“Some gotta win, some gotta lose.
Good time Charlie’s got the blues.”
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–Danny O’Keefe country and western song from the 1970s
Exactly two years ago, the technology stock bubble burst, triggering a bear market and wiping all the good-time grins from the faces of American investors.
Many big winners emerged nonetheless. Some money managers selected stocks suited to the times to help their investors prosper. Others won by betting stocks would decline, and employed short selling, futures and options techniques to gain from the expected drop. Of course, many other money managers and investors did lose big time and are still singing the blues.
The best-performing stock over those past 24 months was pharmaceutical services company AmerisourceBergen Corp. (ABC), which zoomed 365 percent in value. Second was the computerized casino products firm International Game Technology (IGT), up 279 percent. In third place was athletic footwear maker Reebok International, up 246 percent.
Thanks in part to long-time ownership of IGT shares, the $749 million Ariel Fund (ARGFX) had a two-year annualized return of 33 percent.
“We’ve had a terrific two-year period because we stuck to our guns at the height of the bubble in Internet stocks and remained a tried-and-true value manager,” explained John W. Rogers Jr., chairman of Chicago-based Ariel Capital Management and also that fund’s portfolio manager. “Boring and wonderful stocks such as Hasbro (HAS), American Greetings (AM) and Dial (DL) did well for us, as those companies started showing improving earnings in an environment where the economy was going south.”
Meanwhile, the stock market’s worst performer over the past 24 months, fiber optic technology company JDS Uniphase Corp. (JDSU), tumbled 96 percent.
Close behind in that dubious race were personal computer direct marketer Gateway Inc. (GTW) and integrated circuit maker Vitesse Semiconductor Corp. (VTSS), each down 93 percent.
Profiting from JDS Uniphase’s tumble by shorting its stock was the $219 million Prudent Bear Fund (BEARX), which had a two-year annualized return of 35 percent. (A short position is when securities have been sold with the obligation to close the position by buying the same securities at a later date. Funds also use futures and options that exaggerate the move in the opposite direction from the stock or index.)
The other biggest winners over the past 24 months: Following Lockheed Martin (LMT), there was Tenet Healthcare (THC), Ball Corp. (BLL), Darden Restaurants (DRI), Nvidia Corp. (NVDA), Pulte Homes (PHM), Concord EFS (CEFT), USA Education (SLM), St. Jude Medical (STJ) and Centex Corp. (CTX).
Obviously, making defensive moves paid off big.
“There was a bear market from March 2000 through Sept. 21, 2001, and after that came the beginning of a bull market,” believes Hugh Johnson, chief investment officer with First Albany Corp. in Albany, N.Y. “The most significant shift the past two years was out of the bull market’s growth stocks led by technology and into the bear market’s value stocks, especially those with higher dividend yields.”
Poor performance of telecommunications, due to depressed earnings and heavy debt loads, also played a role.
The other biggest losers in the past 24 months: Following Nextel Communications Class A (NXTL), there was PMC-Sierra Inc. (PMCS), Yahoo Inc. (HYOO), Nortel Networks (NT), Ciena Corp. (CIEN), Lucent Technologies (LU), Conextant Systems (CNXT), Corning Inc. (GLW), Applied Micro Circuits (AMCC) and Providian Financial (PVN).
But just like two years ago, times change. There’s a good chance that the worst is now behind us.
“You’re seeing a lot of cyclical stocks looking past the abyss and moving aggressively in a broad market,” observed Stuart Freeman, chief equity strategist with A.G. Edwards & Sons in St. Louis.
Real earnings, cash flow and stock prices remain preeminent. Before the market downturn, a lot of folks either forgot about that or refused to acknowledge it because they were so busy chasing price gains. In addition, although a few industries may outperform all others, it still makes sense to be diversified and spread your risks among many different industries and stock types.
In the coming two years, Ariel’s Rogers believes the financial services industry could be a big winner. He especially likes insurance stocks Horace Mann Educators (HMN) and HCC Insurance Holdings (HCC).