In 2002, the third year of a grinding bear market, most analysts were happy just to make contact with the ball. Parking one in the bleachers took a special talent as the Standard & Poor's 500 index fell 32 percent and the Nasdaq composite index gave up 23 percent. The biggest blast among the ten stocks highlighted in this year's Home-Run Hitters -- Institutional Investor's annual selection of the brokerage analysts who picked the best-performing stocks of the previous year -- was Royal Gold, which posted a 382.6 percent return. That was our shortest winner since 1994 (Stratacom, up 317.9 percent).
If the Internet bubble era -- remember Qualcomm's 2,600 percent gain in 1999 or VeriSign's 1,200 percent return that same year? -- required stock pickers to suspend their disbelief, this bear market is testing researchers' basic skills -- such as discerning a corporate turnaround. Immucor, identified by John Reilly of Westchester, New Yorkbased CJS Securities, battled product problems and a proxy fight before soaring 153.5 percent last year; Jarden Corp. (up 204.1 percent) struggled with an underperforming business before prospering under new management; retailers Petsmart (up 74.1 percent) and Jo-Ann Stores (up 221.4 percent) both had to solve inventory management issues; and CCC Information Services Group (up 186.9 percent) suffered through an Internet hangover before its big run. Another Internet survivor, Amazon.com, which made our list four years ago with a gain of nearly 1,000 percent, returns this year with a more modest 74.6 percent increase. Boston Scientific Corp. (up 76.3 percent) also makes a another appearance this year; the medical device maker was a 1995 Home Run with a 83.4 percent rise that year.
As usual in a bear market, defensive, consumer stocks are well represented -- Dreyer's Grand Ice Cream (up 84.9 percent) and Coach (up 68.9 percent), in addition to Jarden, Jo-Ann and Petsmart. And befitting a year in which global tensions rose and safe havens were scarce, Royal Gold led the way.
A word on how we pick our sluggers. Greenwich, Connecticutbased FactSet Research Systems listed the five top-performing stocks with a total market value between $75 million and $1 billion, and the five biggest gainers among stocks with market caps exceeding $1 billion. We excluded companies that went public in 2002, as the shares must have traded for the entire year. All equities on the list had to be trading at $5 or more at the start of 2002. Performance reflects total returns with dividends reinvested.
Next we used research performance measurement company Investars.com of Hoboken, New Jersey, to identify the analysts who covered each stock and when they made their calls. We then consulted with the management or investor relations officials of each company to pinpoint the analyst who first recommended the shares or best understood their value over the most recent market cycle. We eliminated analysts working at firms that underwrote a company's IPO if it occurred in the past four years, since they may be duty-bound to recommend the shares.
Join us then, in applauding the efforts of this year's Home-Run Hitters. They'll need to keep their eye on the ball: The new season's barely started, and already a number of 2002's best-performing shares are in a wicked slump.
Assistant Managing Editor, Research, Lewis Knox wrote the overview; Contributing Editors Jeanne Burke and Ben Mattlin and Contributors Pam Abramowitz and Carolyn Sargent wrote the profiles that follow.
DREYER'S GRAND ICE CREAM
Deutsche Bank Securities
(Nasdaq: DRYR) +84.9%
Looking to expand his food coverage beyond large-cap staples such as Kellogg Co., former Merrill Lynch & Co. analyst Eric Katzman hit upon midcap Dreyer's Grand Ice Cream in early 2000. He liked the company's plan to boost its margins and efficiency, and Swiss food giant Nestlé owned a 12 percent stake that was expected to grow. Katzman, 38, recommended the stock in March 2000 in the low 20s. When he left Merrill that fall for Deutsche Bank Securities, he took the Dreyer's recommendation with him, urging clients to start scooping up the shares at $28.
One key to Dreyer's strategy was a $200 million-plus direct-to-the-store delivery system, or DSD, that let the company bypass warehouses and distributors and stock retailers' shelves directly. Another building block: pushing such higher-margin "superpremium" ice cream as Godiva and Dreamery harder than its premium brands, Edy's and Dreyer's.
Although surging butterfat prices squeezed margins in 2001, driving the stock down from $36 in January to the high $20s in the fall, the company's strategy paid off in 2002. Dreyer's highly recognizable brands, efficiencies delivered by DSD and growth of superpremium sales boosted margins to 13 percent from 11 percent and jacked up earnings per share to $0.94 from $0.24 in 2001. The stock was already climbing through June 2002, when Nestlé and Dreyer's announced a $2.8 billion merger plan worth $83 to $88 per share at certain periods in late 2005, 2006 and 2007. Katzman downgraded to hold at $68; the shares ranged from $67 to $71 for the balance of the year.
