BRIGHT STARS AND BURNOUTS
Back in 1993, the world was Just Toys Inc.'s playground. The New York-based toymaker had hits with products such as Bend-Ems and the Beauty and the Beast Talk 'N View Magic Mirror. Sales had topped $32 million in 1992, after growing more than 200% for three years running, and the future looked bright for Allan Rigberg and Rose Evangelista, the husband-and-wife team who co-founded the company. Indeed, Just Toys was so hot two years ago, when it topped BUSINESS WEEK's Hot Growth Companies ranking, that Rigberg declined to answer questions about the company. He feared the Securities & Exchange Commission might accuse him of hyping the red-hot stock.
There's little chance of that these days. Just Toys sports the second-worst two-year total return of the Hot Growth Class of '93. Its stock fell 93%, from 18 to a recent 11/4. What spoiled the fun? Just before last Christmas, a few of its Quick 'N Easy Micro-Bake toy ovens emitted sparks or melted. When it recalled thousands of units, results melted down too: In 1994, Just Toys lost $15.7 million on sales of $23.9 million.
In March, Rigberg and his wife were fired, and outside director Morton J. Levy was installed as the new chief executive. The pair complained that they were made "scapegoats." Levy counters that their capricious management style was the problem: "They didn't get that they were running a public company," he says.
CYCLE SYNDROME. No one ever said investing in Hot Growth companies was for the faint of heart. While high-flying companies can dazzle investors with their prospects, inexperienced managers can stumble when faced with exponential growth. As a group, the Hot Growth Class of 1993 posted an 8.8% total return over the last two years, compared with the 26.5% return of the Standard & Poor's industrials. Small-company mutual funds rose 25% for the same period, says Morningstar Inc. Why the big gap? Small companies typically see growth rates slow as they get bigger--while investors tend to bail out at the first sign results are weakening and move money into companies earlier in the growth cycle.
Still, it's the promise of picking out the rare star capable of breaking from the pack that keeps adventurous investors betting on bustling young companies--such as Computer Associates International Inc., one Hot Growth alum that's made it big. A $100 investment in Computer Associates when it made its Hot Growth debut in 1985 would be worth $2,102 today.
U.S. Robotics Corp. isn't in that league yet, but the Skokie (Ill.)-based manufacturer of modems and network management systems is the clear valedictorian of the Class of '93. It even graduated right off the Hot Growth roster, since its 1994 sales of $378.7 million far overshot the list's $150 million cap. U.S. Robotics beat out its Hot Growth classmates as the best-performing company thus far: Its stock is up 287%, to a recent 791/4.
The secret? As offices and homes across the country link up to networks and online information services, U.S. Robotics sits in the middle of the action. And unlike most of its competitors, the company buys inexpensive, generic chips for its modems, rather than buying more expensive specialized chips. "They buy lower on the food chain and add their own value," says Montgomery Securities analyst Todd A. Dagres. "They also have [their industry's] best management."
Good management is also playing a role in the turnaround of another highflier of 1993: Longhorn Steaks Inc., an Atlanta-based restaurant chain. Its stock began to tumble in the middle of 1993 when it expanded with too many new restaurants in iffy locations. Founder George McKerrow Jr. made a rare move: He essentially fired himself as CEO. Though he remains chairman, he brought in seasoned industry veterans to run the show. The new team of experienced managers has begun to put things right. Although Longhorn's stock is still down 28% from 1993, it has climbed 62%, to 133/4, since the beginning of 1995. Having learned its lesson from too-hot growth, Longhorn is working its way back into investors' favor.By Elizabeth Lesly in New York