Only Some of the Hot Stay Hot

Investors in search of a roller-coaster ride couldn't ask for a more volatile group than BusinessWeek's Hot Growth companies. Consider these two companies from the 1999 list. At Applied Micro Circuits Co. (AMCC ), a San Diego company in the white-hot optical networking business, revenues grew by 64% in 2000 and 153% in 2001, and its stock price has nearly quadrupled in two years. By contrast, Vitech America Inc. (VTCH ), a Miami PC maker with markets in Brazil, has seen its shares plummet 90%. The Brazilian currency tanked, fire destroyed a key plant, and the company is in a legal battle with PC giant Gateway Inc. (GTW ) Says President William St. Laurent: "This is not [a stock] for widows and orphans."

To see if the 100 Hot Growth companies have maintained their performance or were just corporate flashes-in-the-pan, BusinessWeek waits two years to revisit them--enough time to take into account any short-term anomalies. The last two years, marked by a dot-com implosion and a slowing economy, were tough ones for the class of '99. It had a two-year market-weighted return of 52.3%, a far cry from the 149% two-year gain of the class of '98. Even so, that far outpaced the Russell 2000's 15.3% gain for the same period and the Standard & Poor's 500-stock index' 4.2% loss.

But that overall performance masks extreme volatility. Seven companies that ranked near the bottom of the 1999 list were among those with the best two-year stock performance, while five ranked near the top were among the biggest laggards. The biggest loser: Friede Goldman Halter Inc. (FGHLQ ), a Gulfport (Miss.) builder of oil rigs that ranked No. 1 in 1999 and filed for Chapter 11 bankruptcy two years later.

The Hot Growth companies from 1999 that have thrived are mostly technology companies with smart management and good products. Until the tech slowdown, David Rickey, CEO of Applied Micro Circuits, ranked No. 66 in 1999, managed to accelerate his company's growth by building faster chips and expanding its technology offerings. No. 97 Barr Laboratories Inc. (BRL ), a generic drugmaker in Pomona, N.Y., has seen its stock price soar 189% over two years, says CEO Bruce L. Downey, thanks to aggressive patent challenges and savvy marketing. When patients feared switching from DuPont Pharmaceutical's popular blood thinner, Coumadin, to Barr's generic version, Barr conducted studies that showed no adverse effects from the switch. Since 1999, Barr's market share has nearly doubled. Says Downey: "That has remained a very profitable product."

"FRESH GO." When companies can't respond quickly to external forces, however, they can suffer. Cotelligent Inc. (CGZ ), a San Francisco consultant, says the slowdown in tech spending has cut revenues and profits by 75% since the fiscal year ended March, 1999. After shifting the company's focus from enterprise software to wireless, CEO James R. Lavelle is hopeful: "We've got the opportunity to make a fresh go of it."

Being smart enough to overcome problems is what marks a strong Hot Growth company. Several of those profiled this year, such as Frontier Airlines Inc. and Chico's FAS Inc., went through tough times but pulled through. The best companies, of course, almost always do.

By Louis Lavelle in New York

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