How Great Were Those Great Stocks? - Brief Article

Kiplinger's Personal Finance Magazine, Nov, 1999 by Manuel Schiffres

If you bought all the stocks featured in our November 1998 cover story ("Great Stocks on Sale"), you must be feeling as smug as a winner on election night. If you bought only a few, and the wrong few, look ahead to the next campaign.

Since the story went to press, four of the 11 stocks we featured have fallen by more than 25%, symptomatic of a market in which investors flee in droves when companies fail to meet earnings expectations. The good news, of course, is that the remaining seven stocks rose, including a couple that experienced rocketlike ascents.

Bottom line: If you had invested equal amounts in all 11 stocks at the prices we published a year ago, your portfolio would have zoomed in value by 53.3% (results and prices are to September 20). By contrast, Standard & Poor's 500-stock index appreciated 30.9% over the past year.

Among the highfliers, the big questions for the future focus on price. America Online, the leading Internet service provider, continues to grow at a breakneck pace and generate earnings in excess of analysts' estimates. That hasn't kept its shares from dropping, however, from a high of $176 last April. AOL still sells for about 115 times its estimated profits of 75 cents per share for calendar year 2000. And some analysts are concerned that Microsoft's aggressive forays into the online-service market could hurt AOL.

Shares of Vitesse, a maker of gallium arsenide semiconductors, are also in rarefied territory. The biggest winner in our group, the stock has benefited from investors' desire to take advantage of the explosive growth in demand for fast-operating telecommunications gear, one of Vitesse's primary markets. The stock recently traded at 67 times projected calendar-2000 earnings of $1.38 per share. If the company can deliver long-term earnings growth of 40% per year, as analysts expect, that may not seem all that expensive.

Among the losers, two in particular bear watching. Shares of Apollo Group, an operator of colleges for working adults, have fallen even though the company has regularly met or exceeded analysts' earnings estimates. As a result, the stock now sells at just 23 times estimates of 94 cents per share for the fiscal year ending August 2000. That is below its long-term estimated profitgrowth rate of 25% per year. Analyst Howard Block of Bank of America Securities says several factors that contributed to the stock's decline, including a Department of Education investigation, should no longer be at issue, and he remains "very positive" on the shares.

Given its involvement in the redhot e-commerce arena, the performance of Sterling Commerce has been especially disappointing. The stock suffered two big sell-offs over the past year after Sterling, which provides software and services to facilitate the electronic exchange of documents among businesses, disclosed that profits wouldn't meet forecasts. The company attributed at least some of the shortfall to customers delaying purchases because of Y2K concerns (see "The Y2K Itch," on page 74). But with the stock selling at just 11 times estimated calendar-year-2000 earnings of $1.80 per share, some value investors see opportunity. For example, William Nygren, manager of Oakmark Select fund, says Sterling's problems are short term in nature. He thinks the stock could sell at $45 to $50 within a year or two.

RELATED ARTICLE: Maytag Earnings (and Price) Take a Tumble

IT'S NOT JUST Maytag dryers that are tumbling. So is the stock of the big appliance maker, featured as an "Expert's Pick" ("Smart Investing," Sept.). Already down sharply from our publication price of $74, the stock plunged to $39 when the company announced earnings would fall short of estimates. Joe Williams, manager of Commerce Growth fund, who recommended Maytag in the September issue, says he hasn't sold any shares and may buy more. Wall Street overreacted, he says, to news that instead of earning $3.75 per share this year, Maytag will earn $3.50. "You'd think they were losing money." But, Williams acknowledges, the stock "may languish for a while."

                         RECENT   PERCENT
                         PRICE    CHANGE

Vitesse Semiconductor     $93      301.1%
America Online             86      230.8
Qwest Communications       30       76.5
ADC Telecommunications     41       51.9
Guidant                    53       39.5
Vical                      15       36.4
Harte-Hanks                24        4.3
Apollo Group               22      -26.7
Aspect Development         24      -31.4
Sterling Commerce          20      -45.9
Steris                     13      -50.0