In March 2003 the Federal Trade Commission nixed the deal as anticompetitive, and Katzman advised selling based on the fundamentals of an independent Dreyer's. The shares fell about 18 percent in the days that followed. In mid-March, with the stock at about $69, the companies were still trying to formulate a deal the FTC could approve. "If the deal closes, it will trade back up to $75," the analyst says. "If it collapses, the fundamentals would give you $30 to $40."
BOSTON SCIENTIFIC CORP.
J.P. Morgan Securities
(NYSE: BSX) +76.3%
For five years J.P. Morgan Securities' Michael Weinstein had steered clients clear of Boston Scientific's shares. He feared that the Natick, Massachusettsbased medical device company's difficulty absorbing a series of acquisitions was distracting it from R&D. "It was no longer the market leader," he says, "and execution started to slip." The stock, which had traded as high as $47 in July 1999, fell to almost $12 in December 2000.
But Boston Scientific hadn't taken its eye off the ball completely: In 1997 the company had started working with a promising compound, paclitaxel, to create drug-eluting stents, cardiovascular devices which keep clogged arteries open and deliver medications designed to keep scar tissue from forming. Impressed by early clinical data from medical giant Johnson & Johnson, the market seemed to assume that only J&J would be able to deliver a viable product. But in February 2002, after polling interventional cardiologists involved in the preclinical testing on paclitaxel, Weinstein, 32, concluded that Boston would "get it right." The payoff could be huge, given the company's relatively small size.
Weinstein recommended Boston Scientific at $22 in February 2002; the shares hit $43 by year-end. He sees more upside. The researcher expects the drug-eluting stent market to more than triple from $1.4 billion in 2002 to $5 billion in 2004, and calculates that BSX's earnings per share will gain more than $0.05 for every two points of market share. Weinstein also knows that Boston Scientific is a fierce competitor: It quadrupled its penetration of the $2.2 billion bare (non-drug-eluting) stent market, to 25 percent, between the third and fourth quarters of 2002.
The competition in this new marketplace is just getting started. Regulators in Europe approved Boston Scientific's stents in January 2003; the product launched there February 17. Weinstein expects the company to gain Food & Drug Administration approval for U.S. use by year-end. He estimates 2003 earnings of $2.50 per share, with $3.00 possible. And the analyst thinks the shares, trading at $44 in mid-March, have the potential to reach $55 by year-end.
Deutsche Bank Securities
(Nasdaq: AMZN) +74.6%
Amazon.com has been downright cruel to Wall Street analysts. First, there was former Merrill Lynch analyst Henry Blodget's misfortune, then onetime Lehman Brothers convertible bond researcher Ravi Suria's controversial call. All the more reason to give credit to Jeetil Patel of BT Alex. Brown, now Deutsche Bank Securities, who has managed to get the shares mostly right.
Blodget, while working at CIBC World Markets, became forever identified with Internet excess when in December 1998 he predicted that Amazon's shares, already at $240, would exceed $400. They blew past that goal (presplit) the next month, hitting $630 presplit ($105 postsplit) in April 1999, not long after Blodget landed a job at Merrill. The stock peaked in December 1999, however, at $640 presplit ($107 postsplit) and lost half its value by the spring of 2000; by late 2001 (when Blodget resigned), it was off its high by more than 90 percent. Suria caused a ruckus in June 2000 when he said Amazon risked running out of cash; the stock's nosedive continued, but the company never ran out of money.
Patel, now 29, was more measured, rating Amazon market perform in January 2000 at $70 (or about $420 before the two 1999 splits). The stock, says the analyst, "was likely to correct, since there was so little clarity about its earnings potential." It did, but Patel upgraded Amazon to buy at $16 in April 2001 based on the company's longevity, its stature in e-commerce and its proprietary technology. "Toys R Us had joined with Amazon just before the holiday season, and that relationship was starting to show promise," says Patel.
Although the stock slipped to $11 by 2001's end, it jumped 75 percent in 2002 to almost $19 -- up 20 percent since Patel's recommendation. That doesn't compare to Amazon's tenfold increase in 1998, but the gain was based on much sounder financials.
