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7 stocks with perfect summer records
Modelman digs up dog-days winners, including a medical-device maker that's risen 8 Augusts in a row. Plus, readers get their evil-CEO licks in.
By Jon D. Markman
Every couple of months, the author of the SuperModels column answers his mail as readers implore, Hey Modelman! The mail continues to pour in on the lousy corporate CEOs and their excessive pay. But first, something different.
Hey Modelman: You used to write about stocks that had a tendency to go up in a certain month -- the HIMARQ model described in your book. What does it look like for July or August?
Modelman: Youll be sorry when I tell you that, going into last month, one of the most consistent big winners for June was PalmOne (PLMO, news, msgs) -- up four of the past four Junes for an average of 24%. Now its 5 of 5, since the stock was up 64% last month . . . As for July, two stocks with perfect records for the month are J2 Global Communications (JCOM, news, msgs), +20% on average over four years; and Cognizant Technology Solutions (CTSH, news, msgs), which is 6 for 6 and +17% . . . For August, perfect scores have been posted by First Horizon Pharmaceutical (FHRX, news, msgs), 4 for 4 with an average gain of 44%; WebEx Communications (WEBX, news, msgs), 4-4 with an average gain of 24.6%; Praecis Pharmaceutical (PRCS, news, msgs), 4-4, 22%; Mobile TeleSystems (MBT, news, msgs), 4-4, 21.8%; and Kensey Nash (KNSY, news, msgs), 8-8, 20%.
Of all of these, small-cap Kensey Nash has the highest StockScouter rating, an 8, and it also represents the largest sample period. It makes specialty medical devices in the cardiovascular market, including such products as Angio-Seal Vascular Closure Device, which seals and closes femoral artery punctures made during diagnostic and therapeutic cardiovascular catheterizations. Its sports medicine products include meniscal repair tacks, ACL and rotator cuff repair screws and a rotator cuff repair patch. On a more exotic plane, Kensey Nash also develops and manufactures synthetic biomaterials for use by orthopedic, dental and vascular surgeons.
In April, the company reported record results for its fiscal third quarter, and lifted estimates for its fourth quarter. It reported total revenues up 35% to $15.8 million and net income up 78% to $3.5 million. Later this month, analysts expect the company will report income up another 50%, to a level that would put its forward price/earnings multiple at around 30 -- a little below its historic average. The big news on the horizon is the potential for FDA approval of a major new product, the TriActiv System. Already approved for use in Europe, it helps cardiac surgeons create better vein grafts when performing bypass surgery.
Kensey Nash shares have backed off the historic high of $36.85 set last month to around $32. Theyre up 35% in 2004, well ahead of the pace of their industrial group -- medical appliances -- which is up a blistering 12% this year. With a little help from the overall market, they should be able to hold around this level for the rest of the month before potentially fulfilling the destiny of past Augusts. A 20% gain, if it materializes, would put shares around $38 by the end of summer, which seems reasonable. Certainly the company seems on track to get to $40 or better by the end of the year, even if theres a hitch with TriActiv, a level that would put it over the $500 million mark in market capitalization.
Cracking down on excessive CEO compensation
Hey Modelman: As a senior compliance officer at one of the nations largest financial institutions, I am watching ethical lapses on CEO compensation both on the news and at my daily work. I appreciate you pointing out (Big paydays for bad CEOs) that this issue threatens our entire system. Here are my ideas on how to rein in CEO compensation without making more government:- CEO compensation should be subjected to a vote of all shareholders, with approval requiring a supermajority of 80% of outstanding shares. Failure to vote proxies would be counted as a No.
- Shareholders wishing to propose reductions in CEO compensation should be allowed to do so if they can get 20% of all shares to agree to consider the motion.
- Federal civil and criminal law should be amended to create a rebuttable presumption that a CEO is personally liable for the acts of the corporation. One of the main justifications of the capitalist system is that those who risk their capital should have commensurate possibility of reward. Yet in our current system we have the reward with no risks.
I would be willing to invest in a campaign to change rules for CEO compensation; it would provide excellent returns through future corporate and stock performance. -- Eric Dewey
Modelman: Great points: No capitalist would argue with the super-high compensation package of a successful entrepreneur who has put his own money at risk. The problem is that so many major CEOs today are putting only shareholders money at risk and then paying themselves handsomely whether their gamble paid off or not. If a big pay package is clearly merited, then it should be no problem getting 80% of shareholders to agree to it.
The Wall Street Journal published a terrific piece on this subject July 7, titled As CEOs Miss Bonus Goals, Goalposts Move. Reporter Jesse Drucker noted that AT&T Wireless changed its executive bonus targets in the middle of 2002 when it became clear it would miss its original targets. Originally, Drucker reported, the bonus target focused on subscriber growth; the new target was based on market-share growth. In 2003, he reported, even the market-share growth target was eliminated, which was cynically smart, because the company lost market share. Nevertheless, Drucker reported, AT&T Wireless paid annual bonuses to three of its top executives that were 50% higher than the previous year. Shameful.
