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Hot Stocks: Capital Advantages
In a not-so-great economy, Washington has some big pluses—and creative companies that are meeting all sorts of needs. Here are ten worth watching. Plus, how our expert stock pickers fared this year.
Washington is not immune to the nation’s economic woes. But according to Stephen Fuller, George Mason University’s regional economic watchdog, there hasn’t been much slowdown here. The number of jobs is still increasing, though at half the rate of recent years, and the unemployment rate is the lowest of any metropolitan area’s.
Fuller says our job growth would be higher if people elsewhere could sell their homes so they could move here.
How else is Washington different? We have more women in the workforce than anywhere else. That’s partly, Fuller says, because our high cost of living means one-income families can’t afford to live here.
Doug Poretz, founder and head of the investment and media-relations firm Qorvis, sees a bright future for the Washington economy spurred by the upcoming change of administration. He thinks the same groups that have fueled the expansion of Washington since the late 1970s—associations, lawyers, and accountants—will experience plenty of activity ignited by the changed political environment.
Real-estate magnate Joe Robert sees the distressed real-estate and debt markets as an opportunity, and he might be worth listening to: His 1990s fortune was built on the ruins of the real-estate collapse that resulted from the 1980s savings-and-loan crisis.
Local business guru Mark Ein sees promise in the number of next-generation technology companies beginning to emerge from entrepreneurs who were involved with MCI, UUNet, and AOL, and in ventures like GridPoint, a company that optimizes electrical-grid management for utilities and consumers.
AOL alumnus and Washington Capitals owner Ted Leonsis sees the same potential in Web-centric start-ups such as Clearspring Technologies and Qloud, a digital-music company providing free music on demand from an endless library embedded in Facebook and other social networks. He also likes Tidal Wave TV, an online call-in show designed to help people break into the entertainment business.
For all of the leading-edge companies that pop up around Washington, the area’s technology sector is dominated by companies like ManTech, which solves problems for Uncle Sam. The area continues to be home to the nation’s best-educated and most geographically diverse workforce as well as to some very interesting companies such as those described here.
Clearspring (private). Let’s say you go to the Clear Channel radio Web site to keep up with the latest music, to MSNBC’s site to keep tabs on the election, and to NationalGeographic.com to see the “photo of the day.” McLean-based Clearspring simplifies the process with its network of digital-information suitcases called widgets, which easily allow you to put content you care about on your personal home page or blog, where the information is automatically updated. The technology also lets your friends add these bits of news and information to their own blogs or social-networking sites in seconds.
Because content providers can sell ads or advertise their own products and services, the widget network allows an advertiser’s message to spread across the Web, creates a channel for marketers to engage in continuous conversations with consumers, and lets users establish themselves as advocates for their favorite products, movies, TV shows, and brands.
Users pay no fee for the service. Fees are paid by publishers such as CBS, Turner Broadcasting, and NBC Universal as well as advertisers including Snickers and Honda that use widgets as a brand-building tool geared to targeted audiences whose interests are determined based on the content channeled to their personal sites. The company also partners with such social Web sites as MySpace, iGoogle, Blogger, Digg, and Facebook on which widgets can be pasted with one click. CEO Hooman Radfar believes that his company is pushing the next generation of the Web.
ManTech (Nasdaq: MANT). When George Pedersen cofounded ManTech in 1968, its missions for the Navy were to develop computer simulation to track Soviet submarines and create ways of deploying US submarines so they were undetectable. Today Fairfax-based ManTech is a public company with 7,400 employees in 40 countries, but its missions still have to do with defending America. ManTech doesn’t manufacture products—its highly technical, security-cleared workforce puts together software and technology packages to solve tough problems that the Pentagon, intelligence community, and other government agencies throw its way, nearly all of them classified.
