FOR THE FIRST TIME IN THREE YEARS, THE WIND WAS BLOWING OUT TOWARD THE bleachers in 2003. The rally that began in March lifted the Standard & Poor’s 500 index 26 percent for the year, after cumulative losses of 40.5 percent from 2000 through 2002. As a result, this year’s Home-Run Hitters -- Institutional Investor‘s annual selection of the brokerage analysts who picked the previous year’s best-performing stocks -- got off an impressive array of tape-measure blasts. The longest ball was hit by Fulcrum Global Partners’ Walter Piecyk, who recommended cell phone carrier NII Holdings; it rose 535.1 percent last year, beating the 382.6 percent gain of the best shot in 2002, precious metals royalty company Royal Gold, a small-capitalization stock. All ten 2003 top-performing stocks rose more than 300 percent; none of the 2002 large-cap picks even doubled.
The biggest blasts in 2003 chiefly came from the resurgent sectors that drove the rally. After going into bankruptcy in May 2002, NII, like many wireless carriers, rebounded in 2003. Biotechnology companies such as MGI Pharma (up 467.6 percent), Esperion Therapeutics (up 386.8 percent) and Onyx Pharmaceuticals (up 385.9 percent) led a sector that jumped 45 percent after two down years. Indeed, David Bouchey becomes our first double winner since 1990 for his MGI and Onyx calls. Internet players Equinix (up 394.9 percent) and Netflix (up 396.7 percent) emerged from the tech bust with viable businesses.
To select this year’s Home-Run Hitters, we asked Greenwich, Connecticutbased FactSet Research Systems to list the five top-performing stocks with a market value between $75 million and $1 billion and the five biggest gainers with more than $1 billion in market cap. We excluded IPOs launched in 2003 and shares that were trading below 5 at the start of that year. Performance reflects total returns with dividends reinvested.
We used data from research performance measurement company Investars.com of Hoboken, New Jersey, to help pinpoint the analysts who covered each stock and determine when they made their calls. Company officials were also consulted for guidance on who first favored their shares or best captured their run-up. We excluded analysts at any firm that lead-managed a winning company’s IPO within the past four years. -- Lewis Knox
NII HOLDINGS (Nasdaq: NIHD) +535.1%
Walter Piecyk Fulcrum Global Partners
When NII Holdings, the Nextel Communications spin-off formerly known as Nextel International, emerged from bankruptcy in November 2002, it was “falling below the radar of many investors,” recalls Fulcrum Global Partners analyst Walter Piecyk. With good reason: The wireless telecommunications operator’s newly issued stock was illiquid, and its exposure to volatile Latin American currencies made profit predictions nearly impossible. Piecyk, however, viewed Reston, Virginiabased NII as a great way to play both Latin America’s economic revival and its emerging cell phone markets. The only mistake the 32-year-old made was repeatedly underestimating how powerful NII’s turnaround would be.
Piecyk, a former Nextel investor relations officer who also follows that company, recommended NII on February 10, 2003, at 15.35, which was roughly double its postbankruptcy IPO price, with a target of 28. As profits rose and the company’s relatively well-heeled subscriber base expanded -- NII boosted its number of business and upscale-consumer users in Argentina, Brazil, Mexico and Peru by 18 percent in 2003, to 1.46 million -- the one-time PaineWebber wireless analyst increased his earnings estimates and price targets a half-dozen times. NII’s 2003 earnings per share of $3.47 were more than four times Piecyk’s original estimate back in February. He now expects earnings before interest, taxes, depreciation and amortization to jump 41 percent this year, to $350.1 million. The stock hit 74.63 at year-end 2003 and burst through to 103.21 in mid-March. Piecyk’s most recent 12-month target: 142.
NII is “a very different company” than the one Piecyk first backed in early 2003: Its market cap has increased sevenfold, to $2.4 billion. But Piecyk, who has a BS in economics from the Wharton School of the University of Pennsylvania, believes still more good news is coming from NII. The company has a seasoned, savvy CEO, Steven Shindler, a former Nextel CFO; its customer-acquisition costs and attrition rates are falling; and only 25 percent of the Latin American population has cell phones, compared with 50 to 60 percent in the more price-sensitive U.S. market. -- Pam Abramowitz
SCHNITZER STEEL INDUSTRIES (Nasdaq: SCHN) +508.2%
John Rogers D.A. Davidson & Co.