Survival is everything
Hey Modelman: You are bringing up thoughts I have had for years (Readers rage over worst CEOs -- their bosses ). The most damaging aspect of sky-high management pay to me is the exactly opposite incentive it provides. If my pay package is $10 million a year, all I need to do for lifetime security is survive a couple of years. All decisions even subconsciously descend from this. Corruption is like a slowly spreading cancer difficult to detect and legitimized by the high paid consultants and lawyers whose silence is rewarded. -- Paul Beadle
Hey Modelman: I propose that all executive pay packages, pensions and/or severance packages meet the following guidelines: - All executive pension plans should be eliminated and executives should be required to enjoy the pension plans available to all employees.
- Severance packages would be limited to the severance program available to all company employees. If employees get one week per year of service, the CEO gets the same deal.
- All executives must participate in the company health plan and cannot have any supplemental health benefits paid by the company.
- Prohibit deferred compensation plans. If you make the big bucks, you pay the big taxes.
- If the company treats most of its employees as "employees at will," they cannot change policy and create an employment contract with senior executives.
- Executives cannot be awarded options in an amount in excess of the average option award for all management employees as a percentage of salary. Example: middle managers get 5% of salary in option; CEO gets 5% of salary in options.
- Any executive bonus in excess of 50% of the executives salary must be approved by a shareholder vote before it is paid.
-- Brad Ford
Long-distance runners at the buffet table
Hey Modelman: The sad fact is that the U.S.A. is being mismanaged in the manufacturing sector. A good rule of thumb is that if the top 20 executives are making more money than the company is spending on R&D, there is a problem. Proprietary information must be created faster than competitors can steal and copy for the USA to survive. The analog to our situation is a marathon runner who gets ahead early in the race and stops running and sits down in an-all-you-can-eat restaurant! -- Steve McGuire
Modelman: An anonymous reader proposed a metaphorical sports framework for compensation that makes a lot of sense. He noted that the current system is similar to the National Basketball Association or Major League Baseball, in which contracts are offered to players on the basis of past performance. More often than not, the method fails. In 2002, for instance, the Seattle Mariners gave a four-year, $29 million contract to third-baseman Jeff Cirillo -- who promptly went into a two-year slump. Instead, companies should adopt the Professional Golf Association method of reward: The PGA pays pros on a sliding scale after each tournament based on actual performance relative to peers. If you win a tournament, you have a big payday. If you dont, tough luck.
Turning to a PGA-style compensation system for corporations would be a stroke of genius. Lets say that the average revenue-, earnings- and margin-growth performance of each industrial sector of the S&P 500 companies amounted to par for large-cap companies in those sectors, and the same for the average performance of S&P 400 Index companies for public mid-caps and S&P 600 Index for public small-caps. Companies that beat par (on the high, not low, side) would be permitted to extend bonuses on a sliding relative scale to their executives, while companies that bogeyed, double-bogeyed or worse would be required to cut their executives base pay and extend no bonuses. Executives would howl, but it would be a hole-in-one for shareholders and consumers.
Fine Print
To learn more about Kensey Nash, visit its Web site. This page describes its interesting biomaterials business, and this one describes the TriActiv system. According to the companys latest proxy statement, Chief Executive Joseph W. Kaufman received a $280,750 base salary and a $178,141 bonus in 2003. He exercised $3.7 million in options and is the largest single owner of the company with 7.2% of shares outstanding. He took no bonus in 2002 or 2001. Fund giant Fidelity Management & Research is the second-largest owner, while company founders Kenneth R. Kensey and John E. Nash own 5% and 4%, respectively. None of the executives appears to have an egregious compensation package. To see the whole proxy statement, click here . . . Equilar sells shareholders and executives software that helps them sift through executive compensation plan information in proxy statements. Click here for details . . . Labor unions have been on the forefront of the movement to control runaway executive compensation. Read about the AFL-CIO efforts here . . . To learn more about Jeff Cirillo, click here . . . Phil Mickelson is the leading PGA money winner this year, pocketing $4.9 million so far. Hes followed by Vijay Singh, Ernie Els and Tiger Woods. To see all 244 pros whove made money on the tour this year, click here.
Jon D. Markman is publisher of StockTactics Advisor, a weekly investment newsletter. He is also senior strategist and portfolio manager at Pinnacle Investment Advisors. While Markman cannot provide personalized investment advice, he welcomes column critiques and comments at supermodels@gmail.com; put COMMENT in the subject line. At the time of publication, Markman had positions in no stocks mentioned in this column.
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