WIC's up?

Last week, a reporter asked me how things were going with the W-Industrial Complex (WIC) index. It’s up 175% in the last five years, that’s how! And with Exxon’s announcement of record quarterly profits, all’s well with the WIC.

The WIC tracks stocks in the energy, defense, and selected media and high-end retailing industries. I began thinking about it in May 2001 as I tried to imagine the stock market impact of an oil man in the White House.

Since January 19, 2001 (inauguration day) the top three performers in this index are:

• Valero (VLO) + 649%
• Arch Coal (ACI) + 502%
• Peabody Energy (BTU) + 436%

The most interesting trend since the last time I checked the WIC in September 2005, is that oil services stocks have skyrocketed. To wit, since then

• Schlumberger (SLB) + 57%
• Halliburton (HAL) + 46%
• Baker Hughes (BHI) + 33%

This suggests that companies like Exxon are beginning to believe that energy prices will continue to rise – thus justifying the risk of exploring for more.

Car race

Are we a car company or a finance company that happens to sell cars?

This is the fundamental business question facing GM and Ford. As these US-based companies continue to lose market share to Toyota, Honda, and Nissan, it is becoming clearer that the US companies are losing market share because finance has become the tail that wags the dog. For instance, Ford earned $2 B in 2005 because it generated $6 B in operating profits from its finance arm while losing $4 B making vehicles. For the first nine months of 2005, GM limited its $6 B in vehicle operating losses due to the $2.2 B it made financing those vehicles.

GM and Ford can’t cut their way to success in the car business. Both are operating their plants at about 80% of their manufacturing capacity. Their recent capacity reduction announcements – GM announced a 19% capacity cut while Ford’s was 26% -- are designed to bring them closer to 100% capacity utilization. But at the rate they’re losing market share, the US auto companies will find that once they’ve reduced their capacity, it will still be too high because demand will have shrunk. Meanwhile both companies have seen their stock plunge in the last year (GM -44%, Ford -40%).

It’s worth considering why Toyota, whose stock has risen 30% in the last year, is surpassing its US competitors. The first reason is that people want to buy Toyota cars. Toyota cars – particularly Lexus -- top the initial quality surveys year after year. And people are willing to pay for that quality. For example, Toyota charges 14% more for their average vehicles ($24,500) than GM ($21,000).

Toyota also builds cars faster and at lower cost. Toyota can build a car 7% faster (in 21.63 hours) than GM (23.09 hours). Moreover, Toyota enjoys a $300 to $500 per vehicle cost advantage over GM. Part of this advantage is in health care costs. While GM complains about its $1,500 per vehicle health care charge, Toyota makes most of its cars in countries where government picks up much of the health care bill.

Even though it charges higher prices, demand for its cars is so high that Toyota is operating at full capacity and it appears poised to take over the North American market share lead this year. Meanwhile, Toyota earns an average of $1,488 per vehicle in profit, while GM loses $2,300. In its most recent fiscal year ending March 2005, I estimate that Toyota earned $12 B in operating profit selling vehicles and an additional $1.6 B financing them.

Speaking of financing, GM and Ford are not doing too great a job of financing their own operations. GM has almost $13 in long-term debt for every dollar of equity while Ford carries $10 of debt per equity dollar. And debt rating agencies are none too impressed – having downgraded both to junk status.

While I would like to think that GM and Ford can transform themselves into makers of the world’s highest quality vehicles, I doubt that’s realistic. A more likely survival strategy would be for GM and Ford to outsource vehicle manufacturing to China and India and focus exclusively on financing.

Most mergers fail

Numerous studies suggest that most mergers destroy shareholder wealth. For example, a Chicago Tribune/A.T. Kearney study of 50 mergers between January 1999 and September 1999 found that 69% of the surviving companies lagged their industry average in shareholder returns in the two years after the deal closed. About 70% of surviving companies underperformed their peers five years after the deals closed according to Kidd Stewart (2001).

But not all mergers are bad for shareholders. While the average big merger does not do much for shareholders, there are big performance differences across industries. This is the conclusion of my firm’s analysis of 30 big mergers concluded between 1998 and 2001. These 30 mergers averaged $39 billion and the stock prices of the average acquirer lost 6% between the date of the merger announcement and March 29, 2002 as compared to an 11% loss on the S&P 500.While the average acquirer’s stock among these 30 performed 5% better than the S&P 500 from the date of the announced merger there are wide differences across industries. For example, financial services, energy, and consumer products mergers performed very well while telecom, media, and tech (TMT) mergers were shareholder value destroyers.

