These are the times that try Wall Street's soul--and make a shambles of stock picks and portfolios. BusinessWeek's Inside Wall Street column, by Gene G. Marcial, has not been immune to the trials. A tally of stocks featured in 2000 shows the weekly column has taken its knocks. Still, the results are fairly impressive: The 159 stocks featured last year beat the market in all periods except the six-month haul (table). And even though the column had a definite tilt toward volatile tech stocks, there were more winners than losers in the bunch.
The column's picks are not meant to be buy-and-hold investments. These stock ideas are mostly about an imminent event that could change a company's destiny. That's where Inside Wall Street shines: We measured the column's impact on stocks starting from Thursday's closing prices, after which it begins to reach online subscribers, to Friday's close, after it has hit the newsstands and many subscribers' mailboxes. Of course, investors are often unable to act quickly enough to take advantage of the first-day move. But that one-day move measures the column's impact on the market. The average one-day gain of 4.8% is in line with the column's return since 1997, when we started tracking results. In 1999, when the market was bubbly, the column's average one-day gain was a heady 8.8%.
After a month, the data show that the average stock chosen for Inside Wall Street gained 3.8%--while the Standard & Poor's 500-stock index, the Dow Jones industrial average, and the Wilshire 5000 had negative returns of about 1%; the Nasdaq lost 3%; and the Russell 2000 just broke even.
In the three-month period, the column posted, on average, returns better than all the indexes except the Dow. After six months, however, the column lost steam, trailing all the market indexes but the Nasdaq. With 56% of the highlighted stocks being in the tech sector, that's no wonder. Still, the column's average 10.3% decline was better than the Nasdaq's 24.4% tumble.
The column is a behind-the-scenes look at investment opportunities--a dash of rumor with a dose of back-to-basics balance-sheet analysis. Its specialty is scuttlebutt on mergers. Over the year, 53 stocks, or 30% of all those mentioned in the column, were posed as takeover targets. A fifth of those takeovers materialized--including About.com, Texaco (TX), SFX Entertainment, @Plan, and ForSoft. Marcial's column also surveys in-the-know money managers and stock strategists to get the lowdown on innovative new products or business strategies, changes in earnings expectations, and corporate developments, such as restructurings or stock buybacks.
INSIDE SCOOP. Averages aside, some stocks highlighted last year flew off the charts. A little under a third had double-digit returns after six months--from toolmaker Snap-on Inc.'s (SNA) 10% gain to Bell Microproducts Inc.'s (BELM) 97.6% return. About half of those double-digit earners rose more than 40%. And of all 159 stocks, 110 were up on Friday, 84 were ahead after one month, 78 after three months, and 67 after six months.
The column sometimes offers scoops on companies that aren't widely covered. Consider Belgium's ACLN Ltd., which ships used cars from Europe to Africa. The stock rose 45.5% in six months. But household names such as Tupperware Corp. (TUP) and Walgreen Co. (WAG) also crop up. While rumors of a takeout by German media biggie Bertelsmann did not materialize, shares of Reader's Digest Assn. (RDA) rose 7.5% six months after appearing in the June 19 column.
The real engine for Inside Wall Street's stocks is its chatter on takeover targets. From computer-chip companies to Old Economy industrials, the column has lots to say about who is in the market for whom. Consider the talk last February about Finland's UPM-Kymmene Corp. (UPM), one of the largest papermakers in Europe and a suitor for Champion International. Inside Wall Street's response: Don't think this is a done deal; International Paper Co. (IP) may make a better offer. It did, and the buyout was inked three months later: Champion shares were acquired for $9.5 billion.
In another deal, the column reported in July that Lucent Technologies Inc. (LU) or Nortel Networks Corp. (NT) was in the market for Alteon WebSystems, a maker of switches and adapters then trading at $124. Within a few days, Nortel surfaced as the successful bidder, and the stock jumped to $129, although it fell to $122 by the time the deal closed in early October. Sometimes rumors don't pan out. Investors were fleeing Covad Communications Group Inc. (COVD) by the time it appeared in the Oct. 2 column. Covad, operator of the largest digital subscriber line network for the Internet, had fallen from $60 to $15 in seven months. Allan Roness of JWGenesis Financial Group Inc. called it a "valuable buyout candidate for the deep-pocketed Internet telecom or media players." Hardly: The stock fell 90% six months later, to $1.38.
BAD SHARE DAY. Marcial sometimes bucks conventional Wall Street thinking on certain stocks--or even whole sectors. ADAC Laboratories Inc. had run into trouble when it restated financial results, wiping out revenues and profits. Investors were wary of the stock, but the column reported a new development: A scanning product that tracks ingested radioisotopes, dubbed PET, looked promising. The stock was up 47%, to $20, one month after publication of the column. Seven months later, it was snatched up by Royal Philips Electronics for $18.50 a share. Small-cap value stocks were in the hole 5.6% for the year by June 12. That week, the column featured smaller companies such as Arctic Cat, Artesyn Technologies, Buffets, and NCI Building Systems--all of which saw their share prices climb between 10% and 58% six months later. Buffets, one of the largest U.S. buffet-cafeteria chains, was acquired by buyout firm Caxton-Iseman Capital.
Inside Wall Street's worst call came in the Jan. 10 issue. Talk City, now called LiveWorld Inc., was "undiscovered and undervalued in the crowded Internet world," by the standards of Kai-The Tao of Watson Investment Partners, a stakeholder. The online event host amounted to, well, just talk. The stock peaked at $26 six months after its July, 1999, initial public offering, but fell below $1 by December. It now trades as an over-the-counter bulletin stock. Tech-stock picks, in general, produced the biggest blowups. Last July, Joseph Battipaglia, chief investment strategist at Gruntal & Co., urged readers to buy three software stocks: Microsoft (MSFT), Rational Software, and VerticalNet. In six months, they fell 18.5%, 14.6%, and 89.3%, respectively.
That doesn't mean there were no good tech calls. Efunds Corp. (EFDS), which processes banking transactions for big banks and retailers, had bombed after its June 26 IPO--drifting down from a $13 offering price. The column underscored its potential, and the stock wound up with a 27% six-month return. Dataram was in nosedive formation when it appeared in the April 24 column. Six months later it was up 17%.
One of the hottest tech sectors was data storage: The column featured four companies in that industry that savvy investors liked, three of which were among the year's top performers--Bell Microproducts (BELM), which operates in a niche of semiconductor storage, soared, with a 97.6% return in six months--making it the best performer of all. Another, Seagate Technology Inc. (SEG), was taken private: On May 1, Seagate Technologies was lauded as a "value play." The weakness in the stock was blamed on investor uneasiness about a looming leveraged buyout by a management-led group, the column said. In due course, the buyout took place--and the company was then taken private in October. The stock had advanced 68% within six months.
The markets aren't getting easier to navigate. But as long as Inside Wall Street continues to tap it's best source of leads--savvy investors and money managers with proven track records--the column will have a good chance of staying ahead of the market averages. By Mara Der Hovanesian, with Sarah B. Davis, Michael J. Mandel, and Robert J. Rosenberg, in New York