Where the Gains Are: The 2001 All-Stars

A look at some of the stocks and sectors that have led this year so far.
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It's almost time to pick the most valuable player in baseball's major leagues, and the choice is tougher than it has been in years. My hometown team, the Seattle Mariners, can claim three legitimate contenders -- one a clutch-hitting speedster with a record number of singles, one who hits for power and knocks a lot of runners in, and one who provides both power and leadership.

The point in choosing just one MVP is not to predict which player will go on to a repeat performance next year, but to honor great achievement this year. It's a here-and-now sort of thing -- a chance to celebrate the present and show future generations the values that baseball fans held dear in 2001.

There's no independent mechanism available in the stock market to name an MVP, but it might be a valuable exercise anyway. I've tracked what I have called "all-stars" over the past seven quarters and discovered that most strong stocks that are plugged into the dominant investment theme of the period -- e.g., the right size, sector and style -- go on to perform well, at least in the succeeding one or two quarters.

What's the dominant theme so far this year? There's not much change from what I reported at midyear, or even the end of last year for that matter: Smallness and value are still in; largeness and growth are out. This will change one day, but perhaps not in the next three months. Here's a rundown of current market themes, based on my study of stock data through Sept. 28.

Small-caps: The average gain of the top-50 performing small-caps this year is 123%. Their average price-to-earnings ratio (P/E) is 23; their average price-to-sales ratio is 1.16; their average debt-to-equity ratio is 0.31; their average net profit margin is 3.3%; their average earnings surprise last quarter was 7%; their average year-over-year revenue growth was 8%; and their average year-over-year earnings growth was negative 24%. Most were cheaper than their industry. Top industries were regional banks, medical devices or labs, drug wholesalers and defense manufacturers. Best two stocks: Hollywood Entertainment , up 1,052%, and FLIR Systems , up 610%, both through Oct. 1.

Mid-caps: Average gain of the top-50 performing mid-caps this year is 46%. Their average P/E ratio is 21; their average price/sales ratio is 1.8; their average debt/equity ratio is 0.77; their average net profit margin is 6.7%; their average earnings surprise last quarter was 6.8%; their average year-over-year revenue growth was 11%; and their average year-over-year earnings growth was 3.9%. Most were ever so slightly more expensive than their industry. Top industries were regional banks, medical devices, gold miners and tobacco. Best two stocks: Vector Group , up 211%, and Blockbuster , up 156%, both through Oct. 1.

Large-caps: Average gain of the top-50 performing large-caps this year is 10%. Their average P/E ratio is 28; their average price/sales ratio is 1.7; their average debt/equity ratio is 0.78; their average net profit margin is 8.9%; their average earnings surprise last quarter was 2.3%; their average year-over-year revenue growth was 7%; and their average year-over-year earnings growth was 15.5%. Most were slightly more expensive than their industry. Top industries were defense, health care, food and Baby Bells. Best two stocks: Tenet Healthcare , up 34%, and Lockheed Martin , up 29.6%, both through Oct. 1.

My all-star list last year has posted a decent record relative to the market, if not in absolute terms. Last year's 20 all-stars, highlighted in a column on Dec. 12 ("

Will 2000's all-stars win in 2001? "), are essentially unchanged since then, vs. a 24% decline in the

S&P 500 and a 49% decline in the

Nasdaq Composite.

Respironics

(RESP)

and

Pharmaceutical Product Development

(PPDI)

have been the top performers, up 45% and 44% through Oct. 1.

So who's the MVP? This is a very subjective question. For my money, the MVP should be a stock that has achieved the highest return with the lowest volatility; it should also be profitable, have solid cash flow and still be relatively cheap. By these measures, a top contender at this time is

Medical Action Industries

(MDCI)

, which weighs in with a

market capitalization of $154 million. It's one of the few stocks I've found that has been up in every month this year, with an average monthly return of 14% and a total gain in 2001 of just over 400%.