Not many investors were paying attention to stodgy steel companies in April 2002 when D.A. Davidson & Co. institutional research chief John Rogers started putting his clients into Schnitzer Steel Industries, a recycler and minimill operator. Scrap steel prices, which had dropped by half, to $70 a ton, over the previous five years, had begun to rise, so Rogers recommended Schnitzer at a split-adjusted 9.40 based on the prospect of strong earnings growth, a U.S. economic rebound and China’s voracious demand. The veteran steel analyst got everything right but the share price: He thought it could reach 12. By the time 2003 ended, Schnitzer shares had blown through several of Rogers’ subsequent targets on their way to 60.50.
Rogers, 42, has followed Schnitzer since it went public in November 1993, in part because both Davidson and the steel mill are located in Portland, Oregon, which allows for frequent visits. “It’s a longtime family business that has managed to stay profitable through all cycles, up and down, by managing for the long term,” explains Rogers, who covers a variety of aerospace and industrial stocks. Schnitzer is virtually a pure play on scrap steel prices, which have recently skyrocketed to $230 a ton. Other steel businesses “are negatively impacted by rising scrap prices,” Rogers says.
Schnitzer’s earnings jumped 555 percent in the fiscal year ended last August, to $43 million, and 321 percent in the November quarter, to $12 million. Several times during the past year, Rogers urged clients to lighten up on Schnitzer shares because he thought the price was moving up too fast. Last October, for example, with the shares at 40, he downgraded to neutral, just before the stock surged above 60. By January 29, however, Schnitzer had retreated to 42.30, and Rogers again told investors to buy. In March the shares had jumped to 45.42. Rogers’s latest target is 55. “The underlying story hasn’t changed,” he says. “The changes in our rating have been based on valuation.” -- P.A.
MGI PHARMA (Nasdaq: MOGN) +467.6%
David Bouchey C.E. Unterberg, Towbin
MGI Pharma took a major hit in the summer of 2002 when the closely watched Phase III clinical trial of its pancreatic cancer drug, Irofulven, produced disappointing results. The company’s stock lost more than half its value that year, dropping to 7.25, but life sciences analyst David Bouchey didn’t let the bad news distract him from a more encouraging development: Minneapolis-based MGI also had Aloxi, a promising new drug designed to alleviate the nausea suffered by patients undergoing chemotherapy.
Bouchey, then at C.E. Unterberg, Towbin and since last month at RBC Capital Markets, decided in April 2003 to raise his long-term outlook on MGI from market perform to buy when the stock traded at 12.75. “Aloxi was having a good Phase III, and nobody cared,” says Bouchey, who is the first Home-Run Hitter since 1990 to reach the bleachers twice in one year (see Onyx Pharmaceuticals, page 48). Also favoring Aloxi: An injection could relieve nausea for up to three days, compared with less than a day for the three other available drugs. “I realized that not only was Aloxi different, it was better and would become a leading drug in a $1 billion market,” says the 46-year-old researcher, who draws on an extensive scientific background. He holds a BS in microbiology from Michigan State University, an MS in virology from the University of Kentucky and a Ph.D. in cell biology from the University of Virginia.
Bouchey, who also has an MBA from the University of Kentucky, grew even more bullish in June. With MGI shares at 23.85, he upgraded his medium-term outlook to buy after crucial Phase III Aloxi trial results were presented. MGI began promoting Aloxi in September, two months after gaining the Food and Drug Administration’s approval. By year-end the stock had reached 41.15. On March 17 it hit 56.68, as MGI upped its estimate for 2004 Aloxi sales from the $80 million$90 million range to $100 million$110 million. That’s nearly three times MGI’s $40 million in total 2003 sales.
Adding to the good news, Irofulven’s setback may have been caused by flaws in the design of its clinical trial. A new test is under way, and the preliminary indications are encouraging, says Bouchey. -- Michael Sisk
NETFLIX (Nasdaq: NFLX) +396.7%
Safa Rashtchy Piper Jaffray & Co.
Netflix’s “business model is completely different from anything that’s existed before,” explains Piper Jaffray & Co. Internet analyst Safa Rashtchy, 43. Subscribers to the Los Gatos, Californiabased company’s service pay $19.95 a month to rent an unlimited number of DVDs (but no more than three at a time); they place their orders over the Internet and receive and return the movies via first-class mail (postage is included in the subscription price). Two big selling points: 15,000 titles to choose from and no late fees.
In June 2002, a month after his firm co-managed Netflix’s IPO at 7.50 (split-adjusted), Rashtchy rated the e-commerce company’s shares outperform at 6.91. “Unless Blockbuster spent $40 million to develop the infrastructure to do online rentals, I had to recommend Netflix,” says the seven-year Piper Jaffray veteran, who is based in the firm’s Menlo Park, California, office. Rashtchy’s call had near-perfect timing. The shares slipped to 5.51 early in 2003 then nearly quintupled in a strong technology rally to finish the year at 27.35.
