Cover Story: Where To Invest '96: 1995's Best And Worst: Winners & Losers
THE GOOD, THE BAD, AND THE UNSPEAKABLE
Up and up and up it goes; when it'll stop, nobody knows. In this kind of market, which was powered along by Internet and pharmaceuticals plays, it's hard to believe there even were losers in '95. The unhappiest investors were those who picked trendy retailers, riverboat gaming, and oil companies. Below, we sketch the extreme ends of the spectrum, all of which kicked off the year at a share price of $5 or better.
BEST NYSE STOCK: Continental Airlines Holding Inc. was the wild card in a wildly volatile industry, where the players are at the mercy of their dumbest or most desperate competitor. Until Gordon M. Bethune stepped up to chief executive, Continental appeared to be a little of both. Obsessed with driving down costs, management ultimately drove away customers by reducing first-class and frequent-flier benefits. The airline declared bankruptcy twice. But Bethune beefed up service and shed unprofitable routes. Continental's stock has soared from 6 1/2 to 44 5/8, an increase of nearly 686%. The threatening clouds now appear to have broken for Continental, which may realize its best margins ever in 1996, says Vivian Lee, an airline analyst at BT Securities Corp. in New York.
WORST NYSE STOCK: Edison Brothers Stores Inc. Chances are you've never heard of them, despite the fact that their 2,700 clothing and shoe stores are mall staples. But if you're a shareholder, you can only wish you never heard of them.
Three years ago, Edison Brothers declared record profits. Last November, the St. Louis-based chain went into bankruptcy and announced plans to close 500 stores. The company's stock was recently trading at 2 1/4, a precipitous decline of 84% in the last year. "Edison's Achilles' heel was that they didn't have as strong a consumer franchise as their competitors, like Gap Inc. or The Limited," says Don Spindel, a retail analyst at St. Louis-based A.G. Edwards & Sons Inc. The stores--known by several different names--specialized in the trendy young men's clothes popular in the '80s. It was a formula for disaster in the grunge-plagued 1990s.
BEST AMEX STOCK: Biovail Corp. International. Orphaned by analysts when it was trading around $7 per share at the start of the year, this Canadian pharmaceutical company was the Rodney Dangerfield of health care. But shareholders who got in early have had the last laugh. The company's successful licensing of Tiazac, a time-released medication for high blood pressure, has propelled the stock to a recent price of 56 1/2, with a one-year total return of 629.03%.
Three other cardiovascular drug candidates will be submitted to the Food & Drug Administration by the start of 1997, says Eddie Hedaya, an analyst at BioVest Research in Hartsdale, N.Y. With earnings per share projected to jump from 82 cents in 1995 to $1.68 in 1996 and a stunning $3.36 in 1997, according to Hedaya, Biovail is likely to start earning more than just Wall Street's respect.
WORST AMEX STOCK: Resort Income Investors Inc. was designed as a 12-year self-liquidating real estate investment trust (REIT). Liquidate it did, and how.
The mortgage REIT invests in loans that are secured by property acquired to develop luxury resorts. Most of the stock is owned by the company's directors, Chris and Mark Hemmeter, a father-and-son team who made big bets on riverboat gaming in New Orleans only to see their grand plans run aground in the Mississippi mud (BW--Oct. 16, 1995). Even worse, the Securities & Exchange Commission began an investigation and the Hemmeters, who resigned in August, were accused in court complaints of squandering company assets. The stock was recently trading at 1 1/8, down from its 52-week high of 10 1/2.
BEST NASDAQ STOCK: Ascend Communications Inc. develops and manufactures a range of high-speed digital wide-area-network access products used by 29 of the top 31 Internet service providers. Its stock managed a total return for the year of a staggering 721%.
The company's flagship product, the Max 4000 WAN access switch, won a $10 million-dollar contract with Pacific Bell Internet Services to support its soon-to-be-available dial-up Internet access service. This agreement and marketing alliances with other regional Bells will fuel the stock's future growth, says Michael Cristinziano, a research analyst at Needham & Co. in New York, who predicts a revenue increase of 263% in fiscal 1995.
