Two Years of Hard Time

Stony soil is no good for growth. For the 100 companies that made up BusinessWeek's Hot Growth list in 2000, the past two years have been about as rocky as they come. Many of the small companies were hit hard by the downturn and couldn't rely on large reserves of cash to pull them through. Although some of the companies from the 2000 list benefited from a resilient consumer, others were caught in a squeeze as large corporations froze capital spending.

That pain was reflected in the group's stock returns. Take Ditech Communications Corp. During the 2000 telecom boom, the maker of echo-reduction equipment came in at No. 55 on the Hot Growth list, with $77.5 million in sales to telecom giants such as Qwest Communications, Alcatel, and Lucent Technologies. When the telecom bubble burst, those companies halted orders. Ditech watched its shares go way down, with the rest of the industry. Today, its stock trades at around $3 a share, down 96% from 2000, when it traded at over $85.

To measure whether the Hot Growth companies have kept their punch, BusinessWeek waits two years to check back--enough time for them to wash out any short-term anomalies. The verdict on the Class of 2000? Ditech is far from unique: 59 of the companies have been stock-market losers. Thirty-one have seen shares rise, and 10 have merged or have been acquired.

Making a bleak picture even worse, some of the biggest companies on the 2000 list--such as Network Appliance Inc. and Vitesse Semiconductor Corp.--lost the most. The average two-year return for the group was -0.7%, but those big-market-cap hits had the list limping in with a market-weighted return of -49%, way below the small-cap Russell 2000 index's modest gain of 3.9% in the same period.

Most of the bottom-dwellers are in two sectors: technology and telecom. Together, they account for 22 of the 25 worst performers from the class of 2000. No wonder: Buckets of money were poured into building telecom lines and other gear that now sits unused. At the bottom of our list is telecom software maker DSET Corp., which has lost 99.5% of its value in the past two years.

Still, several companies from the 2000 Hot Growth list managed to thrive. Some retailers, often among the most volatile groups, showed surprising growth. The common thread? Strong brand management. "If the shopper is brand-loyal, she'll still go to the stores she likes," says John Kyees, chief financial officer of women's apparel chain bebe stores inc. It returned 145%, fourth-best among 2000 Hot Growth companies.

Christopher & Banks, a Minneapolis-based specialty clothing chain, tops all comers with a 448% return. C&B kept a sharp eye on inventory management while aggressively expanding, says Chief Financial Officer Andrew K. Moller. The clothier, which changed its name in July, 2000 from Braun's Fashions to sound more upscale, isn't done: It plans to add 90 stores in the next year.

The two years haven't treated other of Hot Growth 2000 members as kindly. Battered, they're counting on renewed corporate spending to put them back on track. Ditech has been expanding its customer base overseas and continues to develop new telecom hardware in preparation for an economic upturn. "We expect it by mid-2003," says company spokesman Kim Shanley. Hope for growth springs eternal, even in the rockiest of times.

By Brian Hindo in New York

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