Investing in equities can be A herky-jerky ride these days -- a stock can be up two points one week and down three the next before putting you right back where you started. So picking stocks is harder than ever. Such was the challenge last year for Gene G. Marcial, the BusinessWeek veteran who writes the Inside Wall Street column each week. In contrast with a bubbly 2003, stocks last year showed modest gains, and most of those came toward the end of the year. But Marcial's 152 picks usually shot out of the gate. On average, his stocks beat five major indexes over the first day, first month, and first three months after they appeared in his column. Over six months the going got tougher, with the column beating only the NASDAQ Composite Index and Dow Jones industrial average.
He did especially well over three months, up an average of 4.6%, vs. 1.4% for the Standard & Poor's 500-stock index and 0.5% for the Dow and NASDAQ. That's the seventh time in the eight years we've tracked his performance that Marcial has beaten the S&P 500 over three months.
Marcial talks with professional money managers, research analysts, and private investors. He hunts for stocks that are ready to break from the pack, benefiting from an event such as the launch of a promising new product or government approval of a new drug. Occasionally a hedge-fund manager or a big investor may make a case that a company is so undervalued that it's a takeover candidate or that it has a new product that's sure to attract bigger fish. Marcial identified 25 stocks last year that his sources thought were potential targets, and within six months, two -- Marimba Inc. and DoubleClick Inc. (DCLK) -- agreed to be acquired. But as we make clear every year in this report card, Marcial's picks aren't widow-and-orphan stocks to be tucked under the mattress for the long haul. Investors buying these stocks should monitor them closely.
HOW WE MEASURE
To chart the performance of each stock discussed in Inside Wall Street, we start with the closing price on Thursday, shortly before BusinessWeek is first available on our Web site (businessweek.com). Then we track the stock over the next six months -- a period that ended in late June for the columns published at the end of 2004. We calculate one-day, one-month, three-month, and six-month price changes for each stock and compute the average performance for each of those periods. We then compare them with the major indexes. (Marcial received five weeks of relief from BusinessWeek colleagues David Henry and Mara Der Hovanesian, whose picks are included in the results.)
Stocks spotlighted in the column usually get a big first-day boost from the publicity. Last year they rose by an average of 2%. Inside Wall Street's picks kept up the momentum after one month, rising an average of 2.2%, vs. a 0.4% return for the S&P and 0.1% for both the Dow and NASDAQ. The list's 4.6% jump after three months lengthened its lead over the five indexes. But after six months, Inside Wall Street was up by just 2.3% -- a percentage point or more behind the Wilshire 5000 Total Market Index and the small-cap Russell 2000, and trailing the S&P 500 by 0.4 of a percentage point.
The top one-day winner was Bioenvision Inc. (BIVN), a small developer of oncology drugs. Its shares surged 19.5%, to $6.19, the day after Marcial noted in the BusinessWeek dated Feb. 9 (and released 11 days earlier) that the biotech outfit was a likely buyout candidate for a large pharmaceutical maker eager to get its hands on Bioenvision's leukemia drug that was under development. Marcial picked the stock again on Mar. 22, and it soared 49.8% over the following month, giving Marcial his best one-month performer last year. Meanwhile, the first Bioenvision pick was turning in the year's best three-month run, jumping 122%. The third time wasn't as lucky for Marcial, though: After he recommended the stock again on Dec. 6, it fell 16.8% the first month and 35.7% over six months. No one has acquired Bioenvision yet, but its stock is still 45% higher than when Marcial first wrote about it.
His biggest home run was Audible Inc. (ADBL), which uses popular books and magazines to make audio tracks for handheld devices such as Apple Computer Inc.'s (AAPL) iPod. Its shares soared 122.5% in the six months after its mention in the Aug. 9 issue. He cited ThinkEquity Partners LLC analyst Mark Argento's belief that Audible would get a lift from the growing popularity of portable audio players.
Health-oriented grocer Wild Oats Markets Inc. (OATS) was another winner: It leaped 71.2% in six months. Marcial's sources -- two hedge-fund managers who asked not to be named -- argued that the chain's recent struggles, which had pushed the stock down from $15 to $5.67, could make it a takeover candidate for a chain such as Kroger Co. (KR). Wild Oats is still independent. But since Marcial featured it in his Nov. 8 column, it has performed smartly, seeing its stock snap back six months later, to $10. The catalyst: news in March that Ronald Burkle, a billionaire investor and former supermarket magnate, had bought a 9.2% stake. Burkle said he saw immense potential for Wild Oats to grow because of the rising demand for natural foods as well as the opportunity to expand into the many prime retail sites being vacated by the likes of Toys 'R' Us Inc. (TOY) and Winn Dixie Stores Inc. (WNDXQ)
A FEW STRIKE-OUTS
On the flip side, Homestore Inc. (HOMS) suffered the biggest one-day loss among Marcial's picks -- 13.3%. While his sources were betting that the Web-design and publishing company would be a great fit for Yahoo! Inc. (YHOO), Homestore stunned investors by announcing a first-quarter loss of $5.1 million shortly after the market closed on May 6 of last year and just before the release of the column. This piece of bad news sent the stock tumbling the next day. Homestore never recovered, losing 46.5% over six months.
But Axonyx Inc. (AXYX), which is developing drugs for cognitive disorders, took the biggest hit overall. It plunged 78.6% in the six months after it appeared in Marcial's Oct. 11 column. Elemer Piros, an analyst at Rodman & Renshaw LLC, was bullish on Phenserine, Axonyx' drug for Alzheimer's disease. But after the stock rose 8.8% in the first three months, it sank from $4.85 to $1.88 in February. Why? The company disclosed that in a clinical trial Phenserine performed no better than a placebo. Still, Piros is optimistic that Axonyx may yet be successful with a reformulated version of the drug.
TiVo Inc. (TIVO), the maker of digital videorecorders, was another loser. Its shares plummeted 64.2% in the six months after Marcial mentioned it in his Mar. 1 column. Daniel Ernst, at the time also an analyst at Rodman & Renshaw, maintained that TiVo's tight partnerships with manufacturers, such as RCA (TMS), Sony (SNE), and Toshiba (TOSBF), could help it boost its subscriber count by 75% in the next year. But TiVo's shares swooned within weeks as speculation grew that DirecTV Group Inc. (DTV) -- which provided TiVo players to its customers -- would drop TiVo in favor of a recorder made by one of DirecTV's sister companies. The rumors were right: Last August, NDS Group (NNDS) PLC said it would start supplying digital-recorder technology to DirecTV. Both companies are owned by Rupert Murdoch's News Corp. (NWS). Ernst, now an analyst at Hudson Square Research-Soleil Securities, is still bullish on TiVo, noting that its subscriber count has doubled in 18 months. And he believes TiVo's subsequent deal with Comcast Corp. will help offset the loss of DirecTV's business.
TiVo's performance is a reminder that many of Marcial's stock picks are high-risk, high-return plays that can disappoint if something goes wrong with the investment thesis. Still, home runs such as Audible and Wild Oats more than made up for Marcial's occasional strike-outs and boosted his overall performance.
By Dean Foust in Atlanta, with Robert J. Rosenberg, Michael J. Mandel, and Sarah B. Davis in New York