Much of the company’s work has to do with secure communications, such as exchanging information among embassies and getting timely information from headquarters to troops on the ground, and what Pedersen describes as forensic analysis—determining how someone could intercept a transmission, detecting that interception, and foiling it. Pedersen calls the company a think tank, but the wars on terrorism and drugs are big business. In 2002, when ManTech went public, its annual revenue was $500 million. This year it anticipates revenue of $1.8 billion; the stock reflects that growth, having appreciated by 60 percent in the last 12 months and 20 percent in the year to date.
MiddleBrook Pharmaceuticals (Nasdaq: MBRK). Dr. Ed Rudnic was puzzled by the reaction of bacteria to antibiotics—he wondered if the drugs would work better if the timing of their delivery was altered. Seeking an answer had value, so he founded MiddleBrook Pharmaceuticals in Germantown to do just that.
The accepted treatment for strep throat was to take penicillin every six hours. Rudnic thought there might be periods during the day that the bacteria were not affected by the antibiotic, so MiddleBrook developed a once-a-day treatment that released the drug in bursts throughout the day. In 2000 the company found that bacteria exposed to antibiotics in sequential bursts or pulses were killed more efficiently than those exposed to the standard regimen. But the first clinical trials of the delivery system in 2006 failed; Rudnic was forced to lay off employees. Convinced that it was on the right track, the company plowed on, eventually determining that the trial’s failure was caused by treating the bacteria over seven days rather than the typical ten.
Early this year, the FDA approved MiddleBrook’s once-a-day Amoxicillin. MiddleBrook had previously purchased Keflex—used to treat skin, respiratory, ear, and other infections—from Eli Lilly. The company remains convinced that a portfolio of drugs can be developed based on its finding that its pulsed-delivery system is more effective in killing bacteria.
NinjaTickets.com (private). Forget StubHub or Ticketmaster—if you want the cheapest ticket to an event, go to NinjaTickets.com. The Potomac company’s software mines the Internet for tickets to events and rates them by desirability, allowing you to see and buy the least expensive best seat available.
NinjaTickets currently scans the top six online ticket stores—eBay shortly will be the seventh—for the information. It soon will be able to scan an even deeper database, but the service is already impressive for a company launched last October with funding from family and friends and whose legal work was done by the grandfather and parents of one of the founders.
Twentysomethings Cliff Mark and Dan Marsh created NinjaTickets to take advantage of what they saw as an inefficient Internet marketplace that provided no practical way of comparing tickets. More than $16 billion worth of tickets a year is available on NinjaTickets now, and the company expects that amount to double in the next year as tickets from auctions, classified ads, and other sources are added.
The name NinjaTickets was conceived in an Eastern Shore swimming pool and, Mark confesses, seemed so bad that it would be impossible to forget.
Novavax (Nasdaq: NVAX). In August 2005 when Rahul Singhvi took over as CEO, Novavax stock was trading at
Buried inside the Malvern, Pennsylvania, company was a hidden asset being tested in Rockville—a vaccine technology called Virus-Like Particle, or VLP. With this technology, the company could create a mimicking version of a particular virus that could be used as a vaccine to trigger an immune response without giving the recipient the disease, thus protecting the person from future infection. The company has two VLP-based vaccines, one to treat the pandemic influenza virus and another to treat the seasonal flu virus. The pandemic-flu vaccine is in a Phase II clinical trial, and the seasonal-flu vaccine will enter Phase II trials this year.
The company, now based in Rockville, is also working to develop a vaccine for shingles and for another major infectious disease it can’t yet disclose. The infrastructure and equipment for producing such vaccines normally is expensive, but Novavax, with $5 million worth of off-the-shelf machinery developed by GE Healthcare, has replicated a production line that could have cost $100 million.
ObjectVideo (private). Raul Fernandez, the wunderkind who founded Proxicom, the Internet service firm he sold to Dimension Data, is now running ObjectVideo, a software company that makes surveillance cameras smarter. The software was developed by the Defense Advanced Research Projects Agency, the research-and-development arm of the Defense Department, and is used by the government to monitor the northern border of the United States. The software uses information recorded on cameras to alert users to suspicious activities.