More gains are still likely, says Patel, citing Amazon's partnership with Target Corp. stores, among others, and its 31 million customers. With 2002 net losses down 75 percent, Patel believes Amazon's 2003 prospects are bright. His price target of 25 may even prove too conservative: The shares were recently trading above 24. "These guys have put together a pretty compelling strategy," insists the UCLA grad.
Johnson Rice & Co.
(Nasdaq: PETM) +74.1%
Petsmart, the Phoenix-based pet supply superstore chain, started to sputter in 1998. Although it stocked enormous inventories at great expense, distribution snafus meant customers often couldn't find popular items. The situation deteriorated further in 1999 when Iams Co. opted to sell its premium pet food through supermarkets and discounters, in addition to specialists like Petsmart. In fiscal 2000 Petsmart lost $0.28 per share; its stock ended calendar-year 2000 at $2.88, down from $13 in 1998. "Many investors, and my sell-side competition, had given up on the concept," says Johnson Rice & Co. retailing analyst David Mann, who initiated coverage in 1998 with a buy and then downgraded the following year on the Iams news.
But Petsmart management began to take corrective action in 2001. In April, Mann, 39, visited a store prototype in Dallas, part of Petsmart's planned makeover from warehouse to niche retailer. "What I found was an incredible sea change visually. Customers loved it," says the grad of Duke University's Fuqua School of Business.
So did employees, whose enthusiasm impressed Mann. "When you can energize store personnel, it usually transforms profitability -- and shows up in the stock price," he says. And five new regional distribution centers dramatically improved inventory management.
Mann reinstated his buy at $6.65 in September 2001, convinced that poor results masked a turnaround. He hasn't looked back. Revenues gained 14 percent in 2001 and 8 percent, to $2.7 billion, in 2002. (New Orleansbased Johnson Rice co-managed Petsmart's July 2002 secondary stock offering.) Inventory improvements and expanded high-margin services like grooming and obedience training nearly doubled earnings per share last year, to $0.63. The stock ended 2002 at $17, up 74 percent.
In early March Petsmart missed consensus estimates, partly because of a January weather-related sales slowdown, and its stock slid 25 percent. But Mann still predicts double-digit sales growth in 2003 as Petsmart completes its store redesign and launches 60 new branches. Says the analyst, "More and more folks are spending more and more on their pets."
Bear, Stearns & Co.
(NYSE: COH) +68.9%
Bear Stearns retail analyst Dana Telsey likes to hang out at local malls and stores whenever she can to "scout out the scene" and see what's hot. In early 2001 her in-person intelligence -- coupled with more objective proprietary retailer surveys -- was telling her that upmarket companies with strong brands had captured shoppers' fancy. Coach, the New Yorkbased maker and retailer of tony handbags and other leather goods, was one name that kept popping up.
The company, founded in 1941, had grown into a $600 million competitor in the $15 billion U.S. market for luggage, handbags and accessories -- and had just gone public in October 2000 at a split-adjusted $8 per share. Telsey, 40, was impressed with its mix of sales through its own branded boutiques and big department stores. More important was management's new strategy: redesigning its own shops, adding new ones, expanding its independent retailer network and extending its product line to include footwear, jewelry, sunglasses and more men's products. In March 2001 Telsey started recommending Coach at a split-adjusted $14.
The stock jumped 43 percent by the end of 2001 and a further 69 percent in 2002, to $33, as the strategy bore fruit. In the fiscal year ended June 2002, Coach's revenue and earnings per share grew 20 and 29 percent, respectively, from 2001. In the quarter ended December 28, 2002, the company posted net sales of $308.5 million and diluted earnings per share of $0.68, up 31 and 39 percent, respectively, year over year.
Even with the shares at $37 in mid-March, Telsey, a repeat Home-Run Hitter who has also been a first-teamer on II's All-America Research Team four times, remains bullish. She projects annual sales and EPS growth of 15 and 20 percent, respectively, over the long term, and thinks the shares can hit $40 over 12 months. "There's definitely still room for growth," she insists, citing new products and variations of favorites. More Coach-owned stores are under development, and plenty of retailers don't yet carry the brand. "The concept is accessible luxury," says Telsey.
(Nasdaq: RGLD) +382.6%
Reeling prices of more conventional stocks and rising global risk created the perfect environment for the shares of Royal Gold in 2002. Powered in large part by gold's surge from $278 per ounce to $348, the company's shares rose from $5 to $25 last year as investors poured into precious metals and their related equities.
