Brett Gallagher of Bank Julius Baer took first prize in this column’s 2000 Stock-Picking Contest with a 175 percent gain in R.J. Reynolds Tobacco Holdings Inc.
For most of the other contestants, however, the contest was a humbling experience.
Only eight of the 36 contestants achieved any gain at all. The average result was a loss of 55 percent, and eight contestants suffered losses of 90 percent or worse.
Swinging for the fences, most entrants picked computer-related stocks, often Internet stocks. But the long streak of hot performance by those stocks ended with a bang last year. As a result, most contestants went down in flames.
The result is a testimony to the power of investment fads and to the danger of following them. Granted, no real money was at stake in the contest. (The winner gets a dinner with a value equal to 1 percent of the point value of the Dow Jones Industrial Average.) But no doubt plenty of contestants had real-money losses in the same stocks they submitted as their contest entries.
Gallagher, who is head of U.S. equities for Julius Baer Investment Management in New York, said he picked R.J. Reynolds because it “just seemed to me that bad news was substantially priced in, and that the tide was turning for tobacco on the litigation front.” The double-digit dividend yield on RJR at the time also attracted him.
For 2001, Gallagher favors Lyondell Chemical Co. “The chemical stocks are pricing in a fairly significant recession,” he said. “Anything short of that should be beneficial for the stocks.” The year 2000 was an abnormally tough one for chemical companies, he said, partly because of rising energy costs. If the industry can get back to normal, he sees a 300-to-400 percent upside in Lyondell.
In a remarkable display of consistency, Scot Stebbins of Milwaukee finished second. That placed him among the top few finishers for each of the three years this contest has run. He was first in 1998, tied for fourth in 1999, and won the red ribbon this year.
Powered by methanol
Stebbins, who was with the Dallas office of J.C. Bradford & Co. last January, picked the U.S. traded shares of Methanex Corp. of Vancouver, B.C. Methanex is the world’s largest producer of methanol, which is used to make synthetic gasoline, formaldehyde and other chemicals. The shares rose 129 percent as the price of methanol soared.
A year ago, Stebbins wrote that Methanex’s “current fundamentals are weak. But the company’s superior liquidity, clean balance sheet, and very cost-conscious management are attractive.” He added that “the stock has been ignored or sold by the ‘buy’ side steadily for the last two years.”
Methanex is also his pick for 2001 because he thinks methanol pricing will “remain tight for the foreseeable future,” and the stock is still cheap based on cash flow.
Stebbins, a former bond trader, is currently doing some consulting and looking for a new job in money management or securities trading. In my opinion, any firm that needs a good bond or stock analyst should snap him up.
Third place went to Michael Sylvie, who notched a 128 percent gain in Offshore Logistics Inc., a Lafayette, La., company that provides helicopter transportation to offshore oil rigs. Sylvie is the Internet project manager for the American Foundation for the Blind in New York. He said he spends at least an hour and a half a day on investing “a hobby that turned into a love.”
For 2001, Sylvie picks Keynote Systems, a maker of software that helps Web sites monitor and improve performance. “The company has lots of cash, low debt, and if it’s able to make its earnings over the next few quarters, it’s not trading at an outrageous valuation,” he said. The stock is trading at 33 times estimated earnings for the fiscal year that ends in September.
My own pick for 2000, OEA Inc., was taken over by Autoliv AB of Sweden in April for a 61 percent gain. My pick for 2001 is Applied Signal Technology Inc., a Sunnyvale, Calif., company that makes equipment used in reconnaissance. The stock sells for 13 times recent earnings and about two thirds of book value (corporate net worth per share).
In a companion contest, people were invited to guess where the Dow Jones Industrial Average would finish the year 2000. Most of the field fell on their faces here too, being too optimistic. Of 29 contestants, 24 guessed that the Dow would be above 12,000.
The actual finish: 10,786.85.
Best Dow guess
First place in the Dow derby went to Larry Sitcawich, who is an international bond analyst with Principal Capital Management in Des Moines, Iowa. Sitcawich guessed 10,415 by shaving 10 percent off the value of the Dow industrials on the day he made his estimate. Reasons: “The irrational exuberance of the day” and the fact that the market had made five years of big gains. Now, with the Fed lowering interest rates and with tax cuts probably in the offing, he said the Dow will gain about 10 percent and end the year at 12,020.
Second place went to Rudy Luo, a broker with Investec Ernst & Co., who guessed 10,300. Third place went to Darren McCallon, director of finance with Blockbuster Inc., whose guess was 11,490. The Dow started last year at 11,497.
John Dorfman is a columnist for Bloomberg News.