Reston-based ObjectVideo has expanded its commercial use to monitoring entryways, property boundaries, school grounds, rooftops, doors, and delivery and loading areas. The analytic software can be programmed to trigger a reaction based on specific unwanted behavior, and that intelligence can be sent anywhere. The video-surveillance technology costs less than human security. ObjectVideo doesn’t make the camera or other hardware, only the software. Currently, 24 camera manufacturers use ObjectVideo software in cameras in airports, banks, power plants, and industrial facilities all over the world; a third of the software is sold in Asia.
SquareLoop (private). Soon after a Scud missile was launched during the first Gulf War, the military pretty much knew the target it was headed for. What US forces lacked was the ability to warn soldiers in that area without revealing their location to the enemy. Mitre Corporation has developed technology that can geographically target text messages. With this targeted-messaging technology, the military can warn only those at risk without revealing their location. Reston-based SquareLoop has licensed this technology for civilian use.
Among SquareLoop’s customers is an insurance company that will provide its customers with precise traffic reporting—so drivers on I-66, say, can be warned of accidents directly ahead. Restaurants could advise nearby drivers that tables are available for the 6:30 seating. Students in a building targeted by a gunman could be warned and given safety instructions. Firefighters downwind from a toxic draft can be alerted, while firefighters elsewhere receive a different message.
SquareLoop’s messaging technology doesn’t track people; it sends messages to geographically targeted mobile phones and other handheld devices, locating them via cell towers. CEO Tom Stroup says the company provides e-mail and voicemail alerts in partnership with other companies. SquareLoop messages have no character limits and can even include pictures. Police could receive a suspect’s photograph with a warning to be on the lookout for him. Because messages are encrypted, healthcare workers could be sent the confidential medical records of accident victims on the way to the hospital.
SureScripts (private). Created and owned by the two trade groups that represent chain and independent pharmacies, SureScripts aims to eliminate paper in the prescription process. The Institute of Medicine believes that electronic prescriptions will reduce the 7,000 deaths and 1.5 million injuries caused each year by medication errors—some the result of physicians’ poor handwriting, some of drug names that look or sound similar, and some of the prescribing physician’s being unaware of other drugs the patient is taking.
Alexandria-based SureScripts runs the network that carries e-prescriptions from the physician’s computer to the pharmacy’s and allows the sharing of prescription and insurance information so doctors can determine which medication is best for the patient. Pharmacies pay a fee for each prescription routed over the network.
SureScripts believes electronic prescriptions also reduce costs, noting that the Henry Ford Health System in Michigan has saved millions of dollars since it began using e-prescriptions by increasing the use of generics and reducing administrative costs. E-prescriptions reduce paperwork in doctor’s offices. And with patient consent, the secure electronic network provides physicians with information about drug costs, whether a generic exists, and other medications that have been prescribed to the patient.
E-prescribing has grown from 700,000 prescriptions in 2004 to a projected 100 million this year. A stumbling block to its use is that controlled substances such as the painkiller Vicodin are not eligible and many prescribers refuse to deal with two different processes, both paper and electronic. Maryland has consistently been among the nation’s top e-prescribing states, and the practice is spreading rapidly in Virginia and the District.
TNS (Nasdaq: TNSI). TNS was created in the early 1990s to transmit credit-card transactions for authorization. The company lumbered along until founder Jack McDonnell realized that the secure high-speed data-communications network he’d built had other uses. Today the company has four divisions able to move money, voice, and information in real time around the world.
Reston-based TNS still provides services to the point-of-sale card-processing industry. The financial-service division, started in 1997, provides communications links between financial-service companies, for which speed is of the essence because markets react to information instantaneously. The telecom service division, among other tasks, passes calls made on cable systems to phone-company customers. Providing these same services, the company’s international division accounts for 44 percent of TNS’s profits and is growing at 15 percent a year. CEO Henry Graham attributes the higher margins on international sales to customers’ preference for reliability and service over savings. Overall, TNS’s gross margins for the first quarter of 2008 were 52 percent—up by 5 percent from a year ago, causing TNS stock to double over the same period.
