MANY OF THE
highflying stocks of the New Economy crashed in 2000, leaving investors buried in the rubble.
But the destruction wasn't universal. Investors who jumped on the surge in power stocks, such as Calpine or Dynegy, are really happy. You won't hear many complaints from investors in optical networkers Ciena and Juniper Networks, either. And some medical stocks also managed triple-digit gains.
This year also saw some Las Vegas-style jackpots. An investor could have made 510% on Manhattan Associates, a consulting firm. And a $100 investment in bean roaster Green Mountain Coffee back on New Year's Eve 1999 would be worth more than $400 now (even after this week's 38% fall).
Fair enough. But what we wanted to know was whether any of these highfliers stand a chance of duplicating their feats any time soon. So we searched for the best stocks of 2000 that still look promising for 2001, with help from Zacks Investment Research. The search focused on companies that had returns of 200% or higher between New Year's Day 2000 and Dec. 15. We also insisted on market caps above $300 million and on projected earnings growth above their industries' averages. We wanted above-average returns on investment and high ratings from Wall Street analysts. Finally, we demanded positive net income over the last 12 months. That last request was made to get rid of the high-growth, zero-profit tech companies that turned into fool's gold this year. The result: 11 stocks, ranging from a pipe fitter to a maker of early pregnancy tests.
Big tech names were conspicuously absent from our list. And even the three low-profile technology stocks that made it to the ranks of 2000's biggest winners face real challenges next year. Aeroflex, a broadband communications-equipment maker, popped nearly 535% this year, but not without wild fluctuations. Newport, another communications-component maker, soared 526% this year, but its stock price was a lot higher in October than in December. The good news is that both companies are expected to grow faster than their industry peers. But how fast the overall industry will grow is open to debate. This fall, many analysts started questioning how profitable telecom-equipment manufacturers can be if their customers continue to struggle in 2001.
Powerwave Technologies makes radio-frequency amplifiers that strengthen wireless signals, and could continue to grow as companies continue to build out wireless networks. But it's now facing questions about how it manages inventory. The stock, up 209% for the year, was up more than 350% in early December. Expect more volatility in the future.
Two energy stocks made the cut, including Comstock Resources, an independent oil and gas producer. The company, which searches for fuels primarily in Texas, Louisiana and the Gulf of Mexico, can thank sky-high oil prices for sending its stock up 298% in 2000. But in 2001, the company's stock will likely swing as wildly as the price of the commodities it drills for.
Our other energy highflier, though, could have some pretty steady growth in its future. Shaw Group is a manufacturer of piping for power plants. Sounds mundane, but the company got a boost when it cut a deal to help build new power plants for fast-growing Entergy. Shaw's stock rose 211% in 2000 and could continue to soar if the nation goes on a power-plant building spree to combat growing power shortages across the country, as many analysts expect.
But the majority of the big winners this year were medical-related stocks. Our aging population can take some of the credit for that. The ballyhooed generic-drug company Barr Laboratories made the cut, rising 247% in 2000. Much of Barr's stock gain came from a court decision back in August, when the U.S. Court of Appeals ruled that it could make a generic version of the antidepressant bestseller Prozac starting in 2001, two years earlier than expected. Analysts look forward to seeing Barr's earnings jump 100% in 2001. The company has other generic offerings on the way, including a private-label version of pain reliever Tylox, which could keep this stock healthy for some time to come.
Hospital manager Lifepoint Hospitals proved itself this year, rising 268%. Less than two years ago, Lifepoint took over some money-losing hospitals from troubled HCA - The Healthcare Company. Today all the hospitals are profitable.
Investors in freelance chemistry company Albany Molecular Research also hit the jackpot, seeing their positions grow more than 275% this year. Albany concentrates on drug research and chemistry work for pharmaceutical and biotech firms, without worrying over marketing budgets or brand building. The company's goal is to be an independent, high powered R&D shop that all drug companies can use.
Two other medical stocks broke the 300% barrier: Quest Diagnostics and Laboratory Corp. of America. Quest is a leading clinical laboratory, and its stock gained 317% this year even as many labs were cutting prices to gain business. The tide in the industry is turning, as all labs are raising prices for their services. SG Cowen analyst Kemp Dolliver loves Quest's move to buy the clinical labs of SmithKline Beecham and the company's foray into direct-to-consumer tests and other growth initiatives.
Laboratory Corp., another testing lab company, saw its stock grow even faster than Quest's, to the tune of 325%. Analysts believe the company has done a good job in winning lab business from doctors and hospitals ruled by managed-care policies. And they hope executives can eliminate some of the bad-debt expense that has plagued the company.
But there's one highflying stock that blew every other away Inverness Medical Technology, a maker of diabetes and pregnancy tests. A $100 investment in Inverness made on Jan. 1 would have been worth $1,029 on Dec. 15. The stock has become extremely pricey, trading at more than 80 times forward 2001 consensus earnings, but UBS Warburg analyst Ricky Goldwasser thinks it might be worth it. The $3.5 billion to $4 billion market for diabetes self-tests is growing at a rate of 15% a year, Goldwasser says, and Inverness's partnership with Johnson & Johnson puts it in a position to take full advantage. There are many rival products out there, but Goldwasser believes Inverness's offerings will win over more customers because they're easier to use and produce faster results.
Nobody knows exactly what 2001 will bring. But many of these companies are anticipating more good news. If Barr boosts its earnings per share by nearly 80% next year and grows 22% long term (as it's expected to), the stock could continue to outperform. Inverness's diabetes market prospects make it intriguing even after its 10-fold run-up (especially after the price deflates a bit). And if Laboratory Corp. can lop off 1% of its bad-debt expense (not an unreasonable request), it could add 30-cents-a-share profit to its income statement. That's not bad for a company that will likely make about $3.20 a share in 2000.
While it's unlikely Barr, Inverness and the other big gainers will turn in similar returns next year, they were 2000's winners for a reason. And those reasons could propel them to more modest gains in 2001.