A trained exploration geologist, Canaccord Capital's Brian Christie, 46, was initially attracted to the Denver-based company under very different market conditions in January 2000. Royal Gold was unusual in that it didn't have any of the operational risk borne by mining companies. It doesn't excavate any land, own any equipment or pay any miners. Instead, it buys chunks of the future income stream, or royalty interests, from other companies' mines. What's more, it seemed cheap at $3.44, or 13.8 times cash flow (compared with 17.3 for competitor Franco-Nevada Mining Corp.). In January 2000 Christie rated it a buy with a target price of $5.50.
The shares stayed relatively flat through mid-2001, and Christie downgraded them to market perform in August of that year (based on cheaper gold). But as prices of the precious metal started climbing at the beginning of 2002, Royal Gold's royalty profits rose. Franco-Nevada had largely exited the royalty business, giving Royal Gold the opportunity to acquire new royalties.
So in February 2002, with the stock at $6.75 and gold close to $300, Christie raised his target price to $8 and upgraded the stock to buy.
During the year higher production at existing deposits, new royalty agreements and a steadily rising gold price drove the stock higher. As the stock soared Christie backed off a bit, moving to a hold in May 2002 at $9.80 and an underperform in November at $19.84. With gold near $350, its highest price since 1997, the shares peaked at $28.42 in February before a report in Barron's called it "overvalued" and sent the shares tumbling 32.6 percent, to $13, in one day. Christie quickly upgraded.
(NYSE: JAS.A) +221.3%
"As a younger male, I have very little background in sewing and crafts," admits McDonald Investments' David Rodgers, 26. But the Cleveland-based analyst had learned enough about merchandizing by following food and drug chains to spot an emerging turnaround at Jo-Ann Stores, a sewing, crafts and home decor retailer based in nearby Hudson, Ohio.
Jo-Ann had been struggling with inventory problems after installing an expensive new companywide computer system in early 2000. It often ordered the wrong amount or type of merchandise, causing flat and even declining sales for more than a year. By mid-2001, however, the debugged system started to aid sales. Jo-Ann also honed its working capital and expense ratios and improved its West Coast distribution system. "There were a lot of moving parts, but they were all coming together positively," Rodgers says.
With new home sales booming and Americans more intent on nesting post-9/11, Jo-Ann's business started to take off late in 2001. After its second consecutive quarter of sales growth that November, Rodgers upgraded the shares at $5.95 to aggressive buy from hold.
Rodgers's timing was perfect, but his target price was too modest: Jo-Ann's class-A shares opened 2002 at $7.15, overtook his initial $12 target in February and peaked near $34 in September. After falling for three years, Jo-Ann's net income rose to $44.9 million in 2002. "They outperformed our expectations and their own," the analyst notes.
This year has proved tougher. By mid-March Jo-Ann's stock had slipped to $18, pressured by a tough retail environment and lowered earnings guidance from competitors. Rodgers maintains his rating, but he trimmed his target price from $37 to $30 through February 2004. The analyst (who now follows multifamily housing REITs, but continues to track Jo-Ann) is confident that Jo-Ann can boost earnings 20 percent this year, partly by launching 20 new superstores. "People have cut back on bigger ticket items like travel, but they can still spend on crafts," he says.
(NYSE: JAH) +204.1%
In late September 2001 new management took charge at Alltrista Corp. (renamed Jarden Corp. in June 2002), the Rye, New Yorkbased maker of Ball- and Kerr-brand home-canning products. The executives, CEO Martin Franklin and CFO Ian Ashken, had their work cut out for them: Alltrista's per-share earnings had tumbled 72 percent in the previous two years, and the stock had slumped 55 percent in the preceding 12 months.
But Charles Strauzer, managing director at CJS Securities, had "no doubts about their ability," he recalls. Strauzer, 35, who joined the White Plains, New York, small-cap specialist when it was created in 1998, knew that Franklin and Ashken had gotten impressive results at another troubled company, Benson Eyecare Corp., and two spin-offs. The management duo also owned 9 percent of Jarden and, having previously tried to buy it outright, arrived with a well-thought-out plan.
Franklin and Ashken almost immediately shed a lagging molded-plastics business and began to emphasize Jarden's consumer brands. Their strategy to boost sales by introducing new products, such as home-canning kits, and acquiring companies with related food-preservation products also held promise, Strauzer thought. He put a strong buy on Jarden in January 2002 at a split-adjusted $8.50.
