What do an auto-parts vendor, a gold miner and an office supplier have in common? When everyone was looking the other way, these stocks took off, in many cases doubling and more, despite the onset of a recession and a sharp drop in the broader market.
It's often the case that the best successes come from out of the blue, and
are all good examples of that.
These stocks' strong performance points out that betting on improving fundamentals can pay off even in a sharply negative broader market. Of course, part of the trick may lie in finding outfits whose businesses are solid but whose expectations are nearly nonexistent.
For instance: After trading in a narrow range for six years, AutoZone, a seller of car parts and accessories, surged 160% in 2001 to about $75 as it took advantage of the economic slowdown.
"Replacement markets have been much stronger than original equipment markets this year," noted Peter Canelo, chief investment strategist at Morgan Stanley Dean Witter.
Morgan Stanley actually lowered its rating on this stock in April while Merrill Lynch downgraded it in January.
Still, the company was able to defy the projections, partly because of good management and strategy, and partly because of good timing. In periods of great economic uncertainty, people tend to repair their old cars rather than buy new ones. That's a trend that helped AutoZone this year.
Wall Street Winces
Big Funds Come Up Big
Restoration Hardware Shakes Off the Dust
Four CEOs Who Slipped Through the Net
Stocks Stuck in the Back Seat
Although the stock isn't as cheap as it was at the start of the year, trading at 27.7 times trailing earnings compared with 12.5 in January, some analysts remain optimistic.
"Earnings estimates for fiscal 2002 stand at $2.70, but I'm looking for $3.10," noted John Lawrence, an analyst at Morgan Keegan. "If the sales trends continue, that could drive those numbers up even further, although comparisons will get tougher in the second half of next year."
Another company that has defied the slowdown in spending is office-supply chain Office Depot. The stock has surged 135% to about $17.
Although the sales environment has been tough everywhere, Office Depot managed to boost margins by improving store efficiencies and tightening expense controls.
Give Me Pens
"You might ask how a retailer could do so well in this environment," said John Hughes, market analyst at Shields & Co. "But the market had already beaten these companies up in anticipation of a recession."
Indeed, Office Depot slid 70% over the past two years. In fact, the stock is still 30% below where it was trading at the start of 1999.
"These companies came back nicely because people were saying the consumer will return and they're discounting that things will get better," Hughes said.
At the start of the year, Office Depot was trading at 14 times trailing earnings, but it now sports a
price-to-earnings ratio of about 25. All the same, some would say Office Depot's run is far from over. Analysts remain optimistic about the prospects for retailers, after all, saying that lower interest rates and mortgage refinancing should free up spending money.
Also showing remarkable strength this year was medical device maker Boston Scientific. After sliding for the past two years, the stock surged more than 80% in 2001 to about $24.50.
Blinded Me With Scientific
Kevin Kotler, an analyst at ABN Amro, said the stock's valuation got so low that it was considered a potential takeover target, something that helped it to recover.
"It's also one of the key players in the coated-stent market, which we believe will be a $6 billion to $8 billion market over the next five years," he said.
And there's more upside to come, according to Kotler. "Small product acquisitions should allow it to grow its top line by double digits," he said. "The fundamentals have improved, and that's reflected in the stock price."
Another standout performer this year has been Homestake Mining, which owns gold mines in the U.S. After grinding lower for about six years (with only small gains in 1998), the firm surged more than 90% this year to about $8.50.
The main reason:
offered to acquire the company in June for a substantial premium. The deal is scheduled to close Friday.
Home Sweet Home
"There were reasons to own these stocks from the standpoint of being defensive," noted John Hughes, analyst at Shields & Co. "Some of them weren't necessarily affected by the slowdown in the economy."
While many of the biggest gainers this year came from defensive areas, a surprising number of tech stocks also saw solid returns.
Network Associates, maker of McAfee security software, climbed well over 500% this year to about $27 after falling 84% last year and 60% the year before. Because the gains came from a much lower level, however, the stock is still 60% below where it was trading at the start of 1999.
"This is really an entirely different entity than it used to be," said Christopher Russ, an analyst at Wachovia Securities.
The company is emerging from a successful restructuring program having changed its management and accounting practices, Russ said.
"It has more cash on its balance sheet, has eliminated noncore businesses to enhance profitability and has stemmed market-share losses," he noted.
The company's visibility is also high given that revenue from its antivirus software is recurring. "Some 75% to 80% of their revenue is subscriber-based," he said, adding that he expects to see additional upside in the stock price despite the mammoth gains already seen.
Among other tech stocks seeing gains this year are
, up about 100%;
, up 65%;
, up about 70%;
, up 55%; and
, up 85%. Most of these stocks were snapping back from steep losses the year before.
, some 200 stocks have actually climbed this year, with 18% of those posting gains of 20% or more, while 4% recorded gains of 50% or more.
"Some stocks had to do better than expected because, for many, there were no expectations at all," said Hughes.