Inside Wall Street: A Report Card

How did stock pundit Gene Marcial do in a treacherous year? Not badly at all, it turns out

After a brutal market in 2001, beleaguered investors hoped that 2002 would be the year the bleeding stopped. No such luck. Accounting scandals and a floundering economy combined to push stocks lower and lower. Investors who followed BusinessWeek's Inside Wall Street column may have lost money as well, depending on how long they held their stock, but they handily outpaced the market averages -- no mean feat in such a rough year.

In fact, the column's 160 picks in 2002 beat all five of the major indexes over four different time periods, with only two exceptions: The Nasdaq Composite Index matched the column over six months and the Dow Jones industrial average nudged it out by two-tenths of a percentage point over that same period. Overall, it was a performance that any seasoned money manager at a mutual or pension fund would envy.

Gene G. Marcial has written the column nearly every week since 1981, except for vacation relief from Business Week colleagues Gary Weiss and Mara Der Hovanesian. Marcial gets his ideas largely by talking with money managers, big investors, or corporate insiders. They may believe that a company is on the verge of an upswing -- because of, say, the launch of a promising new product or the prospect of government approval of a hot new drug, or that a company is undervalued and ripe for a takeover. By their nature, Marcial's picks aren't part of a buy-and-hold strategy. Rather, they're trading opportunities that depend on short-term events that can influence a company's future.

Last year, some of the column's best picks came from the hard-hit technology and telecommunications sectors. The biggest winner, Nextel Communications (NXTL ) soared 93% in the six months after it was highlighted in the Oct. 7 issue. Clifford Henry, who runs Worthington Growth, a Stamford (Conn.) hedge fund, told Weiss that the market had overreacted to the resignation of Nextel's chief operating officer -- a development that had just caused the cell-phone giant's stock to drop 16% in a single day. Henry was right: Nextel, which had just begun to turn around its string of quarterly losses, turned a $2.6 billion loss in 2001 into a $1.38 billion gain in 2002. Its stock, at $7.19 the day before the column hit the streets, was up to $13.86 in six months and closed at $20.03 on July 16.

Inside Wall Street also scored big with United Online Inc., an Internet service provider that was listed as a buy in the Mar. 11 issue. Jonathan Cohen, a money manager in Greenwich, Conn., a frequent source of Marcial's, was bullish, given that United had just signed a pact to provide high-speed Internet service over Comcast Corp.'s vast cable network. Cohen also believed that EarthLink (ELNK ) Inc. might make a run at United to broaden its own subscriber base. United hasn't cut a deal with EarthLink, but United shareholders haven't been the worse for it: The online service has boosted its subscriber count 50%, to 2.4 million, over the past year and is now solidly in the black. As a result, United's stock rose from $6.74 to $10.92 over the six months after it appeared in Inside Wall Street and closed at $29.01 on July 16.

By contrast, the worst performer was Penton Media (PTON ) a Cleveland-based trade magazine publisher and trade show operator that Marcial pointed to as possibly undervalued in his Feb. 11, 2002, column. Marcial noted that investor Mario Gabelli was mulling a proxy battle to shake up the troubled company, which had seen revenues for its technology magazines and trade shows hammered by the technology downturn. But the proxy battle didn't take place, and Penton's fortunes continued to deteriorate. Its stock, at $6.75 when Marcial recommended it, was just 33 cents a share by last August. Last month, the New York Stock Exchange delisted the company. It now trades over-the-counter, where it goes for 66 cents.

To chart the performance of the stocks discussed in Inside Wall Street each week, we start with the closing price on Thursday, just hours before BusinessWeek is first available on the Internet. Then we track the stocks for six months, which is why we wait until now to include the performance of the columns published last December. We calculate one-day, one-month, three-month, and six-month returns for each and average them. We then compare them to the major indexes.

Stocks featured in the column usually get a big one-day lift, and that was the case again last year. On the first day of trading after the column was released, the 160 stocks showed an average gain of 2.8%, and all but 60 of them moved the way that Marcial forecast. The biggest one-day winners were two small biotechnology firms: IntraBiotics Pharmaceuticals (IBPI ) Inc., which rose 47%, to $51.60, after Marcial reported in the issue dated Mar. 18 that some money managers were predicting great things for the antibiotic that it was developing to prevent mouth ulcers among cancer patients; and Dendreon (DNDN ) Corp., a Seattle-based biotech firm whose stock rose 22% after Marcial noted the potential for its prostate cancer vaccine in his Dec. 16 column.

Not surprisingly, those gains couldn't hold in the wake of a sinking stock market: After one month, the Class of 2002 was up an average of just 0.4% -- although that was much better than the 1.7% drop in the Standard & Poor's 500-stock index and similar declines in the other major indexes. But over time, the stocks that were cited in the column headed the same way as the broader markets last year -- south. After three months, Inside Wall Street's picks were down an average 3.7%, which nonetheless was enough to outperform the other major indexes.

Considering that the column focuses largely on small-cap stocks, probably the best benchmark to judge the column's performance is the Russell 2000. As the accompanying table shows, it was pretty creditable. He beat the Russell by 2.8 percentage points over one day, 1.9 over a month, 2.2 over three months, and 1.5 over six months. However, even those results weren't enough to offset the brutal market fully. After six months, only 63 of the 160 stocks that the column mentioned were in positive territory. Among the decliners was IntraBiotics, which despite a first-day surge was down 40% by last September. The column's average was down 8.4% over the period -- still good enough to beat all the other indexes except the Dow.

Merger targets can be good stock ideas, but the dearth of deals last year had Marcial deemphasizing buyout bait. In 2001, 53 of the stocks he mentioned were cited for their takeover potential. But in 2002, he offered 39 takeover plays, including the speculation in the July 22 column that '80s raider T. Boone Pickens Jr. might make a run at Vintage Petroleum (VPI ) Inc. Pickens later opted not to. Of those, three have come to pass by mid-July of this year: SpeedFam-IPEC, bought by Novellus System (NVLS )s last August; LendingTree, gobbled up by Barry Diller's InterActive (IACI ) Corp. in May; and OfficeMax Inc., which agreed on July 14 to be acquired by Boise Cascade (BCC )

Several of Marcial's plays in 2002 were companies that might profit from extra spending on homeland security and defense. Among them were Taser International (TASR ) a maker of stun guns; Cepheid (CPHD ), a biotechnology firm that developed equipment for detecting anthrax; and Strategic Diagnostics (SDIX ), a maker of tests used to determine whether a water supply had been contaminated by terrorists. But Wall Street's initial enthusiasm for such stocks waned quickly: Happily, no other terrorist attack occurred, and the government succeeded in rounding up many leaders of al Qaeda. These three stocks fell between 6% and 63%.

Inside Wall Street once again outperformed the indexes, and the column is a good place to mine for stock ideas. But in today's volatile markets, stock-picking remains a risky business.

By Dean Foust in Atlanta, with Michael J. Mandel, Robert J. Rosenberg, and Sarah B. Davis in New York

    Before it's here, it's on the Bloomberg Terminal.