2000: The Triumphs And The Turkeys
Ahhh, 2000. What a year. From the overhyped hysteria of the Y2K bug to Florida's chad-filled electoral swamp, confusion reigned. Throw in rising interest rates, a slowing economy, and a faltering stock market, and it's not hard to fill this year's roster of bad calls, deals gone awry, and investment bloopers. What's harder to find are real winners.
Years of bull markets have ingrained habits in Wall Streeters that they find hard to shake. Even after major stock indexes started to swoon in March, the big investment houses' cheerleaders kept trumpeting every sign of good news. One of the lead bulls, Lehman Brothers Inc.'s chief U.S. strategist, Jeffrey M. Applegate, finally admitted in a mea culpa to clients in November that his allocation of 80% stocks, weighted heavily toward tech, "looked pretty stupid" in a year when the Standard & Poor's 500-stock index lost 6.76% and bonds were returning 10.35%. So is it time to back off? No way, says Applegate: At 22 times earnings, S&P stocks are selling below "fair value"--so keep 80% in equities.
THE HARDER THEY FALL. Even the smart money was caught unawares. In March, hedge-fund titan Julian H. Robertson Jr. had to shut down his Tiger Management group--once a $23 billion empire. Robertson admitted he missed the high-tech riches of 1998 and '99 and was no better positioned to reap benefits from the tech crash of 2000. Drained by years of losses and heavy investor redemptions, Tiger was only the first of the big hedge funds to suffer. A month later, George Soros announced a "reorganization"--including the departure of two top managers--of his $14 billion Soros Fund Management.
Big brokers made some bad gambles, too. In August, Credit Suisse Group spent $13.4 billion to buy Donaldson, Lufkin & Jenrette Inc. (DLJ), figuring that it could combine its expertise in banking for high-technology companies with DLJ's top-notch junk-bond team. But bad blood over the deal--and resentment of the $82.4 million package negotiated by former DLJ CEO Joe L. Roby--has spurred an exodus of DLJ bankers. One of the firm's greatest losses: star Kenneth D. Moelis, who has left for Credit Suisse's rival, UBS Warburg, along with 25 investment bankers in his West Coast team.
The best place to look for 2000's losers, though, is in the rubble of the tech sector. With the Nasdaq 40% off its March peak, the markets are littered with tech turkeys.
For 2000's bad-timing award, two players are running neck-and-neck. The first candidate: Morgan Stanley Dean Witter. Encouraged by the 360% rise in Internet stocks during 1999, it launched its Morgan Stanley Internet Index with great fanfare on Mar. 24, with index-based options trading on the American Stock Exchange. Talk about catching the peak: The index, launched at a value of 122.8, has since fallen below 39--a 68% drop.
Another ill-fated move was made by Ryan Jacob, top-rated manager of Kinetics Internet Fund. After posting triple-digit gains in 1998 (up 196%) and 1999 (up 216%), Jacob struck out on his own in 2000 to found Jacob Internet Fund--and ran straight into the dot-bomb implosion. The fund has lost 72.57% this year, the second-worst performance among 3,100 equity funds tracked for BUSINESS WEEK by Standard & Poor's. Jacob is now redirecting his portfolio, admitting that he stuck too long with startups that depended heavily on advertising from other Internet companies for revenues.
Prolonged loyalty to failed Internet strategies was common on Wall Street in 2000. Most big-name Internet stock analysts remained bullish--boosterish even--for far too long. Merrill Lynch & Co.'s Henry M. Blodget, who made his fortune projecting a 400 price target for Amazon.com Inc. (AMZN) late in 1998, served as a contrarian indicator for this bellwether in 2000: He upgraded his rating in February, just as Amazon hit a brief split-adjusted peak above 80, and he stayed bullish until it had fallen almost to 30 in late July. Morgan Stanley's Mary G. Meeker isn't doing much better: Her picks are off 68% this year.
Indeed, investors seeking wisdom on the New Economy needed to look in out-of-the-way corners. One of the year's most prescient forecasts came from Ravi Suria, a Lehman Brothers bond analyst. Instead of listening to dot-com CEOs' strategic insights, Suria crunched the numbers--and announced in June that Amazon was suffering from "extremely weak and deteriorating" credit. It took the sell-side pack--including Lehman's Internet analyst, Holly Becker--another month to downgrade the stock.
HOT POCKETS. Where could investors find solace in 2000? How about in the low-tech world of hotels? Salomon Smith Barney lodging and gaming analyst Michael J. Rietbrock put the "buy" sign on Starwood Hotels & Resorts Worldwide Inc. (HOT) when he saw that "lots of cities just don't have enough hotel rooms." Clients who followed that call reaped 50% gains. Indeed, real estate investment trusts (REITs) generally defied rising interest rates to notch strong gains in 2000. Another unglamorous winner: electric utilities, with stocks in the sector up 35% for the year. Investors who followed the advice of Lesa A. Stroufe, CEO of Seattle-based brokerage Ragen MacKenzie, did even better: Her utility picks are up 145% this year.
Will the bitter experience of 2000 put an end to momentum investing, overpriced mergers, and analysts who grab headlines by setting outlandish price targets for the stocks they follow? Perhaps--but only to make way for a new set of fads. For all we know, next year's biggest blooper may turn out to be betting on today's hot small-cap value stocks. There's one thing you can take to the bank: On Wall Street, excess always follows success.