Hot Growth, Against the Odds
Since 2005 online jewelry auctioneer Bidz.com (BIDZ) has seen profits soar nearly sevenfold as consumers glommed onto bargains like the $13,631 Bulgari watch that recently went for $669. But with the housing bust leaving so many so strapped, executives at the Culver City (Calif.) company realized they'd have to work harder to boost profits. So last year, Bidz.com's buyers looked beyond their usual source—jewelry makers looking to close out excess inventory—and began scouring the country for bankruptcy auctions where it could scoop up manufacturer inventories for pennies on the dollar.
Bidz.com's resourcefulness has paid off: While many other retailers began faltering earlier this year, the company reported a 34% jump in first-quarter earnings, thanks in part to this shrewd buying strategy. With several big purchases in hand, CEO David Zinberg recently raised his profit-growth forecast for 2008 by between 4% and 6%.
Shaking Off a Tough Economy
Such agility has not only paid off for Bidz.com's shareholders and customers but has also helped it earn the No. 19 spot on BusinessWeek's all-new Hot Growth list, our annual effort to identify America's preeminent small companies. This year we've tweaked our methodology to identify a smaller, more selective batch of highfliers that have outperformed their sector peers. They are the trend-spotters and innovators, the companies that have displayed an ability to thrive against multi�nationals with more market clout and foreign rivals with cheaper cost structures.
Above all, these companies are showing resilience in a worsening economy. Collectively, this year's Hot Growth companies saw profits rise 26% in their most recent quarters, vs. an average 27% drop in the latest quarterly results for the large-cap Standard & Poor's (MHP) 500-stock index, and a 28% drop for S&P's 4,400-stock Total Market Index. As a group, the Hot Growth Companies enjoyed average sales growth of 41.7% over the past three years and a 158% surge in profits in the past 12 months. Compare that with average sales growth of just 11.6% for the S&P 500 over the past three years, and a 20.6% increase in earnings last year.
Keeping up such stratospheric growth will be even tougher for this year's class, given the economy. That's especially so for Hansen Natural (HANS). Our No. 1 company, best known for its Monster Energy drink, has long been a favorite of short-sellers. After a torrid growth trajectory—profits rose from $20 million in 2004 to $149 million last year—the company's honeymoon with investors ended abruptly last November when it missed analyst estimates, due in part to higher costs for raw materials. The stock has tumbled 46% since.
"We Can Keep Growing"
But Rodney Sacks, Hansen's chief executive, says he can sustain growth and is ready to adapt to the times. That may mean more "2 for $3" and "3 for $5"-type promotions for cans of Monster. And Hansen, which has ranked on the Hot Growth list in three of the past four years, has rolled out new products such as its Java Monster coffee drink and a juice line aimed at kids. "The shorts had it wrong in the past and have it wrong now," says Sacks. "We believe we can keep growing."
Like Hansen, many of this year's Hot Growth companies are sticking with product launches, despite the fact that consumers are on the ropes. That's the case with Under Armour (UA) (No. 34), another repeat Hot Growth performer. Even with its sports apparel business up by 37% last year, the Baltimore upstart threw down the gauntlet against Nike (NKE) in May when it rolled out its first sneaker, a cross-trainer. Under Armour Chief Executive Kevin Plank knows that Nike will stop at nothing to protect its market share in shoes, but he believes the move into footwear was necessary to keep growing.
This year's Hot Growth ranking also features a whole lot of heavy metal. Dotting the list are small manufacturers with low-cost structures and the ability to make specialized products that can't easily be copied by foreign rivals. Among the success stories: Graham (GHM), a Batavia (N.Y.) maker of heat-transfer equipment, and Haynes International (HAYN), a Kokomo (Ind.) supplier of specialty alloys used by jetmakers and gas drillers.
Because of a weak dollar and a surge in global demand, these companies could have the wind at their backs. "What the world wants from us now is [advanced] industrial products—from airplanes to drilling equipment to machine tools," says Mark Zandi, chief economist of consulting firm Economy.com. "I imagine there will be even more industrial companies on this list a year from now."
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