When U.S. financial markets reopened on Sept. 17, 2001, many investors were spooked. The major market averages quickly reflected this worry. They dropped hard that first day and fell all week. By the end of the month, all recovered some of that loss. Two years later, the Dow is down 2% from pre-9/11, the S&P 500 is off 8%, and the Nasdaq is up 8%.
Screening for the top 10 winners
But the averages don't show that many businesses prospered, along with their stocks. I wondered who the winners were, and applied a highly idiosyncratic screen to find out. You can get plain old top 10 lists somewhere else, but we at The Motley Fool want to give things you don't get from any ole financial media outfit with a Bloomberg machine. So here are my criteria:
- Closing price Sept. 28, 2001 to Sept. 5, 2003 (screener goes by month to most recent week)
- Shares traded on NYSE, Nasdaq, or AMEX -- not OTC
- Shares not traded in U.S. market as ADRs
- Enterprise value (market cap + total debt - cash & equivalents) over $100 million
- Positive enterprise value to trailing-12-month free cash flow
- No intervening bankruptcy (screeners can miss that)
Why the free cash flow requirement? I wanted businesses that today have at least some foundation for their valuations. That doesn't eliminate crazed speculations, but it does mean that investors haven't at least recently been completely speculating on business prospects that don't produce any green stuff. This means that you may even find some candidates to research to see if the stock price gains reflect positive business momentum that could lead to even more gains.
Many are Web-based
The resulting top 10 stock market winners since the U.S. markets reopened after 9/11 include not one defense, airport security, or other terror defense firm. They are Sohu.com (NASDAQ:SOHU), SINA Corp. (NASDAQ:SINA), Bankrate (NASDAQ:RATE), NVE Corp. (NASDAQ:NVEC), Select Comfort (NASDAQ:SCSS), j2 Global Communications (NASDAQ:JCOM), Ask Jeeves (NASDAQ:ASKJ), Lannett Co. (AMEX:LCI), United Online (NASDAQ:UNTD), and Concur Technology (NASDAQ:CNQR):
Company Business
Sohu.com Chinese Internet Portal SINA Corp. Chinese online mediaBankrate Online financial products aggregatorNVE Corp. Nanotechnology (spintronics)Select Comfort Makes and sells bedsj2 Global Comm. Communications outsourcerAsk Jeeves Online search technologyLannett Co. Generic drugsUnited Online Dial-up ISP (Juno and NetZero)
Concur Tech. Expense management software
Five of these businesses would not be possible without the Internet in the sense that they are Web-based without using the Web solely as a medium for another traditional business. A sixth, j2 Global Communications, includes a major Web-based product among its product line. Lannett and Select Comfort could not be more traditional businesses -- generic drugs and beds have been with us for eons -- but NVE has been the beneficiary of nanotechnology interest, especially through news coverage in the last few months, and sits on technology's bleeding edge.
16 to 36-baggers, anyone?
Here are their impressive returns:
Company Gain 9/5 Close EV* EV/TTM FCF**
Sohu.com 3588% $35.04 $1213 mil. 84SINA Corp. 3049% 34.32 1536 107Bankrate 2504% 13.54 185 23NVE Corp. 2480% 32.25 129 431 Select Comfort 2248% 23.48 730 27j2 Global Comm. 1999% 35.58 768 36Ask Jeeves 1962% 20.00 843 59Lannett Co. 1645% 18.62 375 89United Online 1616% 38.61 1448 24Concur Tech. 1563% 11.97 365 183
*Enterprise value (market cap + total debt - cash).
**Enterprise value divided by trailing-12-month free cash flow.
These companies jumped from over 16 times to 36 times their Sept. 10, 2001 prices while the market averages varied by at most single digit percentages. But those of you with quick math skills already can tell that not one of these companies had an enterprise value above $100 million two years ago, and if you look back, while all trade on Nasdaq, AMEX or the NYSE today, not all did then. For most, we would likely have written about them -- if at all -- warning that they inhabit the Land of Penny Companies trading for less than $5 a share, with market caps under $100 million, some even trading on the OTC bulletin board or the Pink Sheets. We would have intoned ominously, "there be dragons."
For good reason. Not least among the dragons is the prospect for manipulation of stocks with very low trading volume by unscrupulous penny stock promoters. That's one big reason Tom Gardner sets a minimum $100 million market cap and $400 million trading volume in his search for market-beating Hidden Gems each month: We are trying to find values but neither promote that kind of manipulation nor cause it. (But I will promote this: I said "we" because I'm Tom's guest analyst for the upcoming issue, and I'm enjoying every minute of it.)
Micro caps are not for most
But you have to wonder. Today, all 10 winners have enterprise values above $100 million and three brag over $1 billion. They had to come from somewhere. Sometimes flailing enterprises regain or find new health and their left-for-dead stocks soar -- look at Ask Jeeves or Bankrate. When markets and the economy are sacked, micro-cap companies may offer value -- as I wrote recently in Penny Stock or Deep Value?
It's absolutely true that penny stock emails and newsletters are rife with speculation and silliness and lose money for millions, but for those who spend time ripping apart SEC filings, running spreadsheets, and researching management and product markets, our Penny Pal Newsletter April Fool's joke may need a qualifier: For advanced investors, value may be wherever you find it.
Have a most Foolish weekend, and thanks for reading.
Senior Analyst Tom Jacobs is not going to become the penny stock guy -- no way -- but he does look for value wherever it may be. He owns no shares of companies mentioned in this column (darn!) but does own others disclosed publicly in his profile. The Fool is investors writing for investors.
