The Keyhole's Keystone Kapers for 1998

In the friendly spirit of bull-and-bear bipartisanship, Christopher Byron offers his review of Wall Street's big winners and losers in 1998.
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It's really tempting, with American planes trading fire with Iraqi forces, to get all upset about how goofy and unfocused our foreign policy in that part of the world really is. But this column has more important things to consider -- like, for example, if

Amazon.com

(AMZN) - Get Report

went from 30 to 300 in 1998, will it go to 3,000 in 1999?

Yes, folks, as December draws to a close, it's once again time for our traditional year-end review -- energized as always by the virtual truckloads of email that give us such a sense of involvement with the concerns of our readers. Consider, for example, this critique of our thinking, which arrived in the digital in-box following some recent comments in this space concerning

Ivana Trump

and her apparent exploitation by a gang of stock manipulators: "You are obviously a liar and paid for by the shorts. This article will be sent to my attorney, who will forward it to the authorities at the

SEC

to sue you and your cronies." (With such messages now raining down upon us like Tomahawk missiles, is it any wonder we sleep in a different location every night?)

So, in that friendly spirit of bull-and-bear bipartisanship, let us take a canter back through the year to reprise Wall Street's big winners and losers of 1998 -- at least as chronicled in this column. In a rising tide, all boats get lifted. But as always, our purpose here has been to ferret out the stocks that got raised on real value from those borne aloft on nothing but hype, hope and management hot air.

The record shows that we did better with the latter than the former. Our favorite pick of the year for an underpriced stock --

Thermolase

(TLZ)

-- is now selling for about half the 9 per share it sported when we spotted the company at the start of the year. Sorry about that.

Zeroing in on overpriced stocks was much easier -- mainly because, at the end of the century's longest bull market, there were simply so many of them from which to choose. What's more, the nearly yearlong volatility in overall stock prices helped shake some of the rotten fruit from the tree. The year itself began with the stock market weak. Then prices slumped sharply in late summer, only to rebound dramatically in autumn as a runaway short squeeze erupted in the initial public offering stocks of the radium-hot Internet sector.

As a result of that squeeze, the best stock to have held during the year turned out to be Amazon.com, the Internet book retailer. This company, with fast-growing but modest revenues, with no profits or cash flow, and with poor operating margins, nonetheless rose more than 950% during the year, to about 320 per share. As of late December, the company boasted a Wall Street market value of $16.8 billion, which is to say more or less equal to

Seagram

(VO) - Get Report

and

Barnes & Noble

(BKS) - Get Report

combined.

In fact, of course, Amazon's price performance was totally a function of the scarcity value of its stock. With so-called total shares outstanding exceeding 52 million, but less than 9 million of them registered and trading publicly, the stock was listed by

Nasdaq

until quite recently as a so-called UPC-11830 stock -- in Wall Street lingo, a "zero borrow" security -- meaning that every purchase by a retail investor automatically created an offsetting "short sale" by a market-maker, who then had to go out and "cover the short" with a purchase for his own account. The end result: a dramatically upward-spiraling price rise caused by nothing but a "short squeeze" in the shares.

All sorts of Internet stocks underwent similar price run-ups in the course of the year, spurts caused in almost every case by the sheer scarcity of the shares and the resulting short squeezes on the market makers. Take

eBay

(EBAY) - Get Report

, the Internet-auction site, which went public at 18 on Sept. 24 and three months later was selling for more than 296. (It's now down to about 247.) Or what about

Earthweb

(EWBX)

, another Internet operation, which went public at 14 on Nov. 11 and was selling for 70 a day later. (It's now around 39.) For the wildest example of all, try an obscure, New York-based Internet outfit called

theglobe.com

(TGLO)

, which went public on Nov. 13 at 9 and was selling for 97 per share within minutes of hitting the market. (It's now trading around 33.)

In all these deals and more, the underwriters -- including such white-shoe firms as

Goldman Sachs

and

Morgan Stanley Dean Witter

-- exploited the naivete of retail investors driven batty with desire for Internet stocks at any price. To profit from it, the underwriters structured their deals around offerings of no more than 3 million to 4 million shares, accompanied by prices of no more than 15 to 20 per share. Thus, with retail buyers by the thousands placing "buy at the market" orders for each new Internet IPO to be offered, any preoffering holder of shares could instantly "flip" them to retail buyers in the aftermarket at five and even 10 times their original cost.

At the opposite end of the performance spectrum, we drew attention several times to a stock that began the year at 10 1/4 per share and wound up the year at around 1/4. For this column's dunce prize as 1998's worst-performing stock, the award goes to

Golden Books Family Entertainment

(GBFE)

, the children's book publisher.

Under chairman and chief executive

Richard Snyder

, the ex-head of

Simon & Schuster

, this once-distinguished niche publisher attempted an asset-based restructuring in which revenues dropped by a third, to roughly $250 million a year, while cumulative net losses climbed to more than $317 million, and the entire net worth of the company wound up being written off as worthless.

