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Give thanks if you missed these 4 turkeys
Scandal stocks weren't the only losers in this year when almost everything went up. These duds have failed business plans or have been slow to adapt to changing markets.
By Jon D. Markman
So far this year, you had to really work hard to find and own any badly performing stocks.
Of the roughly 2,500 stocks traded on the Nasdaq of a decent size, only 244 fell in value in 2003 through the last week of November. Of the roughly 2,450 on the New York Stock Exchange, only 401 declined.
If you industriously managed to buy and hold any of the turkeys in this year of robins and eagles, then a doff of our Pilgrims hat to you along with condolences. And if the rest of you dont believe that there were even that many low-flying beasts, then we offer today -- on our national week of thanksgiving -- four names you should be grateful to have missed.
Ive excluded most scandal stocks such as Tenet Healthcare (THC, news, msgs) and LaBranche (LAB, news, msgs) from our list, since they are too easy to pick on. In my column next week, Ill reveal my list of five potential hawks for 2004.
One bourbon, one scotch, one beer
Heres an idea: Lets combine a maker of great televisions, hi-fi equipment and digital video cameras with a first-rate Hollywood motion-picture studio, a television production company and a record company, then throw in a subsidiary to make video game consoles and computers. Wouldnt that be cool? Wouldnt analysts, McKinsey consultants and shareholders love it?
Uh, guess not. The company were talking about here is Sony (SNE, news, msgs), and its so-90s decision to specialize in virtually everything that plugs in or moves at 25 frames a second has so far looked like a cross between its two new movies, The Lost Skeleton of Cadavra and Resident Evil: Apocalypse.
Forget about the mere fact that the stock is down 18% for the year -- a lot of great companies find their shares in the dumps from time to time. Whats appalling about Sony is that it is so unsuccessful as a business. According to Media General numbers, it has managed to wring only a 2.2% return on equity out of its properties in the past 12 months, and its five-year average in this key metric of business success is a paltry 5.1%. Net profit margins this year were less than 1% on gross margins of 37%. Even Albertsons (ABS, news, msgs), in the notoriously low-margin supermarket business, has a net profit of over 2%. A perennially poor performing peer in the entertainment business, Walt Disney (DIS, news, msgs), has 4% net profits.
How can a company that makes such wonderful products -- the Trinitron is a standard of television excellence; the Vaio computer line is gorgeous; PlayStation 2 is on every 10-year-old boys Christmas wish list; Spider-Man was a delightful hit for a record-breaking movie studio division; Seinfeld, Days of our Lives, Jeopardy! and Wheel of Fortune are annuity-like cash-generating machines; and just the As of its recording artist lineup include favorites Aerosmith, AC/DC, Fiona Apple, Louis Armstrong, Chet Atkins, Audioslave, Alice in Chains and The Allman Brothers Band -- record such awful results as a group?
Perhaps its because the whole M&A bankers pipe dream of a vertically integrated entertainment company turns out to have been a farce. Sony essentially scotch-taped a set of hit-driven companies together into a boxed set, then bolted it to a nice but slow-growth electronics business. Analysts say there have been no cost-saving synergies, just the sort of wildly unpredictable earnings swings that drive investors nuts. While the movie, games and computer divisions have done much better than expected, online file-sharing has turned the music business into a money pit. Combine that with the profit-draining effect of the yens strength against the dollar and youve got one of the most disastrous business stories of the past half-decade: Sony shares have declined 73% since February 2000, which is much worse than the Nasdaq Composite ($COMPX) (-54%) and the Japanese stock market (-38%) and right in line with the much-ridiculed Time Warner (TWX, news, msgs) (-72%).
Japanese stocks could be the surprise of 2004. To participate, chief executive Nobuyuki Idei, a 30-year veteran at the company, will need to take some radical steps soon, possibly including difficult sales of some of his crown jewels to achieve more focus.
Bronze star of macaroni
It wasnt supposed to work this way. Back in the bad old days of 2000 and 2001, a pack of consultants and investment bankers persuaded the company then known as Philip Morris, that it would unlock a ton of value if it were to spin off its Kraft Foods (KFT, news, msgs) packaged-food business. It sounded like a great idea: Separate the wholesome maker of mac and cheese, Velveeta, Grey Poupon, Jell-O, Oscar Mayer and Kool-Aid from the evil maker of cigarettes, and investors would kvell.
