When the books close on 1996 much will be written about how most managers did not keep up with the Dow Jones averages. You'll hear plenty of different reasons why the mutuals lagged: a big cap love affair, need to have liquidity and safety at these lofty heights, foreign buying of name-brand stocks.
Let me nominate a different animal: health care information stocks. Never has one group played so much havoc with mutual fund managers as these former darlings. Sure, the semiconductor equipment stocks gaffed a handful of good managers this year, and the financials took down a host of others.
But health care information, a lousy 1% of the S&P--if that--must have been responsible for a substantial part of the underperformance of stock managers, particularly the aggressive growth cowboys.
Some background: Ever since the late 80s, when the government realized that health care costs were out of control, any company that could demonstrate a way to rein in medical costs received massive attention on Wall Street. If you had a software package that somehow harnessed costs, mutual fund managers would pay any multiple for your stock. Then you could take your vastly over-inflated currency and buy some other company in the field and create "efficiencies" that generated ever higher prices.
As the economy so often has shown abrupt signs of weakness during the last seven years, managers eager to insulate themselves from the economy latched on to this group as a surefire way to play economic vicissitudes: These companies had no economic sensitivity whatsoever.
As this sector gained credence, brokerage houses increasingly sought out underwriting candidates, with some seeking to bring anything public that could be labeled "health care information services."
But all good things come to an end. Hospitals and doctors became more efficient and increasing combinations of medical institutions led to a swift consolidation of many of the potential customers of these companies. The easy pickings, the most poorly run institutions, were either merged, closed, or signed as clients.
Somehow the analysts, perhaps too busy doing investment banking to notice, were completely blindsided by this shift. In fact, the worst culprits probably still don't see it happening. They herded their clients
into these Spacelabs, repeatedly recommending HCIA, Vital Com, GMIS, Mecon, Summit Medical and a host of others, all with the siren song of economic insensitivity and double-digit growth.
That's why when these stocks broke they didn't just go down two or three points. They went down 40, 50 and even 60%. In some cases they are still declining, their only real hope a takeover bid from someone still standing.
I know; I just missed getting laid to waste by Summit Med. The company came to my office as part of a road show for a secondary, talking about how their company's software will save hospitals a bundle by telling them which methods of treatment work best: so-called outcomes management. I was dazzled. The stock was at $18 with a new product cycle ahead of it and a host of potential sales wins.
I took a ton of stock down on the deal but no sooner had I purchased it than some mutual fund yahoo came in and ramped Summit up about 25% above the offering price almost immediately. Even though I loved Summit's concept, I figured, bird in hand, and I took the big gain.
Well, the sales never came through. The projections weren't met. The company missed the numbers and the rest is wretched stock history. It now stands--or, I should say, crawls, at $7 and I wouldn't touch it for all the pirated software in China.
When the book on this year is written we will discover that some of the analysts in this group had their bonuses paid, not by sales, trading and research, but by corporate finance and M&A. My advice to those: Get out of our side of the business and go to corporate finance where you belong. We have your legacy--a graveyard of companies that perhaps should never have been public and a whole host of money managers who should have known better but believed in you instead. Good riddance.
James Cramer is manager of a hedge fund and co-chairman of The Street. While he cannot provide individual investment advice or recommendations, he welcomes your comments, emailed to Jjcramerco@aol.com.