WORST NASDAQ STOCK: Tatham Offshore Inc. is an independent oil and gas exploration company focusing on the deepwater regions of the Gulf of Mexico. Unfortunately, the water in the gulf was too deep to retrieve oil economically. Despite a handful of aggressive buy recommendations from analysts earlier in the year, the stock is currently hovering around 1, a plunge of 92.35%. But what do you expect from a company that has named its three biggest oil discoveries after racehorses--Seattle Slew, Sunday Silence, and the most recent, Spend a Buck? Hold any bets.
BEST STOCK GROUP: Peace may be on the march from Bosnia to Northern Ireland to the Middle East, but defense electronics stocks are on the rise, fueled by higher earnings. Led by Loral Corp., the group is up 89.4%.
A focus on high-tech applications--one area the Defense Dept. still spends a lot of money on--has benefited these manufacturers of sophisticated equipment. Still, the smartest defense companies are diversifying--a unit of EG&G Inc., for example, now handles assets seized by federal agencies.
WORST STOCK GROUP: Anticipating an economic slowdown, Wall Street is fleeing cyclical companies. And no cyclical stock group has sustained worse treatment than steel companies. Down 12% for the year, steel is one of only four stock groups to suffer a decline this year. But investors can take heart: The Street's peevish attitude has driven down price-earnings multiples, making such well-regarded steel companies as Nucor, Bethlehem, and Inland Steel potentially appealing as long-term investments.
BEST STOCK FUND MANAGER: Marc Kaufman credits a series of events from the advent of Windows 95 and the Pentium chip to dynamic PC sales for the eye-popping performance--74.4% as of Dec. 8--of his Fidelity Select Electronics Fund.
Semiconductor plays such as Xilinx, a maker of programmable logic chips, bolstered returns. However, Kaufman isn't worried by the stock group's recent volatility. Investors don't seem too worried either: Assets have grown sixfold--from $200 million to $1.2 billion--since February.
BEST BOND FUND MANAGER: David W. Schroeder had a lot of time to work on perfecting his golf game this year.
The scratch golfer and 40-year-old manager of the Benham Target Maturities Trust sat back and watched while three of his funds--part of a series of six portfolios that invest only in zero-coupon bonds that are derived from Treasury securities--were the year's best performers after spending much of 1994 at the bottom of the bond heap.
The no-load funds--staggered by five-year maturation increments--have benefited from declining interest rates. The 2020 fund is up 56.7% as of Dec. 8. Schroeder concedes that this year's strong returns aren't really all his doing: "There's not much I can do in the way of strategy. We pretty much just drive them in their lanes."
BEST COMMODITIES FUND MANAGER: Kenneth M. Jakubzak's currency fund at Chicago-based KMJ Capital Management plunged 13% in '93 and suffered through tough stretches in '94 as well. But in 1995, Jakubzak got it right: The fund soared 149.9% through November, the year's top performance by a commodity manager, according to the Barclay Trading Group fund-tracking service.
The secret? Jakubzak reduced the size and duration of his trades in volatile periods. That paid off when Jakubzak accurately predicted the yen market's rally last spring as well as its summertime reversal. Now, he's a hot commodity himself: KMJ manages $32 million, up from $10 million in early 1995.
BEST COMMODITY: As the corn supply dwindled, thanks to low stockpiles and weather-ravaged crops--export demand boomed. The combination boosted corn prices to $3.47 a bushel as of Dec. 11 from $2.31 in January.
And the demand is showing no sign of abating. If the weather once more batters the Grain Belt in the coming growing season, corn could be the commodities market's answer to technology stocks.
BEST OVERSEAS MARKET: Switzerland. As turmoil over the envisioned single currency continues to shake the European Union's exchange-rate system, hot money is pouring into Switzerland. The influx pushed the Swiss franc to near-record highs, drove short-term interest rates close to 2%, and sent the stock market on a rampage--up 39% in dollars and 24% in local currency terms in 1995.
But the franc's climb is pricing exporters out of world markets and bringing economic growth almost to a standstill. Low interest rates should help the country's big banks and insurers, while Switzerland's multinational pharmaceutical giants will benefit from the global bull market in drug stocks.
The risk is that the Swiss will try to weaken the franc and the hot money will disappear. But as long as the EU can't get its currency act together, Switzerland could remain a safe haven--and pricey investment spot--for some time.By Kerry Capell, with Gary Weiss and William Glasgall in New York and Greg Burns in Chicago