This is important because mergers are among the most significant strategic decisions that a company will make. Mergers can involve enormous capital commitments and can alter in fundamental ways a company’s strategy. As the studies above suggest, the risk of failed mergers is high and the cost of such failures can be enormous.

Three examples illustrate the risks of poorly considered and executed mergers. WorldCom, which announced its acquisition of MCI for $37B in October 1998, underperformed the S&P 500 by -90% from the date of this announcement – before ultimately filing for bankruptcy; JDS Uniphase, which announced its acquisition of SDL for $41.1B in January 2000, underperformed the S&P 500 by -76% from the date of this announcement; and VeriSign, which announced its acquisition of Network Solutions for $21B in March 2000, underperformed the S&P 500 by -71% from the date of this announcement.

In November 2005, my firm completed a study of successful diversification in the payment services industry – companies that process credit card and other financial transactions -- which offers general lessons for corporate acquirers. Our study of 10 diversification businesses created by eight payment services providers (PSPs) found that the PSPs added an average of $559 million to their 2004 sales and $103 million to their 2004 operating income through 20 acquisitions costing an average of $429 million. How did these PSPs succeed? Their approach to M&A takes seriously the basic blocking and tackling of diversification strategy. Specifically, the PSPs in our study apply the following management discipline:

• Pinpoint large, rapidly-growing, profitable markets;
• Focus only on such markets where the acquirer’s core capabilities – such as operational excellence, marketing, technology-based innovation – will give the acquirer a competitive advantage in the new market;
• Negotiate a reasonably priced deal with a company that offers a beachhead into this new market; and
• Grow market share by integrating the acquired company with care while ‘pouring in’ the acquirer’s core capabilities.

Success breeds failure

Success contains the seeds of its demise. When a company achieves market leadership, it often develops habits that prevent it from sustaining that leadership. Success comes from offering customers better value than do your competitors. In some companies this success leads to a culture of entitlement that rewards those who are skilled at winning internal battles for pay, promotion, and perks while punishing those who pay more attention to external matters.

This complacency is important because it ultimately causes a formerly successful company to lose market share to more adaptive upstarts who aspire to success and are willing to work harder than the complacent incumbent to achieve that success.

Ciba-Geigy was a large, successful Swiss pharmaceuticals company which by the 1980s had been around for over 200 years (one of its predecessors, Geigy was founded in 1758). Ciba-Geigy’s stone headquarters building featured walled-in offices with lights above the doors. If the light was red, the office inhabitant did not wish to be disturbed. Ciba-Geigy’s pharmaceuticals culture demanded top-of-the-line quality in offices, research budgets and scientists, and other resources. This unlimited budget mentality pervaded the entire company, including Ciba-Geigy’s intensely price-competitive, rapidly evolving pigments business. Unfortunately, this highest common denominator (HCD) approach to corporate strategy coupled with a ponderous consensus style of decision-making turned Ciba-Geigy into a lumbering giant that could not compete effectively in any of its markets. Ultimately, Ciba-Geigy’s inability to compete led it to merge in 1994 with Sandoz to form Novartis.

To fight complacency, company boards must ensure that the CEO maintains a healthy paranoia. To assess this trait, boards should evaluate whether their CEO has in their earlier career directly experienced the consequences of corporate complacency as a result of working for a company that collapsed due to such complacency. For example, Cisco Systems’ CEO, John Chambers, worked earlier in his career for Wang, a creator of the word processing market in the 1970s that went out of business after it failed to respond to the popular adoption of PCs and word processing software. Chambers participated in the layoffs that resulted from the collapse of Wang’s revenues. As a result of this experience, Chambers has managed Cisco Systems with a healthy paranoia – putting pressure on its executives to monitor closely how customer needs are changing and adapt accordingly.

To fight complacency, executives must continue to raise performance expectations even as they monitor and adapt to changing customer needs, upstart competitors, and new technologies.

Competitor-focused strategies happen

Companies often get into new businesses not because they want to create more value for their customers but because they want to keep up with their more successful competitors. Such competitor-focused strategies (CFS) often fail because they are based on copying what another company has done rather than on positioning the firm to sustain superior profitability by creating competitive advantage.

