Seven Stocks That Rise With the Temperatures

Editor's Note: Every couple of months, Jon Markman answers his mail as readers implore, "Hey Modelman!" The mail continues to pour in on lousy corporate CEOs and their excessive pay. But first, something different.


Hey Modelman: You used to write about stocks that had a tendency to go up in a certain month -- the HIMARQ model described in your book. What does it look like for July or August?

Modelman: In July, two stocks with perfect records for the month are J2 Global Communications ( JCOM), up 20% on average over four years, and Cognizant Technology Solutions ( CTSH), which is six for its last six with an average gain of 17% during the month.

For August, perfect scores have been posted by First Horizon Pharmaceutical ( FHRX), four for four with an average gain of 44%; WebEx Communications ( WEBX), also four for four with an average gain of 24.6%; Praecis Pharmaceuticals ( PRCS), four for four and up 22%; Mobile TeleSystems ( MBT), four for four and up 21.8%; and Kensey Nash ( KNSY), which is eight for its last eight Augusts for an average gain of 20%.

Let's take a closer look at small-cap Kensey Nash, which has the longest August winning streak here. It makes specialty medical devices in the cardiovascular market, including such products as Angio-Seal Vascular Closure Device, which seals and closes femoral artery punctures made during diagnostic and therapeutic cardiovascular catheterizations.

Its sports medicine products include meniscal repair tacks, ACL and rotator cuff repair screws, and a rotator cuff repair patch. On a more exotic plane, Kensey Nash also develops and manufactures synthetic biomaterials for use by orthopedic, dental and vascular surgeons.

In April, the company reported record results for its fiscal third quarter and lifted estimates for its fourth quarter. It reported total revenue up 35% to $15.8 million and net income up 78% to $3.5 million. Later this month, analysts expect the company to report that income rose another 50% to a level that would put its forward price/earnings multiple at around 30 -- a little below its historic average. The big news on the horizon is the potential for FDA approval of a major new product, the TriActiv System. Already approved for use in Europe, it helps cardiac surgeons create better vein grafts when performing bypass surgery.

Kensey Nash shares have backed off the historic high of $36.85 set last month to around $32. They're up 35% in 2004, well ahead of the pace of their medical appliances industrial group. These stocks are up 12% this year. With a little help from the overall market, they should be able to hold around this level for the rest of the month before potentially fulfilling the destiny of past Augusts.

A 20% gain, if it materializes, would put shares around $38 by the end of summer, which seems reasonable. Certainly the company seems on track to get to $40 or better by the end of the year, even if there's a hitch with TriActiv. That would put it over the $500 million mark in market capitalization.

Cracking Down on Excessive CEO Compensation

Hey Modelman: As a senior compliance officer at one of the nation's largest financial institutions, I am watching ethical lapses in CEO compensation both on the news and at my daily work. I appreciate you pointing out that this issue threatens our entire system. Here are my ideas on how to rein in CEO compensation without making more government:

CEO compensation should be subjected to a vote of all shareholders, with approval requiring a supermajority of 80% of outstanding shares. Failure to vote proxies would be counted as a "No."

Shareholders wishing to propose reductions in CEO compensation should be allowed to do so if they can get 20% of all shares to agree to consider the motion.

Federal civil and criminal law should be amended to create a rebuttable presumption that a CEO is personally liable for the acts of the corporation. One of the main justifications of the capitalist system is that those who risk their capital should have commensurate possibility of reward. Yet in our current system we have the reward with no risks.

I would be willing to invest in a campaign to change rules for CEO compensation; it would provide excellent returns through future corporate and stock performance.

-- Eric Dewey

Modelman: These are great points. No capitalist would argue with the super-high compensation package of a successful entrepreneur who has put his own money at risk. The problem is that so many major CEOs today are putting only shareholders' money at risk and then paying themselves handsomely whether their gamble paid off or not. If a big pay package is clearly merited, then it should be no problem getting 80% of shareholders to agree to it.

Survival Is Everything

Hey Modelman: You are bringing up thoughts I have had for years. The most damaging aspect of sky-high management pay to me is the exactly opposite incentive it provides. If my pay package is $10 million a year, all I need to do for lifetime security is survive for a couple of years. All decisions -- even subconsciously -- descend from this. Corruption is like a slowly spreading cancer, difficult to detect and legitimized by the highly paid consultants and lawyers whose silence is rewarded.

-- Paul Beadle

Hey Modelman: I propose that all executive pay packages, pensions and/or severance packages meet the following guidelines:

All executive pension plans should be eliminated and executives should be required to enjoy the pension plans available to all employees.

Severance packages would be limited to the severance program available to all company employees. If employees get one week per year of service, the CEO gets the same deal.

All executives must participate in the company health plan and cannot have any supplemental health benefits paid by the company.

Prohibit deferred compensation plans. If you make the big bucks, you pay the big taxes.

If the company treats most of its employees as "employees at will," they cannot change policy and create an employment contract with senior executives.

Executives cannot be awarded options in an amount in excess of the average option award for all management employees as a percentage of salary. Example: middle managers get 5% of salary in options; CEO gets 5% of salary in options.

Any executive bonus in excess of 50% of the executive's salary must be approved by a shareholder vote before it is paid.

-- Brad Ford

Long-Distance Runners at the Buffet Table

Hey Modelman: The sad fact is that the U.S. is being mismanaged in the manufacturing sector. A good rule of thumb is that if the top 20 executives are making more money than the company is spending on research and development, there is a problem. Proprietary information must be created faster than competitors can steal and copy for the U.S. to survive. The analog to our situation is a marathon runner who gets ahead early in the race and stops running and sits down in an all-you-can-eat restaurant!

-- Steve McGuire

Modelman: An anonymous reader proposed a metaphorical sports framework for compensation that makes a lot of sense. He noted that the current system is similar to pro basketball or baseball, in which contracts are offered to players on the basis of past performance. More often than not, the method fails.

In 2002, for instance, the Seattle Mariners gave a four-year, $29 million contract to third-baseman Jeff Cirillo -- who promptly went into a two-year slump. Instead, companies should adopt the Professional Golf Association method of reward: The PGA pays pros on a sliding scale after each tournament based on actual performance relative to peers. If you win a tournament, you have a big payday. If you don't, tough luck.

Turning to a PGA-style compensation system for corporations would be a stroke of genius. Let's say that the average revenue-, earnings- and margin-growth performance of each industrial sector of S&P 500 companies amounted to "par" for large-cap companies in those sectors, and the same for the average performance of S&P 400 Index companies for public mid-caps and S&P 600 Index for public small-caps. Companies that beat par (on the high, not low, side) would be permitted to extend bonuses on a sliding relative scale to their executives, while companies that bogeyed, double-bogeyed or worse would be required to cut their executives' base pay and extend no bonuses. Executives would howl, but it would be a hole in one for shareholders and consumers.


Please note that due to factors including low market capitalization and/or insufficient public float, we consider Praecis Pharmaceuticals and Kensey Nash to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

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. At the time of publication, Markman had positions in no stocks mentioned in this column. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at sm@jonmark.com; please write COMMENT in the subject line.

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