Some Of My Pans Should Have Been Picks

Along with anyone else who sleeps more soundly amid a rising stock market, I found 2003 truly refreshing. Plenty of my picks, notably Agilent Technologies (A ), Carnival (CUK ), Citigroup (C ), Energizer Holdings (ENR ), and McDonald's (MCD ), saw far steeper gains than I had dared dream. Yet, as always, the year also brought a few nightmares.

That's why, continuing an annual custom, I've gone back to look at columns at least a year old to find those that time and events proved wrong. Given the market trend, you will not be surprised that each blooper came on a bearish call.

Alcon Laboratories (ACL ). Very often, discrete businesses that are carved out of big conglomerates and launched as independent public companies reward shareholders handsomely. I just didn't think that general rule would apply to Alcon, a maker of ophthalmic drugs and supplies in which Nestlé sold stock in March, 2002. The deal came to market at $33 a share, a price I figured was too steep relative to less-indebted rivals. Yet Alcon's price has only gotten richer: Shares now trade near $60. Beneath the stock's rise were surprising gains in sales and profits, driven in part by a new glaucoma drug, Travatan. In 2004, earnings growth figures to slow, as Wall Street analysts on average see a 14% rise.

JetBlue Airways (JBLU ). Yes, when I cast a cold eye on JetBlue after its April, 2002, initial public offering, I noted the loyalty of its customers, who love its leather seats and other nice touches. No, I didn't give JetBlue enough credit, arguing that the costs of expansion meant the stock would likely "leave you feeling blue." Instead, I wound up feeling airsick: From a split-adjusted $20, the stock swiftly dipped under $14 but then took off to a high last autumn above $47. The upstart airline's friendly service and fast growth remain admirable. But investors have been spooked by JetBlue's recent revelation of narrower operating margins as 2003 drew to a close. Even after a steep descent below $27, the stock still goes for a high-flying 25 times 2004's estimated profit.

Panera Bread (PNRA ). Despite the tasty food and good value that diners receive at this fast-growing chain of bakery-cafés, back in June, 2002, I figured its shareholders were courting indigestion. At a split-adjusted $35 a share, it was trading at 50 times 2002 earnings, too much for a restaurant chain whose growth was bound to slow. The stock did, in fact, soon sink 32%, but then perked up again, nearly touching $48 last fall. As I expected, growth did decelerate; what I missed was that some investors would still be willing to pay more than 45 times earnings for a 37% rate of profit growth in 2003. Lately, Panera is trading above $39, or 30 times next year's estimated profits. One fresh worry: The craze for low-carb diets will dampen America's appetite for baked goods.

Chicago Mercantile Exchange Holdings (CME ). In December, 2002, this mosh pit full of futures traders went public at $35 a share. To me, it looked like a money pit, given its weakening prices and conflicted board of directors, most of whose day jobs were as traders and brokers -- the Merc's fee-paying clientele. Good reasons, but I was still badly wrong on the stock. It immediately leaped $10, peaked in July above $79, and now goes for near $78. Through 2003's first three quarters, revenue jumped nearly 21%, while earnings soared 48%. Underlying the gains were record trading volumes. A cloud that refused to dissipate, however, was the Merc's faulty governance policies, spotlighted as the New York Stock Exchange suffered its own crisis. By November, the Merc had instituted a raft of reforms.

That much is heartening. Yet as stocks keep rising, spotting new buys only gets harder. The message in that trend? Insomnia ahead.

By Robert Barker

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