For Washington investors, last year was like a television reality show: The way to make money was to bet on the survivors.
Longshots-R-Us would be the best way to describe the top performing District, Maryland and Virginia stocks of 2002.
Most of the big winners were beaten-down companies that managed to heal their self-inflicted wounds and claw their way through the quicksand that swallowed their rivals.
Who would have predicted a year ago that the top stock of 2002 would be Dan River Inc., the well-known and well-nigh bankrupt maker of sheets, towels and other fabrics based in Danville, Va.
Dan River shares were marked down more than the merchandise in the company's many outlet stores a year ago, tossed in the bargain bin at 55 cents a share. By New Year's Eve the stock was back to $2.75 and had gained 400 percent gain during Wall Street's worst year in two decades.
Stocks selling for less than $5 a share have been excluded from the local rankings in some previous years, on the grounds that low-rollers are such risky buys that most individual investors won't go near them.
But doing that this year would have thrown out seven of the 10 best investments of 2002 among companies based in the three-state region.
Shares of Talk America Holdings Inc., a little Reston phone service company, climbed to $5.60 a share from $1.23, a 355 percent gain. Primus Telecommunications Group Inc., a McLean-based voice and data carrier that climbed 208 percent, from 65 cents a share to $2.
Primus stock is still trading for only a tiny fraction of the $50 a share it was worth before the telecom bubble burst, but that it is trading at all is a victory considering the casualties suffered by what only three years ago was Washington's promising high-tech industry.
Shares of Ntelos Inc. of Waynesboro, once the telecom toast of the Shenandoah Valley, was the year's worst loser, down almost 98 percent from $15.49 a share to 37 cents. But it is still in business and not in bankruptcy. E.spire Communications Corp. and Network Access Solutions Corp., both once high flyers, were liquidated last year. XO Communications was sold in a bankruptcy reorganization.
Equipment-maker Fastcomm Communications Corp. was taken over by a creditor after it went into bankruptcy. Acterna Corp. of Germantown, another hardware company, finished just ahead of Ntelos at the bottom of the loser's list, down 96 percent.
Even though they are the telecom-equipment industry's technology leaders, Corvis Corp.'s and Ciena Corp.'s stocks were creamed. Corvis lost 78 percent of its value, Ciena 64 percent.
Telecom's loser of the year, not only among Washington companies but in the entire industry, was WorldCom Inc., the parent of three of the region's most innovative companies, MCI Communications, Digex and UUNet.
WorldCom stock, worth $14 a share a year ago, still trades for 18 cents a share, but is essentially worthless. It trades only because there are investors who think it will have value when and if WorldCom comes out of bankruptcy. Those fantasies are accommodated by smarter traders who try to make money by buying and selling big blocks of stock whenever it wiggles up or down a few pennies.
The competition for my Washington Investing loser of the year award is a dead heat between WorldCom and US Airways Group Inc., the stock of which fell last year to 28 cents a share from $7 a share. The airline has said the stock will be worthless after it emerges from bankruptcy reorganization.
Both companies, in addition to their internal problems, are in badly bruised industries. But WorldCom was also done in by dirty accounting and the outright greed of some of its top executives.
Those excesses force me to bestow the ignominious dishonor on WorldCom. It is painful to declare WorldCom the loser of the year, just as it is painful to see bankruptcy court become the final resting place for the legacy of MCI founder William McGowen.
Without Bill McGowen, who brought competition and with it innovation to the telecommunications industry, Washington would have no telecom industry. He more than anyone else is responsible for liberating consumers from the Bell monopoly.
At first glance, it looks like 2002 was not such a bad year for Washington investors.
The Washington Post Bloomberg regional stock index lost 2 percent, while the Dow Jones industrial average fell 17 percent, the Standard & Poor's 500-stock index dropped 23 percent and the Nasdaq Stock Market composite index fell more than 31 percent.
But two-thirds of local stocks were down for the year and the local index beat the market only because of a statistical fluke. It was distorted by a stock-pricing strategy favored by Warren Buffett, America's savviest stockholder.
Buffett is a longtime board member and major shareholder of The Washington Post Co. and has long argued against stock splits. Many companies routinely try to keep their stock price in double digits, because they think it makes the shares more liquid. When the stock gets to the $100 range, they do a split. Investors get twice the shares, worth half as much apiece, which for some reason they think is good.
Bad idea, says Buffett, who practices what he preaches. The Class A stock of his investment company, Berkshire Hathaway Inc. closed Friday at $72,000 a share. There's also a "baby Berkshire" or Class B stock that is supposed to be "more affordable" because it is 1/30th of a class A share. That's now $2,403 a share.
The Post Co. also avoids splits and its stock is closed Friday at $751 a share.
That high share price distorts the index of local stocks, which is a theoretical portfolio made up of one share of each of the 215 publicly traded corporations based in the District, Maryland and Virginia. It takes a lot of little tech stocks trading for $5 or $10 a share to match the mathematical impact of one $700-a-share stock.
The "Buffett effect" of an ultra-high share price is so great that Berkshire Hathaway stock is not included in any of the major market indexes.
There are other ways to construct a stock index, such as weighting companies by total market value instead of their stock price. That too can produce distortions when a few giant corporations are mixed with a lot of little ones. (Indexes such as the Dow and the S&P 500 don't have that problem because the disparity in size among the listed companies is much smaller.) Washington Post stock really wagged the regional index last year, because the stock made a tremendous move. It ended the year up 39 percent, a gain of $208 a share, and hit an all-time high of $751 on Friday. The shares got some benefit from a recovery in media stocks, but that was a small part of it. Shares of Gannett Co. of McLean were up only about 7 percent for the year. The major reason for The Post Co.'s surge was the success of its Kaplan Inc. educational division, which the company expects this year to generate more revenue than its newspapers.
A capitalization-weighted index of local stocks would be driven by Fannie Mae, whose total stock market value is $67 billion, and Freddie Mac, which has a $42 billion market cap. Together they account for 28 percent of the $384 billion market value of all the companies in the index. Since Fannie was down 19 percent last year and Freddie was off almost 10 percent, a capitalization-weighted regional index would have had a very bad year.
The effect on the regional index of the high-price Post stock has grown as the market has collapsed. Two or three years ago, there were several tech stocks trading in triple digits -- remember when MicroStrategy Inc. was $313 a share? Those high fliers counterbalanced the Post stock, which was then in the $500 range, but they are all gone.
Because of its high price, Post stock now accounts for almost 15 percent of the regional index. At this point, more than 25 percent of the index comes from Post stock and two others that seem to follow Buffett's no-split strategy. Shares of NVR Inc., the region's biggest homebuilder, closed Friday at $335.50 and the stock of Markel Corp., a Richmond-based insurance company, is up to $212.76. NVR stock gained 60 percent last year and Markel was up about 15 percent.
If you factor out those three companies, The Washington Post Bloomberg regional stock index would look pretty much like all the other measures of stock market performance last year: lousy.