So far this year, you had to really work hard to find and own any badly performing stocks.
Of the roughly 2,500 stocks of a decent size traded on the
Nasdaq Stock Market
, 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 Pilgrim's hat to you along with condolences. And if the rest of you don't 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.
I've excluded most scandal stocks such as
( LAB) from our list, since they are too easy to pick on.
One Bourbon, One Scotch, One Beer
Here's an idea: Let's 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. Wouldn't that be cool? Wouldn't analysts, McKinsey consultants and shareholders love it?
Uh, guess not. The company we're talking about here is
, whose 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
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. What's 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
, in the notoriously low-margin supermarket business, has a net profit of more than 2%. A perennially poor-performing peer in the entertainment business,
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 boy's Christmas wish list;
was a delightful hit for a record-breaking movie studio division;
Days of our Lives
Wheel of Fortune
are annuity-like cash-generating machines; and just the "A's" 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 it's 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 yen's strength against the dollar and you've 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 (-54%) and the Japanese stock market (-38%) and right in line with the much-ridiculed
Japanese stocks could be the surprise of 2004. To participate, Chief Executive Nobuyuki Idei, a 30-year veteran of 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 wasn't 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
( KFT) packed-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 it's still around $30 2 1/2 years later.
Well, not exactly nowhere. It has actually lost 19% of its value this year, even as its former parent, now known as
, has outpaced the broad market advance with a 30% gain. Now that's a turkey.
This is a very strange result for a company that is not only the largest food producer in the U.S., 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% to 3%, at best, and private-label brands at margin-challenged supermarkets are slowly but surely eating Kraft's lunch.
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 overpromising 14% to 16% growth at the time of their initial public offering, and then regularly ratcheted down expectations to around 8% to 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 that they can enjoy with a nice cool glass of milk. I'll drink to that.
Black and White
I'm running out of room, so the rest will be a real turkey shoot.
( FRE) 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, packing 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 toward restoring the market's confidence, but don't count on the choice being driven strictly by business considerations during a presidential election season.
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 one's progress.
In contrast, many Americans have found they can lose weight on low-carbohydrate diets such as Atkins in a much less-expensive, time-consuming framework. The company's 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
firstname.lastname@example.org, and I'll 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.
Jon D. Markman is publisher of
StockTactics Advisor, an independent weekly investment newsletter, as well as senior strategist and portfolio manager at Pinnacle Investment Advisors. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at
email@example.com. At the time of publication, Markman controlled accounts that were long the following securities mentioned in this column: Merck and Wyeth.