The Game Developed

Decade's Hottest Stocks Reflect Hunger for Anything Tech
Wall Street, California
Wall Street: Biggest winners saw astronomical gains. Buy-and-hold strategy paid off for those who chose well.
December 28, 1999|JOSH FRIEDMAN | TIMES STAFF WRITER
The decade of the tech stock? Now there's an understatement.
The hottest stocks of the 1990s are virtually an all-tech affair, as a list of the top performers compiled for The Times by Ned Davis Research shows.
 
Just look at Dell Computer Corp.'s decade-leading 91,863% rise, as measured from its closing stock price on the last trading day of 1989 through Thursday.
That means a $5,000 investment in the personal computer maker at the start of the '90s would be worth more than $4.5 million today. You could have become a Dell millionaire by putting in only about a grand.
Ouch.
A $5,000 investment in No. 2 performer EMC Corp., which makes data storage software and equipment, would be worth more than $3.5 million today.
Who knew?
Both of those issues were pretty much penny stocks on Dec. 29, 1989, the last trading day of the '80s. Dell went for $5.75 a share (split adjusted: less than 6 cents), and EMC fetched $3.63 (split adjusted: 13.5 cents).
Microsoft Corp., well known by then but certainly not the preeminent software firm it is today, likewise would have put you in the millionaire camp with a modest investment.
From a split-adjusted $1.21 a share at the end of 1989, the stock today is worth nearly $120 a share. A $5,000 investment in 1989 would be worth nearly half-a-million dollars now.
Of course, much of the advance in Dell, EMC, Microsoft and most other tech stocks has come just in the last two to three years.
Still, in an era when many tech investors like to trade rapidly in and out of stocks, the '90s performances show how lucrative a buy-and-hold strategy can be--when you buy the right stock.
Propelled by such superstars--as well as by many new issues that have begun trading in recent years--the technology-oriented NASDAQ composite index has risen 774% this decade, through Monday, while the Dow Jones industrial average has gained 314%.
Including stocks that began trading in this decade, the list of top-performing issues of the '90s changes somewhat, given the hot performances of many new issues. Shares of telecom equipment maker JDS Uniphase Corp., for example, are up 28,894% since they began trading in 1993. America Online is up 70,626% since it began trading in 1992.
All told, the '90s market blockbusters are on a different scale than '80s blockbusters. Most of the '80s stars were consumer-oriented and included many retailers. Tech stocks in the '80s were largely viewed as a boom or bust investment play; many investors preferred to bet on a continuation of Americans' conspicuous consumption via names such as Circuit City and Limited Inc.
Circuit City, in fact, topped the list of the hottest stocks in the Standard & Poor's 500 index in the 1980s. Yet its gain in that decade--8,252%, according to Ned Davis Research--was far below what the best tech stocks achieved in the '90s.
Several of the stars of the '80s have continued to perform respectably in the '90s. Circuit City is up 681% since Dec. 31, 1989, modest compared with its rise in the '80s, but more than double the Dow's gain.
(Rival electronics retailer Best Buy, meanwhile, has been the 10th best-performing stock in this decade, up 8,900%.)
Other '80s stars that have surged in this decade as well include Wal-Mart, up 1,138%; and Gap, up 2,302%.
But two other retailers--department store chain Dillard's and toy giant Toys R Us--have actually declined in price in the '90s after being among the hottest stocks of the '80s.
Whether the '90s tech stars' stock gains will be sustained is another question. For now, here's a closer look at some names that had the potential to make investors super-rich in the decade now ending:
* Dell, the No. 1 stock, found a better way of doing things: selling personal computers directly to consumers either by phone or, more recently, via the Internet.
Chief Executive Michael Dell bet on volume, volume, volume as the company cut PC costs by skipping the middleman and building to order. The increasingly computer-savvy public loved the idea. But as PC unit sales slow, some analysts wonder whether the company can continue to grow at its torrid pace.
* Solectron, the biggest contract manufacturer for the electronics industry and a symbol of Silicon Valley, has, not surprisingly, ridden the Valley's boom. It takes third place among all stocks in the '90s performance derby, up 19,751%.
* One of the decade's biggest trends--industry consolidation--has benefited Clear Channel Communications Inc., a network of radio and TV stations whose stock has surged 14,488% in the '90s. Though the acquisitive company has grown rapidly, analysts expect more of the same: Per-share earnings are projected to rise nearly 30% annually over the next few years.
The Penny-Stock Pyramid Scheme (and Its Similarity to Multi-level Marketing Pyramids)
Each era has its own business hoax. The schemes develop in good times and bad and adapt to the special conditions of each era. With the benefit of experience and hindsight, the hoaxes appear obviously as frauds, but in the context of their period, they are seen as believable and beguiling. They inspire hope and excitement and they attract millions of followers.
A common thread of many of these hoaxes is the pyramid scheme. The insidious, underlying flaw in the pyramid scheme is its denial of the future. Its allurement is the promise of immediate enrichment. It most destructive impact is not financial but communal. Pyramid schemes enroll large numbers of people in a plan to defraud larger numbers of others.
Hoax of the 80's Still Alive and Well Today
The business hoax of the 1980's was known as "penny stocks." They are still with us today, camouflaged as legitimate securities inside today's much larger stock market that now involves millions more investors. Today, they may be camouflaged as IPO's or a hot new "Internet stock."
Here's how a typical penny stock scheme works, although there are many variations on this theme.
A stock brokerage company makes a deal with a small group of investors to sell stock in a newly formed public company and then to merge this new company with an existing privately held one. The new public company will have no product, no history, no experience, nothing. Shares will be sold to the public on the story that this is a `blind pool.' or `shell,' that is, the new public company will have the structure of a publicly traded company which allows investors to buy and sell shares and better enables the company to gain new capital. It will also have cash available from the initial shares its sells. When the initial stock is sold, it will have a public structure and a large bank account without debt, nothing more. Then, it will merge with the private company which is engaged in some enterprise or another and thereby fold the private company into the public structure.
This process is a cheaper and easier way for the private firm to become publicly traded without the federal or state regulators, journalists or shareholders ever examining it. The shell will be sold boldly as just a new company with a bank account but one that has great `potential.' Shareholders are told that an impending and portentous merger will send the stock skyward.
The penny stock investor is really buying a `future.' The shell by itself is an unattractive business proposition indeed. But its potential is great due to possible subsequent events. This impeding event in the penny stock scheme is the much heralded `merger' leading to subsequent resell of the stock at a big profit.
The Mathematical Trick
Now comes the mathematical trick common to all pyramid schemes. In penny stocks, the math is spelled out in the prospectus sent to each shareholder but is usually ignored or not understood by the investors. Penny stocks operate best in a booming economy where anything seems possible. People are investing in hope, so, why bother to pore over the complicated language of the prospectus?
Millions of shares are issued but only 20% are actually sold to the public. One or more people control the other 80% even though they may have invested little or no money of their own. This ensures massive profits to the insiders, including the company waiting in the wings for the merger, and to prevent any interference from those who actually put up the money.
The stock is sold for about one penny or a few pennies a share. Investors believe this is very cheap and they are getting a bargain. It is a low initial investment. Brokers hint that the stock could go to a dollar! They are getting in on the ground floor. This shell will soon merge with a company that has explosive potential for growth. This is an opportunity of a lifetime!