grow up to be the next Wal-Mart Stores Inc. or Intel Corp. But the risks are as high as the potential rewards.

The companies on BUSINESS WEEK's 1991 Hot Growth list are a case in point. As a group, the Class of 1991 generated a negative total return of 8% in the past two years. By comparison, the total return of the Standard & Poor's industrial index was 28%. And on average, small-company mutual funds saw a gain of 35% for the same two-year period, according to Morningstar Inc. BUSINESS WEEK's 1991 list was heavily weighted with health-care and technology companies, whose stocks took a beating.

PAYOFFS. Of course, there were successes. American Power Conversion Corp. is the clear class valedictorian. The West Kingston (R.I.) company makes electronic devices to protect personal computers and PC networks from dangerous power surges. In the past two years, its stock has soared by 517%, to about 32. The payoff for investors has been heady: a total return of 2,080% since American Power's 1989 debut on the Hot Growth list.

Don't look for American Power on this year's ranking. Sales in 1992 surged 68%, to $157.5 million, pushing the company over the $150 million cap. In 1993, sales should swell an additional 52%, to $240 million, says analyst Rick Martin at Chicago Corp. "This is the ultimate no-frills company, " says Martin. "They're the Wal-Mart of their business."

If American Power Conversion was the Class of 1991's star, then Medical Imaging Centers of America Inc. (MICA) was the class goat. The San Diego-based company's medical diagnostic centers have suffered as health insurers cracked down on expensive procedures and federal regulators nixed payments to physicians for referring patients.

All that has put MICA in a bleak position. Sales slipped 4% last year, to $4.5 million, and it hasn't turned a profit since the second quarter of 1991. Its stock has tumbled 92% and now trades at about 1. "We were a fast-track company. We stumbled," says MICA founder and CEO Antone J. Lazos. Says Joseph E. Millsap, an analyst with Morgan Keegan & Co. in Memphis: "We are not even offering projections for MICA."

ROCKY. One erstwhile Hot Growth Company that lost out is Cascade International Inc. The retailer of apparel and cosmetics was liquidated last year after its CEO vanished and regulators found Cascade had lied about how many stores it had, as well as its sales figures. Four other companies on BUSINESS WEEK's 1991 list also don't exist any more--but they were bought out by competitors.

Even though many in the Class of 1991 have had a rocky time, former Hot Growth Companies have been known to make comebacks. That's what Aldus' Brainerd aims to do. He's launching the fifth upgrade of Aldus' PageMaker program in June, cutting costs and homing in on a few key areas, especially professional graphics software. "We'll focus on what we've got to do each quarter to get back to being successful," Brainerd vows. For scrappy entrepreneurs, a crash landing doesn't mean having to stay earthbound forever.BUSINESS WEEK'S CLASS OF 1991

THE WINNERS...

Company Two-year total return

AMERICAN POWER

CONVERSION 505.6%

ELECTRONIC ARTS 472.8

CISCO SYSTEMS 454.6

GB FOODS 319.9

THREE-FIVE SYSTEMS 263.6

SOUTHERN ELECTRONICS 237.5

TRANSMEDIA NETWORK 205.5

ALLOU HEALTH &

BEAUTY CARE 151.9

BENCHMARK ELECTRONICS 128.1

LATTICE SEMICONDUCTOR 126.6

Calculated on basis of stock price as of Apr. 30;

excludes companies no longer trading

...AND THE LOSERS

Company Two-year total return

MEDICAL IMAGING

CENTERS OF AMERICA -91.7 %

SIERRA TUCSON COS. -81.1

KNOWLEDGEWARE -74.0

DIGITAL SYSTEMS INTL. -72.7

IPL SYSTEMS -72.4

UNIVERSAL INTL. -70.3

HANDEX ENVIRONMENTAL

RECOVERY -68.4

PUROFLOW -66.7

ALDUS -66.7

EASEL -66.3

DATA: STANDARD & POOR'S COMPUSTAT SERVICE INC.

Elizabeth Lesly in New York


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