When publicly-traded companies pursue such CFSs, they create opportunities for investors and for competitors. The stock price of companies that pursue CFSs is more likely to decline because the CFS distracts management attention and resources from its core business. If the distraction is sufficiently large, the core business is likely to see its competitive position decline.

In 1998, Dell decided to start a corporate venture unit, Dell Capital, after envying the corporate venture capital success of Microsoft and Intel. At the time, Microsoft’s venture capital portfolio had $6 billion in unrealized capital gains and Intel’s had turned $2 billion worth of investments into shares worth $10 billion. Moreover, in early 1998 Dell had passed up a chance to invest in Network Appliance – causing it to miss an opportunity to own a substantial chunk of this then $18 billion (market capitalization) maker of network storage equipment. Dell Ventures was born later that year with an unfocused strategy described in terms that captured all the era’s most popular Internet buzzwords. After investing billions in 87 companies over six years, Dell Ventures sold its 20 most valuable portfolio scraps for $100 million – the others had simply folded.

Investors can profit by selling short the shares of the company pursuing the CFS. Competitors of companies pursuing CFSs can profit from the distraction as well. Such competitors should evaluate the potential to take customers of the CFS-pursuing company’s core business.

Expect the unexpected

Decision-makers must allocate resources despite the lack of sufficient information about the future. For example, even after conducting rigorous analysis of the profit potential and likely competitive position of entering a new market, a company may be blindsided by an important outcome that it had not anticipated. Therefore, decision-makers should consider alternative scenarios of how the future might unfold and focus attention on the likelihood of different outcomes before allocating resources.

Scenario and uncertainty analysis are important because they help decision-makers anticipate the most significant risks to achieving the outcomes of a potential strategy. By anticipating these risks and considering how they might change their strategy in response to them, decision-makers can increase the chances that their strategy will succeed. Furthermore, by assessing the likelihood of various scenarios, executives can invest their planning time in accordance with their relative likelihood – placing more emphasis on the more likely scenario(s).

In 1982, the Consumer Electronics Group at Philips NV was facing a decision about whether to build a plant in the US in 1983 to satisfy potential demand for CDs or to import the CDs from Europe in 1983 and possibly build a plant in the US in 1984, depending on the demand. Philips considered two scenarios: (1) US demand for CDs built up slowly and (2) US CD demand grew quickly. Under scenario 1, the most profitable option would be to import the CDs in 1983 and under scenario 2, the most profitable option would be to build the plant in 1983 in order to gain economies of scale and preempt competitive entry with a lower cost position. Based on its estimate that scenario 1 was more likely to occur as well as the revenues and costs of the two options, Philips decided to wait a year. Unfortunately for Philips, demand growth was much more rapid than Philips had anticipated and it missed a significant opportunity.

Decision makers should develop scenarios that differ from their consensus expectations. Since they may be less influenced by the decision-makers’ perspectives, it often makes sense to involve outsiders in constructing these alternative scenarios. Similarly, outsiders can help in estimating the costs and benefits of various options considered under the alternative scenarios.

As the Philips CD case illustrates, such efforts do not always yield the expected outcomes. However, by taking the time to think about them, decision-makers may be better prepared to tackle unexpected outcomes.

Shareholder value and financial performance do not move together

Investment theory suggests that the greater the present value of a company’s future cash flows, the higher its stock market value should be and vice versa. The reality is that it is not difficult to find exceptions to this theory. Nevertheless, many decision-makers strive to maximize shareholder value by focusing obsessively on quarterly financial performance. Ironically, my research, published as Value Leadership (Jossey-Bass, 2003) suggests that superior shareholder value comes not from a focus on shareholder value but from harnessing a company’s daily activities to create competitively superior value for a company’s employees, customers, and communities.

Value Leadership differs from Maximizing Shareholder Value in important ways. First, Value Leadership focuses management attention on a company’s diverse constituents – particularly employees and customers -- rather than focusing exclusive attention on shareholders. Second, Value Leadership drives companies to understand the expectations of these constituents and to operate in a way that exceeds these expectations consistently over the long run. Maximizing Shareholder Value subsumes these longer-term considerations to beating Wall Street’s earnings and growth expectations through quarterly cost cutting and revenue maximizing behavior. Finally, Value Leadership balances the need to generate profit with a willingness to invest for future growth whereas Maximizing Shareholder Value sacrifices longer-term investments to squeeze out the most possible profit growth each quarter.

