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January 11, 1999

Industry Focus '98 Review

by Chris Rugaber (TMF RFK)

In December of 1997, The Motley Fool published Industry Focus '98 (IF '98), our second annual review of promising industries and the leading companies in each. Since we are now selling Industry Focus '99, let's exercise some Foolish accountability and see how last year's publication looks in retrospect. Did we provide some useful investment ideas?

The short answer is an Ed McMahon-style YES! But before we get to details, let's emphasize what readers of the IF '98 did not receive: the stocks covered were not "stock picks"; they were not "recommended buys." That's not how The Motley Fool works. We want to provide our readers with information to assist you in making your own investment decisions. We don't promise that this or that stock is definitely a "great buy right now." Some of the stocks discussed last year, such as Coca-Cola, were proposed only as long-term investments.

The purpose of the Industry Focus is to provide a review of some of the top industries and provide a small set of stocks for readers to consider when conducting their own research. The 20 or so stocks we highlight are meant primarily as leads or prospects rather than outright recommendations. With that in mind, it is nevertheless perfectly legitimate, of course, to ask how those stocks performed. We'll look at those numbers, plus a couple of our biggest winners and few of our dogs.

In short, the stocks we highlighted in IF '98 finished comfortably ahead of the market averages. Of course, it's only a year later, and we were analyzing the companies with more of a long-term frame of mind, but nonetheless, so far, so good. In fact, had you purchased equal share amounts of each of the 24 stocks that we discussed in last year's IF '98 -- which would have been very unFoolish of you and completely counter to the purpose of the product -- you would have made a return of 32.7% as of December 15, 1998. This return assumes you purchased the stocks precisely one year earlier on December 15th, 1997, which was approximately when Industry Focus was published. This compares to the S&P 500's 22.5% gain in the same period.

Not bad. Here are the numbers:

Stock

12/15/97

12/15/98

Return

HSN, Inc. (HSNI)

21.625

27.563

27.5%

NationsBank (NB)

64

57.125

-8.6%
FirstUnion (FTU)

50.688

61

23.8%
Amgen (AMGN)

53.938

83.938

55.6%
Harvey's CasinoResorts (HVY)

19.938

26.688

34.9%
Logan's Roadhouse (RDHS)

14.875

23.25

56.3%
Western Digital (WDC)

15.875

15.813

-0.4%
Plexus, Inc. (PLXS)

22.313

31.5

41.2%
Cornell Corrections (CRN)

16.625

17.875

7.5%
Loewen Group (LWN)

24.25

7.563

-68.6%
The SouthernCo. (SO)

23.75

28.938

28.2%
Synopsys (SNPS)

35.75

50.438

41.1%
McDonald's (MCD)

46

67.688

48.0%
BISYSGroup (BSYS)

32.75

50.25

53.4%
TriQuint Semiconductor (TQNT)

18.375

18.25

-0.7%
Anchor Gaming (SLOT)

51.938

48.375

-6.9%
Dell Computer (DELL)

20.859

65.563

214.3%
Compaq Computer (CPQ)

27.25

41.813

53.8%
Intel (INTC)

72.125

115.938

61.0%
Johnson & Johnson (JNJ)

65

80.75

25.9%
Orbital Sciences (ORB)

23.875

40.375

69.1%
Cohu, Inc. (COHU)

32.375

21.5

-32.7%
Coca-Cola (KO)

65.875

65.938

0.9%
Cadbury-Schweppes (CSG)

41.5

64.875

59.6%
Total Return

32.7%

Notes: NationsBank merged with BankAmerica (NYSE: BAC) on September 30, 1998; one share of NationsBank was exchanged for one of BankAmerica. The December 15, 1998 price is equal to price of one BAC share. HSNI became USAI, which subsequently underwent a 2-for-1 split; December 5, 1997 stock price is quoted post split. Dates were chosen as approximate date of publication of IF '98 and one year later.

The Biggest Winners

Dell was obviously IF '98's best stock, screaming upwards in price by 214.3% as its revenue and earnings per share almost doubled in 1998, from $7.7 billion to $12.3 billion and from $0.34 to $0.64, respectively. IF '98 correctly noted that previous worries about Dell's direct sales model -- that it was vulnerable to "price surges due to short supply" -- were unfounded and that "the direct model has captured a lot of value as prices have gradually fallen." We also dismissed predictions that sub-$1000 PCs would reduce sales for PC makers and concluded that "record PC sales" would continue, "driven by the widespread adoption of online services as an information and entertainment medium." This prediction was borne out by ZDNet's November report (among others) that "the number of new users jumping onto the PC bandwagon [this year] will far outstrip those in 1997."

Our section on satellites highlighted Orbital Sciences (NYSE: ORB), whose stock jumped over 69% this year as the company won a record $2.5 billion in new contracts. We noted that Orbital was "well situated to reap the benefits of the continuing [satellite] launch frenzy," and that while the company had experienced some faulty launches in the three years prior to 1997, its longer-term record was enviable. Moreover, the company beat estimates and had rising earnings in the first three quarters of 1997. Despite this progress, Orbital's valuation had been unchanged since 1997's "Black Monday." The company's excellent 1998 validates our analysis, as does the stock price.

The Biggest Losers

The IF '98's biggest loser was the Loewen Group (NYSE: LWN), a "deathcare" provider that owns funeral homes and cemeteries. Loewen, on life support after declining by over 68%, clearly has had a bad year, but it's not dead yet. For a general update, check out our Lunchtime News from last November 6th. While it is true that growth in the deathcare business comes primarily from acquisitions, Loewen became saddled with debt as a result of its purchases. Additionally, as was noted in IF '98, Loewen's rival, Service Corporation International, had attempted to purchase the company once before and was likely to do so again if Loewen ran into trouble. That potential action has not yet materialized. Nevertheless, after some significant management changes at the company, which is still seeking a buyer, the turnaround-or-buyout scenario that IF '98 originally floated is still possible.

Cohu Inc. (Nasdaq: COHU) didn't have a banner year either, with its stock declining 32.7%. The company was clobbered partly due to falling sales and demand in the industry overall. Fellow semiconductor equipment manufacturers like Applied Materials (Nasdaq: AMAT) and KLA/Tencor (Nasdaq: KLAC) also fell hard, though both companies (especially AMAT) have recovered in the past couple of months. We described Cohu's strengths -- "dominant market share, a strong balance sheet� and almost $100 million in working capital" -- in glowing terms. We then added that "should industry growth substantially deteriorate, Cohu will probably only trade down to the mid-20s" We were off by about $10, given that Cohu actually sank to the mid-teens before its recent recovery.

A Year's Worth of Perspective
The 24 stocks highlighted in IF '98 included Dell's three-bagger, 11 stocks that rose 40% or more, and 16 that grew 20% or more. Overall, three-quarters of the stocks -- 18 of 24 -- increased in price during the year since the December 15th publishing date. We have a lot of positive results to show only one year out, and even stocks with mediocre one-year performances, such as Coca-Cola, are obviously still great businesses.

Given the outperformance of our IF '98 stocks as a group, and given the number of individual success stories, IF '98 holds up pretty well so far -- so far being the operative words here. Whether the selected stocks were up big or tanked over the year, we have to remember to keep a Foolish, long-term perspective as we always do. Check back next year, or in five years, to see where some of the IF '98 companies have landed.

* All returns quoted in this article, including the returns of the S&P, assume that dividends were reinvested in the security.

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Click here to learn more about Industry Focus '99.