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Back to Basics

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Remember Netscape? The innovative web browser company went public in 1995 with a record-breaking IPO that marked the Big Bang of the Dotcom Boom. A decade later, it was a mere footnote in the history of the Internet. Today, with the Dow hitting new highs and Google shares topping $500, it’s a cautionary tale for investors.

Over roughly the same period, many lesser-known stocks produced strong returns for shareholders by developing solid long-term growth strategies and consistently executing against them through up and down markets. These total return leaders come in different shapes and sizes and compete in different markets, but they share one thing: superior total return — that is, share price appreciation plus dividend income.

How important is total return as a performance yardstick? Lincoln Anderson, chief investment officer of LPL Financial Services, says total return is the only metric that matters in equity investing, regardless of how returns are generated. “Now that tax rates are the same on dividends and long-term capital gains, it makes very little difference in which form the return is delivered,” adds the former Reagan administration staff economist.

Standard & Poor’s ranks over 7,800 publicly held companies for compound growth in total return (price appreciation plus dividends compounded annually for the last 10 years). The following winners from this list, all of which yielded returns in excess of 20 percent per year, offer valuable insight into how companies deliver superior performance over the long term.

Small companies can yield huge returns

Investors in Mines Management Inc. (MGN) struck gold — or rather, silver — with a compound total return of 46.9 percent. The Spokane, Wash.-based company has been developing mineral deposits since 1947. But its growth really took off in 2002 when it acquired full ownership of the Montanore deposit in northwestern Montana, a prolific silver-producing region.

Timing was critical to this move. Mines Management acquired the Montanore when silver prices were at historic lows, prompting the previous owner to withdraw from the project. Since then, Mines Management’s shares have tracked the rising tide in precious metals prices. “We’ve taken strategic advantage of a change in the business cycle to add significant value for shareholders,” says Douglas Dobbs, vice president of investor relations for the company.

The project is moving forward through developments in the permitting process and engineering. “This is a very challenging process,” Dobbs notes. “You cannot stumble. We have to continue to execute successfully.” Permitting should be complete by the end of 2007, he says. Montanore would rank among the world’s top 10 silver mines, if it were in production today at its estimated annual capacity of 8 million ounces of silver (and 60 million pounds of copper).

With silver and copper prices nearly double where they stood two years ago, Mines Management’s growth prospects are untarnished. Admittedly, it will be difficult for the company to maintain its stellar total return going forward. But Dobbs is sanguine on the company’s prospects. “Compared to our peer group, our shares remain relatively undervalued, so we expect to continue to experience above-average growth.”

Targeting markets helps mid-size companies thrive

Drug and biotech stocks have been on a hot streak lately, so it’s no surprise that two top total return performers belong to this sector. Both have staked out leading positions in lucrative under-served markets, and their relatively modest size lets them move the bottom line easier than big drug companies.

Gilead Sciences Inc. (GILD) has a total return of 37 percent. While its name refers to an ancient region known for its balm, its recent performance has certainly been a soothing salve to investors. The Foster City, Calif.-based biotech company has built a franchise in drugs that treat HIV, hepatitis B and other life-threatening diseases since 1987. Gilead makes four of the most widely prescribed antiretroviral drugs on the market today. Additionally, its Tamiflu product has logged strong sales due to fears about avian influenza.

Gilead’s growth has been driven by the increasing number of new HIV patients starting anti-retroviral therapy, estimated to be 54,000 annually. A few years ago, HIV patients had to take up to 20 pills a day on strict schedules to control the disease. Gilead has simplified HIV therapy with drugs that are taken just once a day. “Because of the profiles of our drugs — particularly Atripla, the first complete HIV regimen given as one pill, once daily — we are certainly among the largest benefactors from the growth in the market,” according to Susan Hubbard, the company’s vice president of investor relations.

While Gilead does most of its own drug discovery, it partners with larger pharmaceutical companies to develop and market new drugs. Acquisitions have also played a role in the company’s growth. In 2006, Gilead expanded into the treatment of cardiopulmonary disease with the acquisition of Corus and Myogen.

Taking a different route, Forest Laboratories Inc. (FRX), best known for its Celexa anti-depressant, began operations in 1958 as a candy and vitamin manufacturer and has developed into a global pharmaceutical company with $3 billion in annual sales. As part of that growth path, the New York-based company generated a healthy total return of 25.3 percent.

A shift in strategy ignited the company’s growth. In the early 1990s, management decided to expand from generic drugs into higher-margin branded pharmaceuticals. Today, the lion’s share of Forest Labs’ (FRX) profits come from new branded drugs like Lexapro, an improved version of Celexa, as well as the Alzheimer’s drug Namenda and the hypertension drug Benicar.

Forest Labs leverages drug discoveries made by others to grow its business. “We look at companies around the world that are doing good science and license their discoveries or partner with them to develop and market the drug,” says Charles Triano, the company’s vice president of investor relations. “We think this approach gives us a leg up.”

Celexa’s patent recently expired, but skillful planning helped the company bounce back quickly: “We knew that Celexa had a finite life, so we weren’t caught by surprise,” Triano notes. “Sales of our new products have more than replaced the lost earnings from Celexa.”

Both Forest Labs and Gilead have increased shareholder value by repurchasing shares. “We believe the best way to provide both the greatest return for our shareholders and benefit for patients is to continue to invest in growing our business,” affirms Gilead’s Hubbard.

Focus on execution keeps big companies growing

Growth in global business, combined with deft financial engineering, has propelled ProLogis into the top ranks of the real-estate industry, and the S&P 500 company has rewarded its investors with a total return of 20.4 percent, including stock appreciation and dividends.

ProLogis (PLD) is the world’s largest owner, manager and developer of industrial distribution facilities, with 2,400 facilities totaling nearly 400 million square feet in North America, Europe and Asia. Formed in 1991, the Denver-based company’s client list is a Who’s Who of global business: DHL, FedEx, Unilever, GM, Matsushita and Mitsubishi. As companies continue to streamline their international logistics and supply chain operations, ProLogis is expanding into new markets around the world via acquisitions and internal development.

ProLogis employs a savvy strategy to finance its expansion. “We fund development on our balance sheet,” says Melissa Marsden, senior vice president of investor relations for the company. “But when the properties are developed and leased up, we form property funds with big institutional investors. This allows us to take our costs out, while maintaining an ownership stake, and redeploy funds into new development.” Using this approach, ProLogis has been able to fund most of its growth without issuing new shares.

As a REIT, ProLogis must distribute at least 90 percent of taxable income to shareholders. “People don’t typically think of REITS as total return vehicles,” Marsden explains. “They tend to think of them as dividend-only plays. Our growth strategy goes beyond just collecting rent and generating gains from occupancy or rent increases. We have more of an operating company business model. I think that’s why the market has recognized the value we’re creating.”

Time to get back to basics

As the performance of this diverse sampling of companies demonstrates, investors today may do well to get back to basics and focus on stocks with superior long-term return records.


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