I'm not suggesting this is a great name to run out and buy; I'm just acknowledging its solid record so far this year. The New York company has a suitably humble niche in the health care world: It primarily makes laparotomy sponges, operating-room towels, gauze sponges and dressings used in medical, dental and veterinary offices. It has grown about 30% annually over the past few years and is expected to do the same going forward; its P/E based on next year's estimated earnings is a pretty reasonable 27.3. A runner-up is

FTI Consulting

(FCN) - Get Report

, a legal services company that's up 196% this year with only one slight monthly downdraft, in July. Among large-cap stocks, the name to beat is Tenet Healthcare.

Click

here to see a spreadsheet listing all the relevant stats on my nine-month 2001 all-star list, and

send me mail if you'd like to nominate any company I missed. For this purpose, I don't care much about what you think the stock is going to do in the future -- only the track record it's already laid down. If the stock isn't profitable and hasn't risen in at least seven of the past nine months, I'm not interested. I'll include the best suggestions in a future column.

CEOs Escape With Impunity

Now let's transition from the sublime to the ridiculous.

In a perverse twist of fate, an unexpected beneficiary of the September terrorist attacks on New York and Washington may turn out to be the financial extremists who ransacked the U.S. stock market over the past four years.

For it turns out that with the nation focused on seeking military revenge abroad, the public is unlikely to have an equal appetite to hound corporate executives, board members and brokerages responsible for ripping off trustful shareholders during the Nasdaq boom and bust. New

Securities and Exchange Commission

chief Harvey Pitt confirmed this development, telling reporters late last month that he believes the securities industry should be responsible for regulating analysts and that Congress should back away.

More's the pity, since we were just starting to make progress, with brokerages changing their rules on disclosure of stock holdings by analysts and the federal officials beginning to pry open the insanely greedy practices of investment bankers in initial public offerings.

The latest luck-out in this new era of good feelings is

At Home

(ATHM) - Get Report

, a flagship Internet bomb that sought bankruptcy protection on Friday night. Few, if any, newspapers put this story on their front pages, and it wasn't the topic of any financial talk shows that I witnessed.

Yet, here is a company that had a market capitalization at its peak of $40 billion but is now worth less than $70 million. Its original media-industry executives, once celebrated for their success at forging alliances between warring cable systems to offer high-speed data services, actually spent $6.7 billion for the Excite Web portal that had little if any prospect of becoming profitable. They also spent $1 billion for Bluemountain.com, a greeting card Web site that never even professed an ambition to make money. All shareholder money. All now turned to dust. (Or, in some cases, into the pockets of executives savvy enough to sell at full gallop, such as At Home senior vice president Donald Hutchison, who unloaded 1.7 million shares worth $15.2 million from April 1998 to November 1999, according to SEC documents.)

There are no words to express the sheer temerity of their acts, and almost no precedent for this level of folly in U.S. economic history. Their misdeeds are sure to leave long-lasting scars on the capital markets of the world. But where is the outrage? To be sure, there have been class-action lawsuits, but by now there are precious few assets with which to pay off litigants. And in any case, civil courts are too bland a venue to hear arguments for and against these men and women who have given avarice a bad name.

There should be something worse, such as the old British custom of debtor's prison -- or at least public pillories. Brokerage analysts have taken the rap for recommending these stocks to customers, but it seems unconscionable that leaders of these firms themselves should escape opprobrium. How about lifetime bans from business for anyone above the rank of executive vice president at these companies, or a couple of years of charity work on behalf of retirees who trusted them with long-term commitments of funds and were repaid with scorn?

Here's a list of once-major, now-humbled companies and their five-year high market caps compared with their current worth. If you're as outraged by the lack of outrage about the misdeeds of their leaders as I am, send me mail and tell me what you would consider fit punishment. Also let me know exactly which companies and leaders deserve the most blame for particular acts. I'll publish some of the more creative ideas here later in the month, and get some expert opinion as well.

At the time of publication, Jon Markman owned or controlled shares in the following equities mentioned in this column: Respironics.