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Sizing Up BusinessWeek's Street Watcher


For investors, 2003 was the year when it was finally safe to come out of hiding. After three years of stuffing their unopened account statements in a drawer and ignoring phone calls from their brokers, investors saw their portfolios head north again.

And BusinessWeek's Inside Wall Street column enjoyed a strong year as well, handily outpacing the gains in the major indexes. The 157 stock picks featured in the weekly column last year rose by an average of 26.4% in the six months after the column was published -- more than double the average rise in the Dow Jones industrial average and the Standard & Poor's 500-stock index during the same period, and several points better than the NASDAQ Composite, Russell 2000, and Wilshire 5000 stock indexes.

BusinessWeek veteran Gene G. Marcial has written the Inside Wall Street column nearly every week since 1981. Last year Marcial got five weeks of vacation relief, from BusinessWeek colleagues David Henry and Mara Der Hovanesian, whose picks are also included in the performance returns.

Marcial talks with professional money managers, analysts, and big investors to find stocks on the cusp of breaking out -- say, because of the launch of a potentially hot product or the likely approval of a promising new drug. Or the pro may simply feel that the company is dirt cheap and ripe for a takeover. In fact, with 34 of his picks, Marcial indicated that the company was a possible buyout candidate -- and three of them were purchased within six months. In addition, Marcial recommended four short sales in 2003 that his sources felt were likely to decline (though in a rising market, only one actually did). Marcial's picks usually aren't intended to be stocks to tuck away for the long term. Rather, they're trading opportunities that often depend on short-term events.

To chart the performance of each stock discussed in Inside Wall Street, we start with the closing price on Thursday, just hours before BusinessWeek is first available on our Internet site (www.businessweek.com). Then we track the stock over the next six months; we wait until now to tally Marcial's performance so the columns published in December can be included. We calculate one-day, one-month, three-month, and six-month returns for the stock, and compute the average performance for each of those periods. Finally, we compare them with the major indexes. In every year since we started compiling this Scorecard in 1998, Marcial's picks did better on average than the S&P 500 after one month and better after three months in six of those seven years. He also beat the S&P over a six-month period in four of the seven years.

BIG ONE-DAY LIFT

Stocks featured in the column usually get a big one-day lift just from the attendant publicity, and Marcial certainly had quite a number of stocks that surged right out of the gate last year. On the first day of trading after the column's release, the 157 stocks showed an average gain of 3.6%; 122 of them moved in the direction that Marcial forecast. After one month, the Class of 2003 was up 7.1%, vs. the 1.7% returns for the stocks in both the S&P and Dow. And after three months, Inside Wall Street's recommendations had risen 17.7% -- roughly 10 points better than the S&P, Dow, and Wilshire, and six points better than the NASDAQ and Russell.

The biggest one-day winner was Sontra Medical Corp. (SONT), a small company that specializes in developing devices to deliver medication or monitor a patient's condition through the skin. Sontra's shares had a one-day pop of 94%, to $2.58, after Marcial noted in his Oct. 13 column that Sontra had granted Bayer Corp. (BAY) rights to market some of its technology. And Perficient Inc. (PRFT) jumped 60.9% on Sept. 19 after Marcial reported that the tech company, which helps big software makers adapt their programs to work with their customers' computer systems, would shortly expand its relationship with IBM -- which it later did.

Some of the column's best ideas last year came from the resurgent technology sector. One of Marcial's big winners was Research in Motion Ltd. (RIMM), mentioned in the Nov. 3 column, whose shares surged 139% in six months as demand for its popular Blackberry e-mail wireless devices continued to surge. (It's now up 213% through July 7.) Another winner was beleaguered telecom-supplier Nortel Networks Corp. (NT), which climbed 168.9% in the six months after it was cited in his Aug. 25 column. Carl Birkelbach, chief executive of Birkelbach Investment Securities Inc., told Marcial that despite Nortel's harrowing plunge from $86 to $2.84, the network-gear supplier had enough cash -- $4 billion -- to ride out the telecom storm. And indeed, Nortel's shares climbed to $7.88 over the next six months. But they've since slid back to $4.60 after Nortel fired its CEO and two top finance officers in late April and warned that accounting problems ran deeper than previously believed.

Another home-run pick was BIOLASE Technology Inc. (BLTI), which rose 171% in the six months after Marcial first mentioned it in his Feb. 3, 2003, column. Peter Cardillo, research director at Global Partners Securities Inc., was convinced that BIOLASE was a buy, given his belief that the maker of teeth-whitening equipment had developed other dental products -- including lasers that let dentists perform root canals without anesthesia -- that looked like winners. BIOLASE's stock surged from $5.30 to $15 by mid-July, although it did fall back to $10 in August after BIOLASE restated sales and earnings from 2000 to March 2003 at the urging of the Securities & Exchange Commission.

But the real winning play turned out not to be technology but perfume. Inter Parfums Inc. (IPAR), a New York company that sells mass-market perfumes, soared 182.8% in the six months after it was highlighted in the July 14 issue. Marcial noted that Inter Parfums had recently gained licensing rights to offer a line of Diane von Furstenberg scents and cosmetics. Michael James, a partner at Kuekenhof Capital Management LLC, said that given Inter Parfums' growing stable of designer names and its pristine balance sheet, the company was undervalued at $7.95 a share. James was on target: Inter Parfums was trading at $22.48 by January and still hovers above $17 now.

By contrast, the worst performer was Sears, Roebuck and Co. (S). In his Feb. 24 column, Marcial noted that a hedge fund manager who did not wish to be identified was recommending shorting Sears' stock because of problems in its ailing credit-card business. But Sears stunned the shorts when it agreed to sell its credit-card business to Citigroup (C) for $3 billion -- a nice exit strategy that, when coupled with a stock buyback campaign, caused Sears' shares to double over the next six months, saddling the shorts with a 100.4% loss. (We assume that when a short position starts showing significant losses, an investor would receive and fully meet a margin call for more capital -- which explains the loss of more than 100%.)

The second-worst pick was Concord Camera Corp. (LENS), which dropped nearly 73% in the six months after Marcial cited it in his Dec. 1 column. Bulls such as Michael Kim of Roth Capital Partners LLC told Marcial that the maker of disposable cameras was looking to ride the digital boom with a new line of digital cameras. And Gary Steiner of Awad & Associates felt that by producing in China, Concord would be able to undercut better-known rivals such as Canon Inc. (CAJ) and Nikon Corp. But Concord experienced problems in getting its models to market and trouble getting shelf space from retailers -- saddling the company with heavy inventories of unsold cameras. "The digital business turned out to be more difficult to penetrate, and their first go-around didn't pan out," notes Steiner.

Concord's troubles, of course, serve as a reminder that diversification is important even in a rising market. But in a stockpicker's market like today's, Marcial's performance suggests that Inside Wall Street remains a good place to mine for ideas.

By Dean Foust in Atlanta, with Robert J. Rosenberg, Michael J. Mandel, and Sarah B. Davis in New York


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