January is great for fresh starts, but fresh starts for me begin best with long, hard looks back. I'm happy to see many past columns, particularly those on Applied Materials (AMAT), Automatic Data Processing (ADP), Burlington Resources (BR), Johnson & Johnson (JNJ), Kimco Realty (KIM), and Korn/Ferry International (KFY), proved to be prescient. Yet
I have to wonder, what might I learn from those that didn't?
With that aim in mind, and to continue an annual custom, I've looked back at columns at least one year old to find those that time and events proved wrong. Among them, my biggest misses seemed to fall into one of three categories:
-- Selling the big trend short. I'm hardly alone in my amazement that so many home prices have soared. Yet having company didn't make me right. Skepticism about home values led me in March, 2003, to question prospects for MGIC Investment, the No. 1 underwriter of private mortgage insurance. The stock sold then for 40; today, it's near 69, as home values remain high and the job picture brightens. Similarly, that same month I had frowned on Capital One Financial (COF), the fast-growing consumer lender that then was under regulatory scrutiny. A company with a record of questionable controls and disclosures, it seemed to me, courted danger if consumer credit growth slowed or delinquencies rose. Maybe, but consumers kept borrowing, and Capital One's delinquency rate and write-offs fell. Then 28 a share, the stock now trades near 84.
-- Blinking past the big risk. At 43 a share, Marsh & McLennan (MMC) in November, 2003, already reflected all of the risk of New York Attorney General Eliot Spitzer's findings of investor-unfriendly behavior at its Putnam Investments (PMN) mutual-funds unit. That much I got right. What I missed -- despite a blunt warning from a shrewd colleague of mine -- was the huge risk that Spitzer wouldn't stop at funds. When he next uncovered wrongdoing at Marsh's insurance brokerage unit, the stock cratered below 23. A few weeks later, I spied opportunity in Merck (MRK) at 43 a share, figuring that with 13% of its sales going into research, something good was bound to come out of its drug pipeline. It may yet. But what I chose not to zoom in on was Merck's recent deep disappointments in moving compounds from clinical trials to pharmacies. Might those failures have affected management's eagerness to concede still more? Perhaps. What's plain is that Merck's Vioxx debacle kneecapped the stock, now under 32.
-- Undervaluing big momentum. Lots of successful investors try to invest only in industry leaders. One trouble with that strategy: It's rare when you can buy a leader's stock at a bargain. That led me in October, 2003, to hesitate over Simon Property Group, whose growth I suspected would slow. Instead, Simon kept expanding, both in the U.S. and abroad. From 44 a share, the stock has risen to record highs near 65. The next month, I likewise did not credit hotelier Starwood Hotels & Resorts Worldwide's (HOT) considerable momentum, which had grown into the hotel biz's No. 2, behind Marriott International (MAR). When occupancy and room rates improved this year, it didn't much matter (as I had supposed) that Starwood's wunderkind CEO, Barry Sternlicht, would spend nearly a year in a very public search for his successor. Long before, he had put the company's chips in most of the right places. Starwood raked in much higher profits. The stock neared 60, from 35.
Missed opportunities like that I hate to see. The only thing worse? Not taking the time to take a long, hard look back.
By Robert Barker