Last year's picks: Hot...and not

Last year's picks: Hot . . . and not

You might be rich today if you'd invested heavily in someof what we recommended last year. But not all of our predictions came true.

By Leslie Kane, Senior Editor

A year ago, in the last edition of this guide, our experts recommendedmutual funds and stocks that seemed poised for big gains. Some choices havesince exceeded expectations, some haven't budged much, and a few are barking.

The best-performing mutual funds exploited sharp picks among electronicsand technology companies. The tech-sector index returned 96.3 percent,*and our top winners—Fidelity Select Electronics Portfolio and FidelitySelect Technology Portfolio—beat it handily, with returns of 125.9 and108.4 percent, respectively. Those are astonishing numbers, particularlywhen you consider that last year we reported 12-month returns of minus 25.1percent for Select Electronics and minus 4.4 percent for Select Technology.

Though eight other electronics/technology funds on our list underperformedtheir benchmark, shareholders probably weren't complaining: Returns rangedfrom 31.2 to 86.7 percent. Even our worst-performing tech-fund pick, FranklinDynaTech Series—Class A, beat the Standard & Poor's 500 Stock Indexby 3.4 percentage points. "Franklin DynaTech's returns were down comparedwith those of its peers, because the fund kept about 50 percent of its assetsin cash," says Brian Grodman, a financial adviser in Manchester, NH."The fund managers were apparently expecting a correction that didn'tmaterialize, and they missed out on growth in the technology sector."

None of these whopping gains came without substantial risk. Technologyand electronics are volatile industries. The tech sector's three-year standarddeviation, which shows how widely returns vary from an average, was 40.5through September. That's almost twice the standard deviation of the Standard& Poor's 100 Stock Index, which consists of large-cap companies.

The international funds we recommended had less of a heyday. The twoforeign funds, which contain almost entirely non-US holdings, both underperformedtheir benchmark. After four strong years, BT Investment International EquityFund returned a more modest 17.4 vs 40 percent for the Morgan Stanley CapitalInternational EAFE Index, which includes Europe, Australia, Asia, and otherparts of the Far East. The fund had too many holdings in Europe, which remainedsluggish, and too few in emerging Asian markets, which rose. However, AmericanCentury International Growth Fund—Investor Shares returned a more impressive27.9 percent return.

Our two global-fund picks, which keep up to half of their holdings inUS stocks, did even better. The Oppenheimer Global Fund—Class A, whichowns international technology and media companies, among other types, returned40.1 percent, beating its world-stock index by more than 10 percentage points.Janus Worldwide Fund, which focused on telecommunications and global technologycompanies, returned a healthy 39.1 percent.

Our stock picks included some diamonds and some coal. Among the gemswas Uniphase, which has merged with JDS Fitel to create JDS Uniphase. Itmakes components that combine light with electronics. In a year, it shotfrom 20 1/2 to 114, far surpassing our expert's prediction of 75.

Institutional investors have recognized Uniphase as the leader in buildingthe Internet's infrastructure," says Phillip A. Lamoreaux, the investmentadviser from Sausalito, CA, who recommended the stock. "As Internetusage grows, the only way to keep up capacity is with fiberoptics. And Uniphasewill continue to benefit from this trend. I think its earnings revenue willgrow 60 percent over the coming year."

Several other picks shone, too. Applied Materials, which makes semiconductor-manufacturingequipment, cut costs to help maintain profitability. Its share price morethan tripled, to about 78. Cisco Systems recently acquired five technologyfirms, helping it to expand its reach and product range. Shares rose fromabout 31 to almost 69.

Though it spent the year fighting the government's antitrust case, Microsoftstill returned nearly 65 percent, factoring in a two-for-one split in March.The company's reorganization into five business units will give each areamore flexibility to respond to customers and competition. Microsoft alsobegan buying minority stakes in other technology companies, to increaseits scope and distribution.

General Electric also did well; its share price rose from around 79 toabout 119. American Superconductor made positive albeit less spectacularstrides, and Vical, which uses genetic technology to develop vaccines anddrugs, also proved a winner. Despite a drop in revenue for American Superconductor,the company has been actively increasing its visibility on Wall Street,says Vahan Janjigian, director of the Forbes Investors Advisory Institutein New York City. Its share price rose from 7 to about 15. And Vical's shareprice enjoyed modest gains in spite of a net loss for the company, in partbecause several institutional investors held or added to their investmentpositions—a vote of confidence, of sorts.

Another reason for Vical's improvement: "The company has made theclinical progress it anticipated, and it has products that should go forFDA approval in the coming year," says Michael Murphy, editor of theCalifornia Technology Stock Letter, of Half Moon Bay, CA. Murphy, who recommendedVical last year, says, "It's only a matter of time before Wall Streetdecides to move the stock price even higher."

Now for the clunkers: Axys Pharmaceuticals, HNC Software, Keane, andSimula each had setbacks that seemed to make investors nervous.

Axys Pharmaceuticals, which develops drugs for cancer and other diseases,saw revenues drop and expenses rise. The company is relocating one of itsoperations to cut costs. The effect on the stock price: a 10 percent decrease.

HNC Software's revenue grew, and the company made several acquisitions,but costs rose and operating income dropped. At almost 40 a share, the stockis worth about what it was a year ago.

Keane, which provides software design and management services for largecompanies, suffered when its year-2000 compliance business waned and itsother revenue sources didn't pick up the slack. The stock moved accordingly,dropping about 35 percent, from 36 to around 23.

Simula, which makes safety equipment and restraints for military andconsumer vehicles, had strong revenues for seven years, but large operatinglosses dampened profits. The price of its shares dropped 33 percent.

*All returns are for the 12 months through September 1999. Where applicablethroughout this article, historical prices have been adjusted to reflectthe value of splits and significant dividends.



Dennis Murray. Last year's picks: Hot...and not. Medical Economics 1999;21:175.