Gene Marcial: How's He Doing?
It's not easy to write about a colleague, even when you are going to compliment his work. How do you do it without gushing?
Oh, the heck with it. Gene G. Marcial, the veteran financial journalist who writes BUSINESS WEEK's Inside Wall Street column, had one sensational year in 1999.
We can say that because we've tracked the 155 stocks mentioned in 49 Inside Wall Street columns during 1999. We measured their price performance on the first day the item was in the news, and again one month, three months, and six months later. (That's why this scorecard is appearing now. We had to wait until the last of 1999's stocks reached their six-months-since-publication anniversaries.) Then we compare those results to the returns of some major stock market indexes during the same time periods (table).
The results are impressive. On the days the magazine appeared, the stocks gained, on average, 8.8% and 132 of them were up. It's not unusual for the stocks to get a pop on Friday. In fact, the previous two times we've run this scorecard, the one-day return was, on average, 4.8%. The Nasdaq composite, the superstar market index of 1999, was up an average of 0.5% for those one-day periods.
UNDISCOVERED. But more important, these stocks are not one-day wonders. One month later, they're up an average of 9.8%; three months later, they're up 16.2%; and six months later, 25.9%. Those numbers trounced the Dow Jones industrial average, the Standard & Poor's 500-stock index, the Russell 2000 in all periods measured, and trailed the Nasdaq by 1.5 percentage points for the three-month periods and 5 percentage points for the six-month periods.
Mutual funds and money managers measure their performances against market indexes, but the Inside Wall Street column is not a managed portfolio of stocks. It's a window on the stock market that reports on the latest information and market chatter--usually not widely known--that could have an impact on companies' fortunes and their shareholders' pocketbooks. The column reports on talk about mergers and takeovers; promising new products; changes in earnings expectations; and corporate developments such as restructurings, spin-offs, and asset sales. You can't judge journalism by stock- price performance alone, but those returns in part validate the reporter's analysis that a stock is an attractive investment opportunity.
Moreover, Marcial proved effective in ferreting out mergers and acquisitions. In all, 49 companies were reported as potential takeovers. Twelve have been acquired, one fought off a hostile bid, and another had an announced deal that fell apart. Two others are pending: Seagram Co., parent of Universal Pictures and PolyGram and, of course, a spirits business, has agreed to be acquired by Vivendi (BW-July 3). Seagate Technology Inc. also has agreed to a deal with Veritas Software Corp. and a private investor group.
Marcial, who has written the column for 19 years, is a savvy reporter, but his 1999 results are also strong because he had the wind at his back. The column features a wide range of stocks, large and small, from New Economy startups to Old Economy giants. Marcial's metier is finding smaller, lesser-known up-and-comers. One great discovery was StarTek Inc., which provides Internet-based services to large companies. In the Apr. 26, 1999, column, James Awad of Awad Asset Management called it "an undiscovered and undervalued Internet play." Boy, was that a call. Six months later, fueled by Net mania, the stock was up fivefold.
Marcial's quests for the undiscovered stars haven't always turned out so well. In 1998, that strategy worked to the column's detriment as investors remained fixated on a few large-cap stocks and pushed them to great heights, leaving the smaller fry well behind. In 1999, and even in the current rocky year, investors clamored for the smaller stocks that hold out the promise of becoming a whole lot bigger.
Just consider Hauppage Digital Inc., which makes equipment that allows its users to put a resizable TV window on their PC desktops and was featured in the issue dated May 31, 1999. The day before the stock appeared in the column, trading volume on Hauppage stock was just 110,000 shares with a closing price of 6 1/4, adjusted for stock splits. The next day, 36.6 million shares traded, and the stock closed at 132 9/32, a 122.5% gain (table). Investors took their profits, of course, but six months later the stock was still up 108% from the price before it appeared in the column.
That's not an isolated case. At their three-month mark, ten stocks were up more than 100%, and one of them, SBA Communications, was up 264%. SBA, which owns and operates wireless communications towers, was featured in the Dec. 13 column as a stock recommendation by investment manager David Burshtan of Northern Trust Institutional Asset Management.
The sixth-month numbers are even more astounding. Fifteen stocks had triple-digit gains, six had more than tripled, four of them quadrupled, and, of course, StarTek was a five-bagger.
You can find more data on Hauppage, StarTek, and the other stocks in the scorecard that begins on page 108. In constructing this report, we measure each stock's return using the stock price on the last day before publication as a base from which to measure results. We then record the price at the end of day one, one month later, three months later, and six months later. When one of those dates falls on a weekend or holiday, we use the previous day's closing price. When stocks split, we adjust the price accordingly.
There are some other things to keep in mind when reviewing the scorecard. Several companies have undergone name changes since they first appeared in the column. Didax, featured in the Jan. 18, 1999, column, has since taken the name of its Christian Web site, Crosswalk.com. Similarly, Big Entertainment, which runs a Web site for movie buffs, renamed itself Hollywood.com Inc. after acquiring that company and its Web site. Having a dot-com in your name, seen as a big plus in 1999, seems almost like a liability now.
Also remember that when companies are acquired for stock, we measure the return by converting the acquired company's shares into the new company's in the same proportion in which they were swapped. SkyTel, which was mentioned as a takeover candidate in the Apr. 12, 1999, issue, was acquired within six months by WorldCom Inc. at the rate of 0.2566 WorldCom shares for each share of SkyTel. So the six-month return is measured in the acquirer's stock. Fore Systems Inc., on the other hand, was purchased within six months by the U.K.'s General Electric PLC for $35 a share in cash, so there's no six-month return.
WORST CALL. There are a few other situations worth noting. Genentech, the granddaddy of biotech companies, featured in the June 14, 1999, column, does not show any three- or six-month results. Yet it's still public today. Here's the reason: Shortly after the column appeared, Roche Holdings Ltd., which had an option to buy the Genentech shares it did not already own at 82 1/2, exercised the option. That resulted in a loss for those who had followed the advice of Lissa Morgenthaler, who was quoted in the article. Morgenthaler, manager of the Murphy New World Biotechnology Fund, recommended buying the stock at 87, a bet that Roche would let the option expire and the stock would zoom past 100. In mid-July, Roche reissued Genentech shares at a price higher than they had bought them back, and they now trade under the symbol DNA. (DNA now trades at 164 1/8.) The former shares traded with GNE as its ticker symbol.
The column's worst call came in the Aug. 2 issue. That featured the year's sole short-sale recommendation, EntreMed Inc. Stuart Weisbrod, of Merlin BioMed Asset Management, had recommended the short at 22, arguing that the biotech company's hot product was not so hot, and the stock would fall to 10. Six months later, the stock had shot up to over 54. That produced a 143.5% loss. Yes, that's right. In selling short, you can lose your entire investment and then some. Hopefully, those who had shorted EntreMed also followed Weisbrod's advice to buy BioCryst Pharmaceuticals Inc. It was up 138.5% after a month, and 162.5% after six months.
It's no surprise that many of the big winners were technology and biotechnology companies. But not all. Shares of Concord Camera Corp., the world's largest manufacturer of disposable cameras and a big private-label supplier to mass merchandisers, gained 367.4% over six months. Well, there was a high-tech angle to the item: the company's move into digital photography.
Earlier this year, the company introduced its digital camera, called "eye Q," that will be sold on a private-label basis through selected retailers. The Mar. 20, 2000, column also featured a bullish item on Concord Camera, and the stock was at the split-adjusted price of 22 7/8. Now it's at 23 5/8.
That's hardly a home run, but preliminary results on 2000 are looking good. How good? We'll report on the returns again this time next year.