The company's main problem? Lack of a coherent strategy for what new businesses, if any, to get into. Now, Mr. Snyder and his partner,

Barry Diller

-- who together own 40% of the stock -- are left holding the bag. Latest word is that the company is being shopped around by Mr. Diller's investment-banking buddies at

Allen & Company.

For a mere $7.8 million, you could buy the whole thing. Trouble is, no one wants it, and one look at the balance sheet shows why: That $7.8 million purchase price gets you: (a) 1,200 mouths to feed (a.k.a. employees), (b) approximately $150 million in long-term debt that is due any minute and (c) the millstone of another $110 million in preferreds. Worst of all, there's nothing left to sell off as a cash-raiser to finance a new turnaround strategy (assuming someone had one) since the company is already under water to the tune of $131 million.

But Mr. Snyder's operation was hardly the year's only big loser. To the pantheon of this column's turkeys, we were able to add, definitively,

Boston Chicken

(BOSTQ:OTC BB), the fast-food retailer. We first called attention to this fiasco-in-the-making back in July 1996, after noticing that most of the company's revenue was coming from fees and interest on loans made by the business to its own franchisees. What's more, those loans accounted for the bulk of the company's balance-sheet assets.

Unfortunately, the company wasn't setting aside any financial reserve for the possibility that the franchisees might go busto and default on their loan payments. The stock was hovering at nearly 30 when we said anyone holding a share was a "chump." By December 1998, the stock had plunged to 30 cents per share, and Boston Chicken had filed for bankruptcy protection from its creditors.

As it happened, 1998 also turned out to be a big egg-on-the-face year for celebrities. Take, for example,

Planet Hollywood

(PHL)

, which went public on tricky accounting in an April 1996 IPO. We promptly labeled the stock a sucker's bet and wondered if investors were really dumb enough to buy shares in a chain of tourist-trap greasy spoons simply because

Bruce Willis

and some other Hollywood showboaters would turn up for openings.

At a post-IPO peak of 29 per share, the supply of stupidos seemed substantial. Yet the company's miserable performance thereafter eventually wised folks up. In the fourth quarter of 1997, losses soared to $43.8 million, and a turnaround effort in which management tried to improve such basic shortcomings as the quality of the food didn't help much. By year-end 1998, the stock had lost 91% of its value and was selling for roughly 2 1/4 per share.

Some other celebrity-linked stocks that tanked in 1998:

Donna Karan

(DK) - Get Report

(to about 8, down from 13);

Lee Iacocca's Koo Koo Roo Enterprises

(KKRE)

(1/2, from 3 1/2);

Trump Hotels & Casino Resorts

(DJT)

(4, from 12 );

Jack Nicklaus' Golden Bear Golf

(JACK) - Get Report

(5/8, from 10). In all these cases and more, investors let themselves be blinded by the dazzle of celebrity involvement with the stock, only to discover just how ephemeral the value of that involvement actually is in an unsettled market.

In terms of absolute dollars, the biggest single loser of the year was

Ronald Perelman

, chairman of

MacAndrews & Forbes Holdings

. Mr. Perelman's worst mistake was also the easiest one to have avoided: letting himself get mixed up with

Albert (Chainsaw Al) Dunlap

, the self-promoting head of

Sunbeam

(SOC)

.

Mr. Perelman's entanglement with the Chainsaw began in March 1998 when Ron sold his 82% controlling stake in

Coleman

(CLN)

, a Kansas-based camping-equipment company, to Sunbeam for $160 million in cash and approximately 14.1 million shares of Sunbeam stock. Within days of the deal, Sunbeam's stock started to nose-dive as evidence surfaced suggesting that a turnaround at Sunbeam, orchestrated by Mr. Dunlap, had consisted mainly of accounting tricks. Now, those Sunbeam shares --worth $643 million when the deal was struck -- are worth only $83 million, representing a loss of $560 million to Ron on that one deal alone.

But there were more. Begin with

Revlon

(REV) - Get Report

, the cosmetics giant controlled by Mr. Perelman that he (a.k.a. the Finagle King) took public in a minority-stake IPO in 1996. At 24 per share, the deal seemed to us at least to be an overpriced turkey, but the shares rose in the aftermarket to a high, by the spring of 1998, of 56 per share. Yet it wasn't long thereafter when evidence started to surface suggesting that the Finagle King's company had been practicing the same sort of "channel stuffing" to bolster sales at Revlon as Chainsaw Al had been engaged in over at Sunbeam. Today, Revlon is selling for 17 per share, a loss of 70% in value. For Ron, who owns 83% of the stock, the drop translates into a $1.7 billion wipeout. Add the two reversals together, and Ron's losses during the year on just these two companies alone total $2.3 billion.

What's ahead for 1999? Hey, if I knew that, I wouldn't be doing this! About the only things I'm sure of are: (a) that the Finagle King will still be worth billions (and I'll still be writing about him), and (b) on a slow news day there will still be Barry Diller. Until then, Happy Holidays.

Christopher Byron's column appears in the New York Observer, and he also writes a Wall Street and investing column for Playboy. He is the former assistant managing editor for Forbes, the Wall Street correspondent for Time and the Bottom Line columnist for New York. Byron holds no positions in any of the stocks discussed in his column.