The ingredients that go into making a hot growth company can be a combustible mix. Either you get a moon shot that keeps soaring into the stratosphere -- or a bottle rocket that can't handle success and flames out. Had you invested in a portfolio of BusinessWeek's Hot Growth companies from two years ago -- the Class of 2002 -- you'd have gotten a few of those moon shots and made some money.
Each year, BusinessWeek takes a second look at the Hot Growth list from two years before. That is enough time, we feel, to account for any short-term anomalies in a given business and to compare companies fairly with the broad-based market indices. The report card is in for the Class of '02, and it's pretty good: Of the 100 companies in the 2002 rankings, 58 posted positive total returns during the past two years, while 37 suffered negative returns (five companies were not included because they've since been merged out of existence). If you had bought one share in each member of the Class of '02, your Hot Growth portfolio would be up 15.4% today.
Better yet, if the performance of the Hot Growth companies of 2002 were graded on a market-weighted basis -- which is how returns for the major stock market indices are computed -- the group would be up 23.2% as a whole. By comparison, the small-cap Russell 2000 Index was up 12.6% during that same period, while the Standard & Poor's 500-stock index rose just 6.5%.
It's the second time in a row that BusinessWeek's Hot Growth companies beat both of those benchmark indices. But previous Hot Growth rosters -- the Classes of 2000 and 2001 -- contained a lot of tech companies that imploded and their returns overall were much weaker. And the odds are working in favor of the Class of 2002 in another sense, too. Any small company that demonstrated the ability to grow rapidly between 1998 and 2001, when the recession took many weaker players down with it, clearly had a leg up as the economy improved. Take a look at Chico's FAS, which three years later is still going strong.
Continuing education provides another apt lesson. Of the top 10 performers from the Class of 2002, four were in the education business: Career Education (CECO ), Strayer Education (STRA ), Apollo Group (APOL ), and Corinthian Colleges (COCO ). All have seen their stock prices more than double since 2002 as millions of downsized and underemployed workers flocked back to school to buff up their credentials or even develop new skills for their next career. And the lessons keep coming. All of those education companies except one, Apollo, show up on this year's list, too, along with a number of new names.
The biggest single winner of the past two years was Central European Distribution Corp. (CEDC ), a Sarasota (Fla.)-based company whose shares soared 204% over the past two years. CEDC is a major liquor distributor in Poland. Given its early entry -- the company pushed into Poland in 1991 soon after the fall of the Berlin Wall -- the reseller now has a virtual stranglehold on the Polish market.
The most spectacular flop of the past two years was the company that ranked No. 1 -- and made BusinessWeek's cover -- in 2002. The Singing Machine Co. (SMD ), a Coconut Creek (Fla.) maker of home karaoke equipment, has seen its shares plunge 92.8% over the past two years. Singing Machine was the victim of a poorly timed expansion, launched just as competitors were coming out with cheaper machines.
But even among the losers on the list, hope springs eternal. Nautilus Group Inc. (NLS ), whose 63% decline was the third worst of any member of the Class of 2002, brought in a new management team in 2003 led by ex-Levi Strauss & Co. exec Greggory C. Hammann. Hammann has wasted no time in trying to resuscitate Nautilus: After the company was hammered by cheap knockoffs of its popular Bowflex exercise equipment, Hammann boosted the research-and-development budget from $5 million to $13 million to roll out new equipment that has capabilities the competition doesn't. "We've put more innovation into Bowflex the past six months than we did in the prior six years combined," he boasts. But only time will tell whether Nautilus Group can light the fuse a second time.
By Dean Foust in Atlanta