The Bw 50: Once More, All Eyes Were On Tech

These stocks again spearheaded much of the BW 50's advance

Build the Internet, and investors will come. That explains Sun Microsystems Inc.'s stunning performance over the past six months: Its stock, which recently split 2-for-1, climbed a lofty 65%. Not content just to sell most of the servers that store and send data, images, and video clips, Sun has been on a tear to expand its reach. Taking a shot at Microsoft Corp.'s Office software, Sun bought Star Division GmbH and is offering its software free from a Web site. Sun also spent $540 million to grab Forte Software Inc., which specializes in e-commerce software.

No surprise then that CEO Scott G. McNealy boasts that he has "the broadest, most integrated offering there is." And together with solid growth in server sales, the dealmaking is showing up where it counts: Sun's net income jumped 45% last quarter.

That sort of hot hand once again has propelled technology companies to the fore of the stock market--and kept many on this year's crop of BUSINESS WEEK 50 companies surging. In the six months since we ranked Corporate America by selecting the top-performing members of the Standard & Poor's 500-stock index, the BW 50 handily outran the overall S&P 500, 7% to 4.4%.

CYCLICALS' COMEBACK. Getting investors excited about big companies--even the best ones--isn't easy these days, however. The large-cap S&P 500 is treading water because investors increasingly have shifted into long-ignored smaller stocks. That explains why the Russell 2000 benchmark of small stocks was able to top the BW 50, with a 10.7% gain for the period. The 30-stock Dow Jones industrial average also did better than the BW 50, rising 11.7% as beaten-down cyclical companies, such as Aluminum Co. of America, bounced back. (Both Standard & Poor's Corp. and BUSINESS WEEK are owned by The McGraw-Hill Companies.)

Still, for those measuring performance against the broader big-cap universe tracked by the S&P 500--which remains the key benchmark for many investors and money managers--the BW 50 continued to excel. The companies that made it on to the 1999 BW 50 were selected based on improvements in sales, earnings, and total return over both a one-year and a three-year period. Two additional yardsticks, net margins and return on equity, were used to judge the underlying financial strengths of the companies. Then the companies were weighted by sales, because it's easier to grow from a smaller base.

To check how well these star performers are doing six months later, we figured the group's total stock performance, as if one share of each company had been purchased when the BW 50 rankings were published. Since spring, much of the BW 50's market increase has been powered by high-tech companies selling everything from software to microprocessors to computer services. Nine of the top 10 companies fall into the tech sector. That includes our No. 1 performer, BMC Software Inc., which racked up an 81% stock-price increase over the past six months. In the quarter ended June 30, BMC churned out 43% higher sales of its software, which keeps mainframe computers and their networks operating smoothly. That soaring demand also boosted net earnings 34%.

"SHARPER PENCILS." Like Sun, other hot tech companies have joined the e-commerce gold rush. The stock price of Oracle Corp., which makes Web-friendly database software, was up 62%. Network systems provider Cisco Systems Inc. rose 37%. And Tellabs Inc. saw its stock gain 31% on surging sales of equipment that transmits data, video, and voice signals. But America Online Inc., the one pure Internet play in the bunch, stalled out. It suffered from Wall Street's tougher, bottom-line examination of Web stocks, even though AOL is one of the few that makes money. Says analyst Christopher P. Dixon of PaineWebber Inc.: "Investors are taking out sharper pencils."

The biggest surprise among the BW 50 winners, however, was found far outside Silicon Valley. AES Corp., the world's biggest independent supplier of electricity, saw its stock shoot up 77%. How did a power company score our second-highest gain? By hustling to take advantage of deregulation. AES is selling electricity to individual U.S. corporations, and is gobbling up overseas capacity. The company's stock rose 10% in one day, on Aug. 19, when it announced a $3 billion purchase of England's massive Drax coal-fired plant.

The other low-tech performer was Navistar International Corp., which can't keep up with demand from Ford Motor Co. and others for its clean diesel truck engines. Navistar is reaping the benefits of an efficiency drive in the early '90s. Thanks in part to a 56% leap in operating earnings for the quarter ended July 31, Navistar's stock rose 24%.

Not all the BW 50 companies proved so nimble at adapting to roiled markets. Pharmaceutical stocks were battered by talk that Congress might give drug benefits to the elderly via Medicare. Investors fear that if the government becomes a huge buyer of drugs, companies will feel pricing pressure. Also, several companies face increased competition as their blockbuster drugs lose patent protection. That's why Eli Lilly & Co. suffered a 24% drop in its shares, while Merck & Co. lost 17%.

RATE WORRIES. Rising interest rates are what ails most of the beleaguered members of this year's BW 50. Those higher rates could spark a slowdown, which would hit retailers and big consumer-products companies. Indeed, jittery investors are taking profits and shifting their money elsewhere. Despite strong results--sales climbed 29% in the most recent quarter, with net earnings up 43%--Gap Inc.'s shares fell 19%. The worry: All the action is in Gap's Banana Republic and Old Navy offshoots, while its Gap store sales are flat.

Maker of big-ticket consumer goods were hit hard, too. Ford, the only carmaker on our list, is facing more competition on its highly profitable trucks. Its net earnings slumped 2% in the most recent quarter, and its stock fell 12% over six months. Maytag Corp., meanwhile, may have set a record for the BW 50's most precipitous fall. In early September, the fast-growing appliance maker shocked Wall Street with projections that sales will stall out for the rest of this year. Turns out Maytag has fallen behind in discount appliances. Its stock price, which had been up 18% at the time, got hammered and finished down 24% for the six-month period.

As investors shifted money out of stocks and into bonds and other investments, some financial-services companies also got walloped. State Street Corp., which provides back-office services for institutional investors, earned the dubious honor of last place on the list, off 29%. Its latest quarterly results showed only an 8% net income gain as mutual-fund inflows fell off.

For many of the BW 50, the next six months won't be much easier. This may be the year Santa Claus relocates permanently to the Internet, challenging traditional retailers like never before. And who knows what impact Y2K will have on computers or consumers? But robust overall earnings projections suggest that there is still growth to be squeezed out of this long-running expansion. "With worries moderating," says Hugh Johnson, First Albany Corp.'s chief investment officer, "quality large-cap stocks are the place to go." And that's what the BW 50 is all about.