Ummm, no. Even after adding Nabisco to the mix -- maker of Oreos, Snackwells and Triscuits -- Kraft has gone exactly nowhere. It went public at around $30 in June, 2001, and its still around $30 two and a half years later. Well, not exactly nowhere. It has actually lost 19% of its value this year, even as its former parent, now known as Altria Group (MO, news, msgs), has outpaced the broad market advance with a 30% gain. Now thats a turkey.
This is a very strange result for a company that is not only the largest food producer in the United States but also has the No. 1 brand in 22 of its top 25 food-product categories. Six brands capture $1 billion in global sales and 61 other brands generate sales greater than $100 million. The company seems to do everything right, outspending all competitors on marketing, spending $350 million a year in research (producing winners like orange-colored Oreos for Halloween and the brilliant Lunchables franchise) and relentlessly driving down costs.
The core problem remains mysterious, but here are four issues:- First, the business is so mature that it grows at the rate of world GDP, around 2%-3%, at best, and private-label brands at margin-challenged supermarkets are slowly but surely eating Krafts lunch.
- Second, Wal-Mart Stores (WMT, news, msgs) wants to double its amazing 15% share of the grocery business in the next five years -- a move that will put the squeeze on the prices of even premier vendors like Kraft.
- Third, legal issues related to obesity are a looming fear and onerous pension obligations are a clear and present danger that could lead to large charges.
- Fourth, Kraft executives disappointed large investors by over-promising 14%-16% growth at the time of their initial public offering, and then regularly ratcheted down expectations to around 8%-10% -- a big no-no.
Of course the biggest problem this year for Kraft as a stock was that it was a defensive, slow-moving play in a market that wanted beta, or volatility. Perhaps next year investors will prefer a stock which they can enjoy with a nice cool glass of milk. Ill drink to that.
Black and white
Im running out of room, so the rest will be a real turkey shoot.- Freddie Mac (FRE, news, msgs) was its own worst enemy in 2003, falling 4% as investors questioned everything from its management and accounting to its ability to grow if the residential housing market slows in the face of rising interest rates. The government-sponsored enterprise -- charged with buying mortgages from banks, packaging them into securities and selling them into a worldwide market -- provides stability to the great American dream. But following a series of embarrassing earnings restatements and the exit of two chief executives, its investors dreams are on hold. Investigations of impropriety are likely to lead to legislation imposing growth-inhibiting legislation and increased capital requirements. A respected new management team would go a long way to restoring the markets confidence, but dont count on the choice being driven strictly by business considerations during a presidential election season.
- Weight Watchers (WTW, news, msgs) sank 18% this year as its profitability faced challenges from the increasingly popular Atkins, South Beach and Zone diets. Many investors had looked at the company as a way to bet on Americans constant battle with their waistlines. But Weight Watchers earns the bulk of its money when customers make a commitment to visit its company-owned or franchised stores and buy specialty food products; its program requires a tedious process of counting calories and focusing on ones progress. In contrast, many Americans have found they can lose weight on low-carbohydrate diets like Atkins in a much less expensive, time-consuming framework. The companys results may rebound if dieters it has lost to other methods come back after failures, but a flexible approach to embracing a low-carb variation of its plan could bring fat back to the bottom line.
What are your top turkey stocks for 2003? Send them to me at jdm@oddpost.com, and Ill post the best responses in a mailbag column next month. Remember, scandal does not a turkey make; it has to be either a company with a flawed business plan or that has failed to adapt to a changing environment.
Fine Print
Wed be remiss if we didnt note that the stock of Microsoft (MSFT, news, msgs), the publisher of this site, has had a less-than stellar run this year, posting a 1% decline while the Nasdaq has advanced 40%. Legal battles, challenges from the open-source software movement and its own success in dominating the arenas for desktop applications have conspired to crimp its growth potential in the mind of investors, despite generating an astounding $15 billion in cash flow from its operations in its 2003 fiscal year. (Microsoft publishes MSN Money.) . . . Turkey growers in the crowd may have noticed that my subheads included the names of some of the nations leading turkey breeds: Bourbon, Bronze, White and Black. Click here for more. . . . As forecast in my two columns about China (here and here), the Bush administration has pushed forward along the perilous route of protectionism, a move that has pushed down the value of the dollar and prompted threats of retaliation from our trading partners. More on this next month. . . . Hope you have a great Thanksgiving.
Jon D. Markman is senior investment strategist and portfolio manager at Pinnacle Investment Advisors. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at jdm@oddpost.com. At the time of publication, he owned the following securities listed in this column: Microsoft.
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