"No one else had recognized or understood the change going on there," says Strauzer. In 2002 Jarden's net income jumped to $2.52 per fully diluted share from a 2001 net loss of $6.71, thanks partly to the April 2002 purchase of Tilia, maker of the FoodSaver vacuum-sealing device.
By year-end the shares hit $24; they traded at $25 in mid-March. Even if Jarden's consumer line stumbles, Strauzer sees steady revenue from another business unit, which supplies zinc for U.S. and Canadian pennies. "It's a cash cow and a cushion against consumer cyclicality," he says. His target for Jarden: 15 times his 2003 EPS estimate of $2.65, or $39.75, although he adds that he's underestimated earnings every quarter.
CCC INFORMATION SERVICES GROUP
(Nasdaq: CCCG) +186.9%
Analyst James Macdonald of First Analysis got more than he bargained for with CCC Information Services Group. When he first considered covering the Chicago-based company in 1998, he thought it would be similar to the other outsourced service providers he tracked. Auto repair shops and insurance agents subscribed to CCC's computer systems that estimate the cost of repairing or replacing damaged cars.
What Macdonald didn't know initially was that CCC was becoming an Internet play as it transformed its system into a communications tool, speeding car insurance claims by helping insurers and auto repair shops agree on a repair price. "I suddenly realized that CCC was going to be very difficult to cover" because it was attempting to link two disparate markets, says Macdonald, 46. To prepare, he boned up on both businesses and started tracking CCC competitors like Automatic Data Processing.
Macdonald initiated coverage with a buy in May 1998; by then the stock had climbed to the mid-20s from about $15 in 1997. But, like many e-plays, CCC got carried away, expanding into businesses far beyond its core competency, including an Internet car-parts exchange; it financed those plans with a mountain of debt. Peaking in February 2000 at $30, the shares sank to $5 in 2001 (Macdonald had gone neutral in November 2000), as the company started divesting or closing unsuccessful initiatives and refocusing on its estimate business.
But when CCC finally reported its second consecutive quarterly profit in early 2002, Macdonald upgraded it on February 8 at $8, to accumulate.
"CCC successfully made the transition back to basics," Macdonald explains. After two years of losses, CCC earned $23 million in 2002 and paid off its debt by year-end. The stock climbed to $20 by early November last year.
Of course, there's a downside. Fierce competition and the inherently slow growth prospects of CCC's original business caused Macdonald to downgrade the shares to underweight at $17.50 on November 14; his 12-month target price was $14.
(Nasdaq: BLUD) +153.5%
CJS Securities analyst John Reilly, 24, was still a Fordham University undergrad when Immucor began to unravel. The Norcross, Georgia, seller of machines and reagents used to type blood had borrowed about $36 million in 1998 and 1999 to buy out a couple of rivals. But pricing pressures depressed earnings in March 2000, investors fled, and the company ran afoul of its debt covenants. Things got worse when three months late, Immucor had to halt sales of an automated blood-typing machine after reports of malfunctions surfaced, forcing the company to provide the reagents gratis for 14 months.
The problems took a toll on Immucor's financials. In fiscal 2001 (ended in May) the company lost $0.74 per share. Immucor stock fell from about $9 (adjusted for splits) in January 2000 to less than $2 in mid-2001. The company was even the subject of an unsuccessful proxy fight in late 2001 by investment fund Kairos Partners of Norwell, Massachusetts.
Eventually, Immucor caught a break. In September 2001 the company resolved its blood machinery problems and renegotiated its debt. Its acquisitions also began to pay off, allowing it to expand market share and raise prices.
It wasn't until a few months later that Reilly, at an investor's suggestion, started investigating Immucor, initiating coverage with a strong buy in June 2002 at $12. Reilly noted that only Immucor offers an FDA-approved, fully automated blood-typing machine; he also liked its recurring revenues. "Once Immucor places a machine, the customer has to purchase the reagents over the machine's five- or seven-year life," he says. Indeed, 2002 sales grew 21 percent. When Reilly downgraded the stock to a buy on valuation last November, it had climbed $2 beyond his $20 target. The stock closed 2002 at $20.
Reilly says the good times still have a ways to run and maintains a $25 price target. "Immucor has another three to five years of continual revenue growth."