The company’s Oscar-caliber performance added further momentum. Subscriber rolls grew from 857,000 in 2002 to 1.5 million at the end of 2003, and Netflix’s average monthly churn rate (cancellations divided by new subscriptions) improved to 4.8 percent from 6.3 percent a year earlier, notes Rashtchy, a two-time Home-Run Hitter who was also a runner-up on Institutional Investor‘s 2003 All-America Research Team. The gains allowed Netflix to post its first-ever profit in 2003: a net of $6.5 million, or 21 cents per diluted share, on revenues of $272.2 million, compared with 2002’s loss of $1.49 per share on $152.8 million in revenues. Netflix is a hit with cineasts. “Anybody who likes movies but doesn’t have time to go to Blockbuster or is tired of paying late fees raves about it,” says the analyst, who rates Casablanca as his all-time favorite flick. Although Blockbuster reportedly plans to launch online DVD rentals by year-end, Rashtchy has set a 41 price target for Netflix’s shares, 17 percent above the company’s 35 level in March. -- Ben Mattlin
ESPERION THERAPEUTICS (Nasdaq: ESPR) +386.8%
Mark Monane Needham & Co.
The battle to lower bad cholesterol has been very healthful for clients of Needham & Co. biotechnology and life sciences analyst Mark Monane. His longstanding recommendation of Esperion Therapeutics, a developer of artery-clearing drugs, paid off spectacularly in 2003 with a 386.8 percent surge -- bolstered by pharmaceuticals giant Pfizer’s December 21 agreement to acquire the company for $1.3 billion. “Mark was the first analyst to cover us,” says Esperion CFO Frank Thomas.
Monane, formerly a Harvard Medical School assistant professor with an MD from New York University School of Medicine and an MBA from Columbia Business School, initiated coverage with a buy at 6.55 in November 2001, 15 months after Esperion’s IPO at 9. At the time, the Ann Arbor, Michiganbased Esperion was unprofitable and had an anemic $169 million market cap, but it boasted one major asset: CEO Roger Newton was a co-inventor of Pfizer’s hugely successful cholesterol-lowering remedy Lipitor (2003 global sales: $9.2 billion). “Management was a proven winner, and the company was going where no others had gone before,” says Monane, 43, who joined Needham in May 2000. Through the end of 2002, Esperion’s high-risk shares performed reasonably well -- gaining 8.55 percent and easily besting the Standard & Poor’s 500 index’s 14.29 percent decline in that time.
By June 2003, when one of the company’s four drugs in development proved effective in a Phase II clinical trial, Esperion’s stock had already jumped to 17.61. Despite the rise, Monane raised his rating to strong buy based on the promise of the drugmaker’s products. In contrast with Pfizer’s Lipitor, which aims to reduce the low-density lipoprotein, or bad cholesterol, that causes plaque in arteries, Esperion’s drugs are designed to enhance the beneficial high-density lipoprotein. They complement anti-LDL therapies -- which helps explain Pfizer’s willingness to offer $35 a share for Esperion, a hefty 54 percent premium to the share price at the time of the bid. The stock ended 2003 at 35.01 and stopped trading in February when the merger was completed.
Monane, whose firm co-managed an August 2003 follow-on stock offering for Esperion, believes that picking stocks is like making soup: “You have to let things simmer and keep testing if it still tastes good.” -- B.M.
JOHN B. SANFILIPPO & SON (Nasdaq: JBSS) +406.9%
Patrick Winton Sterne, Agee & Leach
Discovering the next hot company with an antidote for high carbohydrate and fat levels isn’t just the province of drug and biotechnology analysts. Sterne, Agee & Leach senior analyst Patrick Winton has championed John B. Sanfilippo & Son since October 2002 because its Fisher unit markets nuts, which are low in carbs and fats. The company, he reasoned at the time, was “a small-cap snack-food stock that could benefit from forward trends.”
Winton, 34, first started tracking the Elk Grove Village, Illinois, company when he worked at Seidler Cos. in Los Angeles; his initial 2002 buy was issued when the shares traded at 7. After he joined Sterne Agee in New Orleans last July, Winton, who follows specialty growth companies, quickly resumed coverage, putting a buy on the stock at 16.44 on August 29. By year-end strong revenue growth had helped push the shares to 51.04, almost five times higher than where they started 2003.