Value Leadership is important because it represents a fundamental shift in focus for managing a public company. Rather than obsess over beating quarterly earnings forecasts and raising guidance, Value Leadership focuses on ensuring that an organization’s daily actions create competitively superior value for its key constituents. The end-result of this shift in focus is superior shareholder value over the long-term.

The link between financial performance and shareholder value does not warrant so much management attention. For example, Martha Stewart Omnimedia saw its stock rise three-fold during the span of the trial and imprisonment of its namesake, Martha Stewart, even as the unprofitable company shrank at a 20% annual rate. By contrast, Wal-Mart, the world’s largest company with $305 B in sales, has consistently increased its earnings at 14% per year. However, its stock has been stagnant for the last six years -- stumbling 35% from its January 2000 high. Southwest Airlines is the best example of a company that focuses on creating superior value for its employees, customers, and communities. It creates a fun, team-oriented work environment for its service-sensitive employees – linking bonuses and equity grants to persistent lowering of operating costs while delighting customers. As a result of this and other key elements of its strategy, Southwest is the only airline with an uninterrupted stream of annual profits since 1973. Its stock has more than tripled in the last 10 years.

Companies should learn about the seven principles -- valuing human relationships, fostering teamwork, experimenting frugally, fulfilling your commitments, fighting complacency, winning through multiple means, and giving to your community -- and 24 activities which underlie Value Leadership. Companies can use the Value Quotient (VQ) to assess how well they perform these 24 activities compared to eight top-performing companies (through two recessions, these companies grew 35% faster, were 109% more profitable, and generated five times more shareholder wealth than their peers). These Value Leaders include Synopsys, WalMart, Goldman Sachs, MBNA, Johnson & Johnson, J. M. Smucker, Southwest Airlines, and Microsoft. A VQ-based assessment can help companies identify opportunities to improve the way they create value for key constituents – ultimately yielding superior long-term shareholder value.

Incentives matter

If a CEO wants to implement a change in corporate strategy, the CEO’s ability to achieve this change will depend heavily on whether the new strategy makes customers and partners better off.

If the benefits to the constituents of a new strategy exceed the costs of changing to conform to the new strategy, then the new strategy is more likely to succeed. In some cases, decision-makers neglect to take into consideration these cost-benefit calculations – thus increasing the chances that the new strategy will not succeed.

In 1986, an upstart Irish airline, Ryanair, decided to offer a cut rate service for the hour flight between Dublin and London. Ryanair hoped to turn into customers a chunk of the 750,000 people who took the nine hour, 55 IR£ train or ferry rides between the two cities. At 99 IR£, Ryanair’s offering was priced at half competitors’ such as British Air. Despite British Air’s was planned initial public offering, British Air decided to undercut Ryanair’s price before the service launched. Fortunately for Ryanair, the low industry price created so much demand – much of which came from rail and ferry customers seeking to save time – that Ryanair was able to operate the service at 100% capacity.

Decision-makers should consider how a new strategy will create value for key constituents. The more the benefits of a new strategy exceed the costs to constituents such as employees, customers, and partners, the greater the odds that the new strategy will create value for shareholders. If a new strategy does not create sufficient value, the strategy should be changed until it does.

Confirmation bias filters reality

Confirmation bias leads decision makers to readily accept information that reinforces their pre-existing views of reality and to reject information that challenges those views.

Confirmation bias is important because it often leads to decisions that damage the organization because these decisions do not reflect reality as viewed by customers, competitors, employees, and other key constituents.

Bill Gates tapped confirmation bias to make the most valuable business decision in history. In the early 1980s, IBM was looking for an operating system for its PC. Gates paid $75,000 to license one from Seattle Computing. Gates sold IBM the rights to the OS for use on IBM PCs for a pittance. IBM, assuming that no PC-clone market would emerge, granted Gates the license for the OS on the clones. IBM had convinced itself that Gates was naïve about the emergence of PC clones. If Gates was right, IBM reasoned, then IBM was no longer the marketing powerhouse it believed itself to be. When the PC clone market grew, Gates profited from IBM's confirmation bias.

Some companies have developed the means to overcome this tendency towards confirmation bias. In general, an organization’s ability to sustain superior profitability in an industry depends heavily on how well it performs the specific activities that create value for customers. Customers measure that value based on ranked purchase criteria such as price, quality, and product line breadth – which often vary by industry and customer group. Companies compete for the highest score on these purchase criteria through the way that they perform specific activities – such as manufacturing, marketing, sales, and service. When successful companies seek to enter a new industry, they may not fully understand that the capabilities that made them successful in their core business might not help them compete in the new industry.