Trex (NYSE: TWP). Although Trex has a world-class product, employs perhaps the best distribution system in the building-products industry, and is, like Xerox, a brand that has become a generic term for wood-alternative decking, its stock performance has been lousy. From a 12-month high of $22.40, the stock tumbled to $5.34.
Six months ago, turnaround veteran Ron Kaplan was brought in to fix that situation. He has reduced overhead, slimmed management, increased output (producing more with less, he says), and addressed quality issues, in part by spending $50 million to improve Trex products to “best in class” among wood-alternative decking. If it all works out, Kaplan will have produced one of the most dramatic turnarounds in area business history.Kaplan says one reason he took the job was because he knew the product. His own home “has the largest and most beautiful Trex deck in central Pennsylvania,” he says. Trex’s composite planking is made from recycled plastic grocery bags and sawdust. Seven of every ten plastic bags recycled through in-store collection programs wind up in a Trex deck, fence, or other outdoor-living product. Because competitors use more-expensive polyethylene pellets, Kaplan says, Trex is the low-cost producer and more environmentally friendly. Won’t the tumble in new-housing starts hurt sales? Kaplan says only 13 to 15 percent of the Winchester-based company’s sales is to homebuilders. The rest is to remodelers and homeowners replacing some of America’s 40 million existing decks. Kaplan says 15 percent of wooden decks are replaced with wood alternatives, and Trex owns 35 percent of that market.
Update: One Year Later
Here’s a glance at how the companies featured in last year’s “Hot Stocks” article have performed.
Areva (Nasdaq: ARVCF) signed the biggest contract in the history of nuclear power—8 billion euros to build two new reactors in China. It also announced plans to build and operate a $2-billion uranium-enrichment facility in the United States and applied for approval of its European nuclear-plant design to be able to build in the States. The stock climbed by 15 percent.
AvalonBay Communities (NYSE: AVB) saw its share price decline by 32 percent, but business is booming as the collapse of home prices sends people to the apartments the company builds and rents. Occupancy remains at a high 97 percent, and the average monthly rent in the company’s 53,000 apartments in the high-cost cities of Washington, New York, San Francisco, and Seattle is $1,800.
Cogent Communications Group (Nasdaq: CCOI) expanded into the Detroit, Omaha, Des Moines, and Providence markets and internationally into Hungary, Romania, Finland, Bulgaria, and Ukraine. The telecom-company stock, which declined by 27 percent in price, is 80 percent owned by mutual funds, including Fidelity (15 percent), Morgan Stanley (14 percent), and T. Rowe Price (11 percent).
Corporate Office Properties Trust (NYSE: OFC). Tarred by the real-estate slump, this REIT that focuses on leasing specialized secure buildings to the federal government saw its shares decline by 17 percent. Still, 2007 was its tenth consecutive year of dividend increases, and the company saw a 13-percent revenue increase. It also bought 57 buildings for $378 million. Its five-year total shareholder return places it in the top five of all office REITs.
Interstate Hotels & Resorts (NYSE: IHR), alone and in partnership with other firms, acquired hotel properties and moved into hotel management in India. The strategy hasn’t helped the stock price, which is down by 30 percent since last May.
Iomai (Nasdaq: IOMI), a Gaithersburg company that made vaccine-delivery skin patches, is scheduled to be bought, pending shareholder approval, for $189 million by the Austrian company Intercell AG. That works out to $6.60 a share, up by about $4.60 from the share price a year ago.
Neuralstem (AMEX: CUR) and other biotech companies are pressing the FDA for approval of clinical trials for the first generation of stem-cell-derived drugs as the contentious debate over embryonic-stem-cell research continues. Its share price fell by 48 percent.
RCN (Nasdaq: RCNI) saw its stock lose more than half its value, falling from $26 to $12, though shareholders received a special dividend of $9.33. The Herndon telecommunications company completed the acquisition of Neon Communications for $255 million, further expanding its customer base.
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