In its fiscal year ended June 2003, Sanfilippo boosted revenues by 19 percent, to $420 million, followed by a 27 percent rise, to $296 million, in the six months through December. Some 57 percent of its sales are to the consumer market, where demand for nuts at grocery stores and other outlets grew about 10 percent last year; additional gains came from product introductions like the recloseable Snack ‘N Serve Nut Bowl. The company also supplies nuts to other food makers who use them in snack bars and cereals, and it has a private-label business. Winton believes that nuts’ health benefits -- they don’t contain the trans-fatty acids that contribute to heart disease -- should ensure a solid growth trajectory. Though Sanfilippo’s stock was off 34 percent in 2004 through mid-March, Winton is keeping his buy recommendation intact, with a price target of 46.99. -- Karen Kroll
EQUINIX (Nasdaq: EQIX) +394.9%
Vik Grover Needham & Co.
When Equinix, a provider of Internet telecommunications services, was flirting with bankruptcy in 2001 and 2002, many investors and analysts couldn’t bear to watch anymore. Unfortunately for them, they also missed Equinix’s revival. Vik Grover, a 34-year-old researcher then working for Kaufman Bros., tracked the company through a painful restructuring. (Its shares, which traded as high as 16.50 shortly after its August 2000, IPO, plummeted to 38 cents in October 2001 before recovering to 5.70 at the end of 2002.) In early 2003 he took note when margins and customer-retention levels began to improve, pushing the share price higher. Last August he put a buy on the stock at about 15, and when he joined Needham & Co. a month later, he reiterated his bullishness. By then the stock had jumped to 22, on its way to 28.21 at year-end; the shares stood at 33.20 in mid-March, and Grover thinks they could hit 40.
Foster City, Californiabased Equinix operates online exchanges, or hubs, where Internet content and network providers buy and sell network access and bandwidth capacity. Customers include America Online, Cox Communications and Macromedia. Grover likens the business to an airport: It allows many airlines to land or take off and gives passengers a place to change planes or leave the system altogether. In the same way, Equinix customers can move into, within and out of its hubs as needed -- paying Equinix fees for the privilege.
In light of Equinix’s near-collapse, many analysts weren’t sure if the company’s strategy would ever work. But by early 2003 its “metrics were improving,” says Grover. “Incremental gross margins were increasing by 80 percent, incremental ebitda margins were increasing by 50 percent, [customer] churn was decreasing, and cash flow had turned positive in the U.S. operations. To me, that validated the model.” Equinix revenues jumped 53 percent in 2003, to $118 million. Further brightening the company’s prospects, a major competitor, Sprint Corp., is exiting the business and last October sublet its California hub facility to Equinix. Grover believes that with the company’s infrastructure now in place, incremental sales will fall straight to the bottom line. And if the much-anticipated Google IPO blows out, the stocks of Internet veterans like Equinix will enjoy a boost. -- M.S.
ONYX PHARMACEUTICALS (Nasdaq: ONXX) +385.9%
David Bouchey C.E. Unterberg, Towbin
David Bouchey’s initial support for small-cap drug developer Onyx Pharmaceuticals wasn’t rewarded. The life sciences analyst, then working for C.E. Unterberg, Towbin, raised Onyx to market perform from avoid in May 2002, with the stock at 8.02. Although the Denver-based researcher was encouraged by “promising results” from early tests of BAY 43-9006, an anticancer drug that Onyx had co-developed with German pharmaceuticals giant Bayer, investors did not share his enthusiasm. The stock had dropped to 5.81 by the start of 2003. Bouchey, however, didn’t flinch; he maintained his rating on the Onyx shares, and in June, with the stock up to 11.12, he upgraded further to buy. The Richmond, Californiabased drugmaker’s shares subsequently took off, jumping to 28.23 by year-end (and gaining 385.9 percent for the full year). They rose to 36.19 by mid-March.
Bouchey, a cell biologist by training who also slammed a large-cap home run last year with MGI Pharma (see page 46), says that two factors persuaded him to swing for the fences with Onyx. First, in January 2003, Onyx management ended a series of failed and expensive experiments with genetically altered, cancer-killing viruses. The cost savings helped Onyx shave its net loss to $45 million, or $1.73 a share, last year, from $45.8 million, or $2.23 a share, while more than doubling its cash position, to $105.4 million. Second, in June, Phase I clinical trials suggested that BAY 43-9006 was effective at slowing the spread of metastatic melanomas. The drug has since proceeded to Phase III clinical trials, the final stage before the Food and Drug Administration approval process starts.
