From The Dog House, To The Penthouse>
November 17, 1999
SMARTMONEY.COM: From the Doghouse to the
Penthouse
By PAUL R. LA MONICA
Smartmoney.com
NEW YORK -- Qualcomm (QCOM) has certainly gotten its fair share of press attention for
its surging stock. As of Tuesday, the wireless giant's shares were up more than 1,220% for the
year.
Yawn. 1,220%? That's nothing compared to Interleaf (LEAF).
Interwho? Interwha? Interleaf, a maker of Web publishing software, is up a mind-numbing
1,844% this year! More about that later.
For today's column, I thought it would be kind of fun to look at some stocks that have soared
this year but still probably aren't all that well-known by the average investor. Companies like
Interleaf. Now, this is not meant to be an endorsement of any of them. Obviously anything that
has run up as much as these stocks has to be treated with extreme caution. But I think it's
worth trying to figure out why investors have embraced them with such a passion. You might
learn something that will help you pick out future winners.
What I did was look for companies with at least 10 million shares outstanding and average
daily volume over the last 20 days of at least 100,000 shares to ensure that there was at least
some level of liquidity. After that, I made sure that no more than three analysts follow the
stock. I wasn't looking for hot tech IPOs that soared thanks to the charitable Buy ratings
bestowed on them by their underwriters.
The 25 stocks in the table were up about 550% on average as of Nov. 12. And it shouldn't
come as a huge shock to anyone that most of the companies are somehow associated with
high tech, if not necessarily the Internet. There are six telecom-equipment companies on the list
and two pharmaceutical companies. Twenty-three of the stocks are listed on that tech haven,
the Nasdaq, and the other two companies have tech ties as well.
Audiovox (VOX), listed on the American Stock Exchange, makes cell phones. And InterTan
(ITN) has developed a technology that allows melanin-deficient, sunlight-deprived Internet
addicts to turn their computers into virtual tanning salons...just kidding! Wanted to make sure
you were all awake out there. InterTan is actually a Toronto-based company that operates
more than 1,100 consumer-electronics stores with the Radio Shack and Tandy trade names in
Canada and Australia.
Here are the stories of some of the other big gainers you may not have heard of.
Interleaf is far and away the top stock on this list. In fact, it's the top percentage gainer of all
6,361 companies tracked in the Zacks database we use for our screens. Qualcomm is No. 3,
behind Interleaf and Pokemon phenom beneficiary 4 Kids Entertainment (KIDE). So what's
so special about Interleaf?
The company is a classic example of what sometimes can happen when a dog of a stock
changes its strategy and executes an amazing turnaround. Last year, Interleaf would have
wound up on the list of stocks that I'm preparing for tomorrow, the "Worst Performers You've
Never Heard Of." Its shares plunged 80% last year. But the company made a bet on
extensible markup language (XML), a way to publish information on the Web. Currently, the
most common language is HTML, hypertext markup language.
Many view XML as a programming language that will be more suited than HTML to new
Web-enabled devices like cell phones and wireless digital assistants like the PalmPilot.
Interleaf has benefited from the buzz on XML by launching a product called BladeRunner
(which doesn't have anything to do with the Ridley Scott-directed sci-fi cult classic of the same
name) that transforms material written in Microsoft Word documents into XML. Revenues
have soared for Interleaf this year thanks to BladeRunner, fueling the huge stock-price runup.
Is a more than 1,800% gain way too much for a small cap with less than $50 million in sales
last year and expectations of a loss this fiscal year? Probably. But it goes to show that stocks
can rebound from terrible years if there are at least some flickering signs of improvement in the
company's fundamentals. In fact, of the top 10 winners on this list, seven of them had down
years in 1998.
But bottom fish aren't the only denizens on this list. Netegrity (NETE), for example, the No. 4
stock on our list, with a 932% gain so far this year, has soared on the heels of a nearly 230%
gain in 1998. Netegrity makes SiteMinder, a Web security tool for e-commerce companies.
And Isocor (ICOR), a maker of electronic messaging and directory software, has tacked on a
613% gain this year after a 160% pop last year. Critical Path (CPTH) agreed to buy Isocor
last month for $287 million.
As with these three stocks, the Internet has been the driving factor behind many of the year's
winners, even those in what would seem to be relatively mundane businesses like marketing
and consulting. Rare Medium (RRRR), which sounds like the way a dyslexic might order a
steak, is an Internet consulting firm. The company has soared following a reverse merger last
year. ICC Technologies, an air-conditioner maker, of all things, "bought" the company last
year. But Rare Medium management took control of the company, sold off the air-conditioner
unit and was left with a pure-play publicly traded Internet stock.
Such reverse mergers are usually spooky. They're often done by companies that want to go
public without submitting to the scrutiny that comes with a regular IPO. But Rare Medium,
which has consulted for the New York Times (NYT) and Pfizer (PFE), has skyrocketed more
than 560% this year and was up another 13% Wednesday after announcing that it was the
company that redesigned Microsoft's (MSFT) MSN.com portal site. The new site design went
live today.
The Net has also boosted the stock of a company with the incredibly bland name of Marketing
Services (MSGI). Marketing Services has a traditional marketing division that does direct
mailing and telemarketing for clients. But the sizzle is in its Internet division, which has landed
lots of customers in the arts and entertainment industry. The stock is up about 380% this year.
It's also worth noting that both of these companies are backed by well-known investors. Rare
Medium's largest shareholder is Apollo Management, the investment company run by
renowned financier and former Drexel Burnham Lambert investment banker Leon Black. And
Marketing Services has the backing of General Electric's (GE) GE Capital unit, which owns
18% of the company, and Internet mutual fund wannabe CMGI (CMGI), which owns 10%.
Why does the presence of such high-profile backers matter? A company may have a
technology that nobody is paying attention to that can take off once it is endorsed by a market
leader. Such validation by industry bigwigs can catapult a stock into the exosphere - in other
words, really, really high.
That's exactly what happened to the No. 2 stock on our list, California Amplifier (CAMP).
The company, which makes amplifiers and antennas for wireless cable companies, has staged
a dramatic comeback this year thanks to MCI WorldCom (WCOM) and Sprint (FON). The
two companies made investments in wireless firms earlier this year, rejuvenating interest in the
sector. And since these wireless providers are the companies that California Amplifier sells its
products to, California Amplifier's stock wound up riding the wireless wave as well.
The stock was in a horrific funk for more than two years, falling from an all-time high of 46 3/4
in June 1996 to a low of 1 1/4 in August 1998. At 20 5/8, it's still far off its all-time high, but
it's up nearly 1,000% this year.
It just goes to show that sometimes a stock left for dead can eventually become a Wall Street
darling once again. It's not easy finding these companies (and it's incredibly risky to invest in a
stock that doesn't feel the love of the Street anymore). But by looking back at how some
winners have gotten to where they are, you might find some future hotshots that are currently in
the doghouse. |