This is important because successful executives often believe that their ability to build a profitable company naturally enables them to succeed in whatever industry they choose. This excessive self-confidence can lead executives to enter new businesses without a full understanding of the requirements for competitive success. If unchecked, this can lead companies to invest in new markets despite their inability to perform the capabilities required to be profitable in the new market – thus wasting shareholder’s money. In effect, these executives’ self-confidence can have the potentially destructive effect of reinforcing a tendency towards confirmation bias – leading them to ignore information that does not reinforce their initial decision to enter the new market.

Wal-Mart understands well how to apply to new industries the capabilities that enable it to win in its core market. Wal-Mart’s initial success as a discount retailer was based on three capabilities – its use of superior purchasing scale to drive down its suppliers prices, its ability to generate accurate and timely information within each of its stores about which merchandise is in high demand and which is not, and its ability to move specific merchandise quickly from suppliers to stores where it is selling. Wal-Mart has become so large that it needs to expand into large new markets in order to sustain its 14% five year average earnings growth. Wal-Mart’s management recognizes, however, that such expansion must be made only in new markets in which Wal-Mart’s capabilities will give it a competitive advantage. In 1983 Wal-Mart decided that pharmacy retailing passed the test – building an in-store pharmacy that by 2000 generated over $6 billion in annual revenues.

Few companies are able to overcome their confirmation bias to assess such diversification initiatives as effectively. Decision-makers should evaluate whether investing in a new market will pay off. To do so, they should assess the profit potential of the industry, identify the ranked customer purchase criteria (CPC) of the industry’s customers, evaluate how well incumbents satisfy these CPC, understand the capabilities that enable the leading companies to create value for customers, and audit how well their companies can perform these critical capabilities relative to the incumbents in the industry.

Seven principles of strategic decision making

Executives are paid to make decisions. These decisions can be framed as questions such as the following:

• How can we assure that our new market entry gains us profitable market share?
• How can we motivate our organization to create value for our constituents?
• How can we distinguish between competitor strategies worth following from the dead ends?
• How can we make robust decisions that will maximize our gains even if things don’t turn out as we planned?
• How can we keep success from going to our heads?
• How can we adapt to changing customer needs, upstart competitors, and new technologies?
• How can we assure that our acquisitions are profitable?

Through my consulting work and business strategy teaching, I have developed seven key principles of strategic decision making which I believe can help executives make more effective decisions, including the following:

1. Confirmation bias filters reality --> Assess capabilities objectively before entering a new market.
2. Incentives matter --> Understand customers’ and partners’ incentives.
3. Shareholder value and financial performance do not move together --> Value Leadership is a more useful mission than Maximizing Shareholder Value.
4. Expect the unexpected --> Use scenarios and uncertainty analysis.
5. Competitor-focused strategies happen --> Exploit them by creating customer value.
6. Success breeds failure --> Maintain a healthy paranoia.
7. Most mergers fail --> Analyze them rigorously.

Tech is back

Tech – consumer, not business -- is leading the way in 2006.

Stocks in the technology sector are up 1% today and 6% so far in 2006. Semiconductors and hardware continue to be the sector’s strongest industries; the SOXX is now up 1.6%, while the AMEX Computer Hardware Index is 1.7%. Since the beginning of the year, those indices are up 10.0% and 7.8%, respectively.

But dig underneath the surface and you see that this year’s tech winners make their money selling to consumers – not the mix of business and consumers that characterized the 1990s Internet boom. For example, the big stock market winners over the last year include:

• Google +135%
• Apple +130%
• Adobe +33%
• SanDisk +209%
• Lexar Media + 41%

Compare this to the relatively moribond business tech companies:

• IBM -11%
• Microsoft +3%
• Cisco Systems +1%
• EMC -3%
• Sun Microsystems +7%

I don’t know whether it’s too late to get in on this boom. Certainly NASDAQ still trades 54% below its March 2000 peak. And the venture-backed technology IPO market remains far from the exuberant levels it enjoyed in the late 1990s. With consumer technology still coming up with wildly popular new products and services, the profitable growth underlying the recent consumer tech stock boom may be able to continue for a while. Meanwhile, until the business tech companies can launch products that unleash a quantum leap in productivity, corporations seem unwilling to open their bulging wallets for IT.

