A Year Of Beating The Indexes

Our Inside Wall Street columnist made some prescient choices in 2005

Professional money managers are always on the hunt for "alpha." That's finance jargon for superior performance, an ability to beat market indexes on a regular basis. Gene G. Marcial, the BusinessWeek veteran who writes our Inside Wall Street column, produced it in abundance last year. As usual, most of his 151 picks made a fast start as readers acted on his information. But many stocks he mentioned kept steaming ahead. On average, they beat five major indexes over one day, and after one, three, and six months -- among Marcial's best showings in the nine years we've tracked his performance.

His biggest average gain, 10.2%, was made over six months, when 101 of his picks, or two-thirds, were winners. Over the comparable period, the average six-month gain in the Dow Jones industrials was 2.8% and 4.2% in the Standard & Poor's 500-stock index. Only the Russell 2000 index of small stocks came close, with an average 9.2% six-month gain. Marcial finds the stocks he highlights by talking with money managers, analysts, and investors. He looks for companies that are potential takeover targets, that are undervalued because Wall Street is overlooking important developments, or that may break out because of a product launch or other event. For instance, Marcial featured E*Trade Financial Corp.'s (ET ) push into banking. The shares climbed 36.9% after six months.

To plot Marcial's performance, we start with the closing price of each stock on Thursday, just before BusinessWeek is first available on businessweek.com. Then we track the stock over the following six months. We calculate one-day and one-, three-, and six-month price changes in each case and compute the average performance for each period. Finally, we compare them with the major stock indexes. (For three weeks Marcial was relieved by BusinessWeek colleagues David Henry and Mara Der Hovanesian, whose picks are included in the results.)

Marcial's picks aren't widow-and-orphan stocks to buy and forget. Investors need to keep close tabs on them. For instance, WPT Enterprises Inc. (WPTE ), which operates the World Poker Tour, turned into the biggest loser on the list as excitement over poker dimmed and a hoped-for takeover didn't happen. Also, Marcial's only short last year came to grief. In February his sources pooh-poohed talk that May Department Stores Co. could be acquired by rival Federated Department Stores Inc. (FD ) But instead of falling, May's stock rose by more than $8, and Federated did indeed buy it.


Still, Marcial produced enough winners to more than offset the dogs. After one day, 120 of his picks were up, with medical gear maker Misonix Inc. (MSON ) climbing 10.8% on buzz about its new Sonablate 500 ultrasound device for treating prostate cancer. After a month, 92 of the picks were still gainers, led by data-storage specialist Western Digital Corp., (WDC CORP. ) up 44.1%. Nearly as many, 90, were still up at the end of three months, led by oil refinery technology company SulphCo Inc. (SUF ), which was up 333% at one stage. America West Airlines Inc. was tops among the gainers after six months. Its acquisition of US Airways Group Inc. (LCC ) helped boost the stock by 129.9%.

Despite a generally lackluster year for blue chips, several of Marcial's big-company picks produced market-beating gains. Consider Marathon Oil Corp. (MRO ) Riding the wave of interest in energy stocks, it turned in a 52% rise after six months, moving from about 36 to 55.

Although he handily beat all the indexes against which we measure him, Marcial undoubtedly was helped by the generally positive tone of stock markets. With the market's gyrations this year, it may be harder to produce all that alpha again.

By Joseph Weber, with Sarah B. Davis, Michael Mandel, and David Purcell in New York

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