The Year Of The Fast-growth Bear

When the Big Board sniffles, it's the INC. 100 that gets pneumonia. This year's 16% drop can in part be blamed on the earnings ailments of larger companies.

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Once again, INC. has engaged in the fruitless exercise of purchasing a hypothetical $100 worth of shares of each company on the INC. 100 list and seeing how the paper investment would have fared -- this time, from March 16, 1983, to March 15, 1984. We say "fruitless" because, even with actual greenbacks, the exercise can't be done. After all, no one knows a year in advance which companies will be admitted to the next distinguished family of fastest-growers. Still, the outcome is not without its academic interest.

Sad to say, INC. chalked up the poorest result among four stock market indexes -- although not nearly by the largest degree in the five-year history of the INC. 100. Two years back, in the recession of 1982, INC. 100 stocks shed a hefty 27%. But last year, they led the batch with a gain of 72%. This year, they were down again, by 16%, despite gains in other averages -- which shows that fast sales growth alone does not a stock market winner make. As has been pointed out elsewhere in this issue, 1984's median compound annual sales growth rate was a hefty 101%; yet the INC. 100 median stock market move was a loss of about 12%.

The current batch is distinctive in the unusually high number of stocks that entered the market via initial public offerings in the course of the year. No fewer than 91 are traded over-the-counter, usually the market of necessity for young, lightly capitalized IPOs. While IPOs were a hot arena for a few months, they cooled off markedly toward winter, and many issues dropped well below their offering price. Of the 38 IPOs on the list, only 8 managed to hold a gain at the end.

Indeed, anybody who stubbornly husbanded stocks of smaller-cap companies can probably provide firm, if dismayed, witness that the bear market started as far back as a year ago. Many stocks of smaller companies topped out way back last summer, while the big blue chips of the Dow Jones Industrials went on to set a new all-time high in November of 1983.

Unlike previous years, high interest rates couldn't be blamed for stifling profits in 1983. Rather, the prime culprit was the fear of a lack of working capital. The prominent case of Osborne Computer Corp. was typically unsettling, as the private company soared to nine-figure sales in 18 months, then couldn't even pay its bills to vendors. Ironically, the public offering which that company was about to undertake could well have saved it. Nevertheless, investors took the lesson of Osborne to be that thinly capitalized fast growth was just too frightening.

In other instances, overcrowded markets hurt quarterly earnings growth, which in turn sent stockholders scurrying for the exit. Many of the abandoned stocks were in technology industries, a factor that dragged INC.'s results down even beyond the general run of the speculative over-the-counter market, whose average alsoi declined significantly. Of the 34 INC. 100 companies involved in computers and data processing, a scant half dozen managed stock market gains, despite their heady sales growth rates. The atmosphere for technology investment turned gloomy well beyond what conditions warranted. On the other hand, even astute investors are having trouble picking the probable stayers among computer companies.

Then, too, the troubles of larger, Big Board companies like Texas Instruments, Coleco Industries, and Digital Equipment didn't help the newer entries, either, even though the latter can be quicker to re-adjust their marketing strategies and product lines. It will undoubtedly take the investment community a while to under stand the changing nature of small businesses' approach to marketing, just as it took many small businesses themselves time to appreciate the compelling nature of that force.

Even so, it is encouraging to note that the biggest winner, Byers Communications Systems Inc. (#74) -- up 148% -- is in the high-technology business. And, as we have seen many times, things can change mighty fast. Last year, for example, it was the sorry oils that were the INC. 100's albatross; this year, four of seven oil and gas issues were able to post gains against the trend -- and none was a takeover candidate. One, Yankee Oil & Gas Inc., took second place with a profit of 79%. The oil group's performance, at least to some degree, gives substance to our closing thought last year, when we optimistically noted that "it is not beyond the realm of possibility that . . . this group could lead next year's INC. 100 gainers."

Viewing the litter of 73 losers, we offer no such solace this time, except to note that if the record growth rates of the 1984 INC. 100 can't be converted to solid pershare earnings over the.months to come, either the economy is more troubled than it seems, or newly public small-business management still has a lot to learn. Chances are that neither is entirely true. In which case investors should perhaps be taking a second look.

INC. 100 MARKET PERFORMANCE

1984 $100

Company (symbol/exchange) rank 3/83 3/84 Worth

1. Byers Communications (BYCM/O) 74 $7.88 $19.50 $247.62

2. Yankee Oil & Gas (YNK/A)n1 2 7.45 13.38 179.45

3. Independence Health (IHPI/O)n29 7 13.44 23.50 174.88

4. Health Extension Srvds. (HLP/A) 99 10.13 17.50 172.84

5. Electro-Kinetic (EKSIA/O)n28 68 1.38 2.38 172.73

6. Servamatic Solar (SSSI/O)n2 18 1.94 3.25 167.74

7. U.S. Health Care (USHC/O)n2 91 15.22 22.50 147.81

8. Concept Develop. (CDII/O)n3, n31 51 14.64 21.00 143.41

9. Helionetics (HILX/O) 64 14.81 20.75 140.08

10. Movie Systems (MOVSC/O)n4 96 2.37 3.25 137.29

11. Wedtech (WEDT/O)n27 52 15.88 21.50 135.43

12. Chemfix Tech. (CFIX/O)n5 90 2.50 3.38 135.00

13. Doran Energy (DORE/O) 56 1.88 2.50 133.33

14. Home Depot (HOMD/O)n6 26 15.00 19.50 130.00

15. Andros Analyzers (ANDY/O) 79 6.13 7.75 126.53

16. JP Industries (JPII/O)n30 50 10.00 12.50 125.00

17. Ultimate (ULT/A)n7 3 13.08 16.25 124.20

18. Emulex (EMLX/O)n8 4 14.75 18.00 122.03

19. Kloss Video (KLOS/O) 31 6.88 8.25 120.00

20. Comair (COMR/O) 59 9.88 11.75 118.99

21. Texas Energies (TXEN/O) 81 2.75 3.25 118.18

22. AGS Computers (AGSC/O) 82 18.63 21.50 115.44

23. Info. Resources (IRIC/O)n9 15 22.50 24.50 108.89

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