The Cohan Letter +23.3% in 2005

The Cohan Letter, my monthly investment newsletter, had a good year in 2005 – stocks mentioned there were up an average of 23.3% compared to 3% for the S&P 500.

Here are its three top-performing stocks for 2005 (through 12/30/05):

• Whole Foods (WFMI): +73.1% from $44.71 – mentioned at the end of January -- to $77.39;
• Express Scripts (ESRX): +67.7% from $49.98 – mentioned at the end of June -- to $83.80; and
• Digital Insight (DGIN): +59.5% from $20.07 – mentioned at the end of April -- to $32.02.

2005 continued a streak of good fortune for my public stock picks. Since January 1998, when I began promoting my first book, The Technology Leaders (Jossey-Bass: 1997), my public stock recommendations have increased at an annual average of 74% compared to 5% for the S&P 500. My picks were made public through various media including appearances on CNBC and CNN, in print at Business Week and Fortune, online at sites such as BusinessWeek Online and TheStreet.com, and, since 2003 in The Cohan Letter.

In each year since 1998 – with the exception of 2003 – these public stock picks have outperformed the S&P 500. Here are my one, three, and five year returns compared to the S&P 500:

• 2005: 23.3% (S&P 500 +3%)
• 2003-2005: 22.3% (S&P 500 +13.7%)
• 2001-2005: 45.8% (S&P 500 +1%)

Investment Approach

I use fundamental analysis to select investments. However, I adapt my approach to changes in overarching investment themes. For example, since 1998, I’ve identified three distinct eras which presented different investment opportunities:

• The Internet era. High returns between 1998 and 2000 resulted from buying technology and Internet stocks as explained in e-Stocks (HarperBusiness, 2001);
• The era of collapse. In 2001 and 2002, high returns came from selling short the stocks of debt-laden companies in danger of violating their contracts with lenders; and
• The trendless era. High returns between 2003 and 2005 resulted from buying stock in industries with strong demand growth and pricing power such as career education, freight transportation and IT outsourcing.

The Internet Era

For example, in 1998, my six picks returned an average of 69%. This return was generated by suggesting leaders in the most attractive Internet market segments. Here are two:

• Cisco Systems (CSCO). Due to its leading share in the attractive Internet infrastructure segment, I suggested that this stock could rise in a July 28, 1998 CNBC appearance when it was trading at $48. It closed the year at $92.81, yielding a 93% return; and
• Check Point Software (CHKP). Due to its leading share in the attractive Web security segment, I suggested that this stock could rise in a September 29, 1998 appearance on CNBC when it traded at $22.56. It ended 1998 at $45.81 for a 103% return.

The Era of Collapse

For example, in 2002, my picks returned an average of 81%. The 81% return was the average of the returns of four short picks and four long ones. As the list below illustrates, my short picks in 2002 were far more valuable than my long ones. Here are two of each:

• VeriSign (VRSN). I suggested that this stock could tumble in a BusinessWeek Online article on March 12, 2002 when it was trading at $32.38. It closed the year at $8.42. Covering the short position then would have yielded a 285% return;
• Williams Energy (WMB). In an article in TheStreet.com on June 5, 2002, I questioned management’s credibility. At that time, WMB was trading at $9.12 a share. It ended the year at $2.20. Covering the short position then would have earned a 315% return;
• Apollo Group (APOL). In an October 22, 2002 article published in BusinessWeek Online, I argued that this education company was benefiting from the recession. At that time, APOL was trading at $41.92 a share. It finished 2002 at $44.25. Selling shares then would have earned a 6% return; and
• Bed, Bath & Beyond (BBBY). In an October 22, 2002 article published in BusinessWeek Online, I argued that this home furnisher benefited from 2002’s housing boom. At that time, BBBY was trading at $35.46 a share. It closed the year at $34.99. Investors selling shares then would have lost 1% of their investment.

The Trendless Era

For example, in 2003, my 36 picks returned an average of 24%. This return was generated by suggesting companies in specific industries with growing demand and rising prices. Here are two:

• Cognizant Technologies (CTSH). Due to demand for outsourcing IT, I suggested that this stock could rise in the February 2003 issue of The Cohan Letter when it was trading at $23.37. It closed the year at $45.64, yielding a 95% return; and
• Career Education Corp (CECO). Due to growing demand for adult education, I suggested that this stock could rise in the January 2003 issue of The Cohan Letter when it was trading at $23.22. It ended 2003 at $40.15, yielding a 73% return.