Hit A Few, Miss A Few

I've just taken my customary look back at columns in the past year or two to search for those that time and events belied. A keyword in that search: Google (GOOG ). The juggernaut's shares recently topped 446, which you probably would not have missed even if you spent 2005 under a rock. That's where I must have been back in August, 2004, when Google sold stock at 85 in an initial public offering. I didn't like Google's unwillingness to discuss business in the sort of detail to which investors are accustomed, seeing that as inherently too risky. The market disagreed, valuing Google's staggering growth in cash flow more than corporate transparency. Chalk it up as a big one -- make that a leviathan -- that got away. In my own defense, lots of my calls panned out. Among them: columns on AT&T (T ) (before SBC Communications bought it and took both the name and ticker symbol), Callaway Golf (ELY ), CarMax (KMX ), Devon Energy (DVN ), eBay (EBAY ), EnCana (ECA ), Hospira (HSP ), and Office Depot (ODP ). Yet those that really riveted me are the ones that went awry (charts).

MOST NOTABLE among these were many bearish outlooks on stocks that surged, including the IPOs of Domino's Pizza (DPZ ) and Herbalife (HLF ). At Domino's, higher same-store sales and lower cheese costs widened margins, while network marketer Herbalife is enjoying faster-than-forecast revenue growth. It sees midteens percentage gains in 2006 sales. I also erred on fashion retailers, both in a piece on women's clothier Chico's (CHS ) FAS and a second on "teentailers" such as Abercrombie & Fitch (ANF ). Of Chico's, I was dubious about a plan to keep expanding its number of flagship stores while integrating the acquisition of a smaller chain, White House/Black Market (CHS ). Yet management has been able to maintain its wide gross margins, lifting cash flow through 2005's first three quarters by 37%. The ever-volatile teentailers proved more mixed, but most kept posting neat same-store sales gains, confounding my fear of lofty multiples and high levels of insider selling.

Goodyear Tire & Rubber (GT ) proved quite a different story. Back in April, 2004, when I judged it too risky even for contrarians, the company was the subject of a Securities & Exchange Commission investigation into its accounting practices. In August, the company was notified that the SEC staff planned to recommend an enforcement action against it. Goodyear said it was cooperating with the SEC. I was also worried about Goodyear's balance sheet, and while it remains highly leveraged, quarterly sales are setting records -- more than enough to assuage investors. Similarly, my concerns about regulatory woes in Florida for a unit of Psychiatric Solutions (PSYS ), which operates mental-health centers and services, proved unwarranted. The company keeps growing rapidly, in part through acquisitions.

Most of my bullish assessments worked out better, no doubt in part because of a generally rising stock market. But two wayward columns stick out. Although I had outlined the dangers of software maker Symantec's (SYMC ) stated plan to grow by acquisitions, I never figured its later deal for Veritas Software (SYMC ) would slay the stock as it did, even as its cash flow kept growing. And, finally, there was my old friend Krispy Kreme Doughnuts (KKD ). Back in 2000, when Krispy Kreme was all puffed up, I was too early in warning of a top; in 2004, when it had deflated, I spied a bottom much too early. Despite the company's suspect accounting for acquisitions, I had thought investors could take comfort in its operating cash flows. Yet the stock plunged even as that cash flow has itself become questionable. The next time I get the urge to ponder pastry, I'll be off to Dunkin' Donuts, a privately held company that serves a tasty cup of coffee.

By Robert Barker

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