In March, Bouchey left C.E. Unterberg to join RBC Capital Markets, where he continues to cover small- and midcap biotechnology companies, including Onyx. The 46-year-old father of three boys concedes that he is not as committed to everything as he was to Onyx. “I grew up rooting for the New York Giants,” he says, but shifted his allegiance to the Denver Broncos once he moved to the Mile High City in 1996. -- B.M.
ASV (Nasdaq: ASVI) +374.5%
Alexander Blanton Ingalls & Snyder
Alexander Blanton always keeps an eye out for interesting new suppliers to Caterpillar, the heavy-equipment giant he’s covered for more than 30 years. When Grand Rapids, Minnesotabased ASV (All Seasons Vehicles) signed on in 1999 to let Cat sell its construction and farm vehicles mounted on a uniquely designed set of rubber-tracks that can negotiate both paved and unpaved surfaces, Blanton was intrigued. “It’s the snowmobile approach,” explains the Ingalls & Snyder machinery and electronic manufacturing services analyst, who recommended ASV shares shortly after the deal was finalized, at a price of 20. Initially, the joint effort didn’t gain much traction with customers. Sales of ASV loaders and tractors through Cat dealers sputtered; its shares fell to 10 in October 2000. Then the two companies decided to rethink their arrangement. Instead of making the vehicles, ASV began to supply the suspensions and undercarriages for Caterpillar’s own multiterrain loaders. The revised program hit its stride in 2003. ASV’s sales soared to $96.4 million from $44.2 million in 2002, and net earnings climbed to $8.7 million from $1.4 million. Of the 2003 sales, $42 million came from Cat, up from $14 million. ASV’s stock, which had fallen to 8.08 at the end of 2002, jumped to 37.25 at 2003’s close.
The success is attributable to Cat’s respected brand name and distribution system and the effectiveness of ASV’s tracks. ASV treads are less likely to slip off when on rough terrain, easier on grass and more maneuverable on roads than rival versions. Company co-founders Edgar Hetteen and Gary Lemke know something about tracked vehicles. Hetteen started snowmobile makers Polaris Industries and Arctic Enterprises, and Lemke was a snowmobile dealer. Blanton, 67, a Harvard University MBA who covered machinery at Merrill Lynch & Co. before joining Ingalls & Snyder in 1991, wants to make sure the stock doesn’t go . . . well, offtrack. He cut his ASV rating on January 7 from buy to buy-on-weakness, citing the stock’s run-up. The shares fell 18 percent through mid-March, but Blanton -- 12 times a ranked Institutional Investor All-America analyst covering the machinery sector -- likes the company’s long-term prospects. Rubber-track vehicles are gaining ground in the U.S., and international markets are still untrammeled. -- K.K.
ERESEARCHTECHNOLOGY (Nasdaq: ERES) +355.3%
Gene Mannheimer Roth Capital Partners
When starting a new job, it never hurts to browse through the papers that a new employer has left on your desk. Just ask Gene Mannheimer. On his first day at Roth Capital Partners in Newport Beach, California, in April 2002, Mannheimer found some files a Roth colleague had deposited for him on a company named EResearchTechnology, whose executives had made a presentation at a Roth-sponsored conference earlier in the year. The firm’s new health care information technology analyst discovered a company that specializes in the collection and management of electrocardiogram data from clinical drug trials, as mandated by the Food and Drug Administration. After conducting his own research and holding a conference call with Philadelphia-based EResearch managers, the 38-year-old Mannheimer, who’d previously covered the health care and Internet infrastructure sectors for the U.S. venture capital arm of Taiwan’s China Development Industrial Bank, realized the little-followed company “was in a sweet spot” of the pharmaceuticals IT business.
EResearch controlled 40 percent of the market for centralized EKG data services -- expected to grow to $1 billion within five years -- and had invested in a number of promising new digital platforms for automating manual, error-prone processes in clinical drug trials. The software can help reduce the time it takes to bring a drug to market by 20 to 30 percent. What’s more, 15 of the world’s 20 biggest pharmaceuticals companies already did at least some business with EResearch.
Two months after his arrival at Roth, Mannheimer recommended that clients buy EResearch shares at a split-adjusted 6.37. But when the stock popped to 16.75 at year-end 2002 and then surged to 22.34 in late June 2003, Mannheimer got nervous. At that level, EResearch shares were trading at 40 times earnings and well above the 19.30 a share he estimated the company was worth. So he downgraded to neutral. But in July the company signed its largest contract, a $6 million Phase III clinical-trial project with an undisclosed pharmaceuticals company -- leading Mannheimer to raise his revenue and profit estimates and reinstate his buy rating at 18.32. By year-end the shares had risen to 25.42, on their way to 27.68 in mid-March. -- P.A.
