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Stock Analyst Update

Market Value Creators and Destroyers

These firms have created or destroyed the most equity market value in 2002.

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There's no question about it: Regardless of a few brief rallies, 2002 has been another bear market year.

As one might expect in such a grisly--and grizzly, for that matter--market, the value destruction wrought by the 10 stocks that lost the most in market value this year far outdistanced the value created by the 10 stocks that gained the most in dollar terms. (The tables below show the 10 stocks that gained and lost the most, respectively, as measured by their absolute change in equity market capitalization, or the total dollar value of their outstanding shares.) In fact, the combined $77 billion market-value gain of the top 10 stocks amounts to slightly more than half the nearly $140 billion market loss tallied by the worst performer, General Electric (GE).

If the current trend holds, 2002 will complete a hat trick of three losing years for the major market indexes--the first time this will have occurred since the period from 1939 to 1941. Since the indexes peaked in early 2000, a whopping $7 trillion in equity market capitalization has vaporized in the most protracted market contraction since the Great Depression.

 Stocks with the Largest Gains in Market Value

Market Cap
as of 12-17-02
( $ Bil )

Market Cap
as of 12-31-01
( $ Bil )
in %
in $
Procter & Gamble (PG) 113.56 102.52 10.76 11.04
United Parcel Service B (UPS) 71.38 61.44 16.17 9.94
Kraft Foods (KFT) 68.57 59.04 16.13 9.53
Boston Scientific (BSX) 17.36 9.73 78.46 7.63
Nippon Telegraph & Telephone  (NTT) 59.63 52.28 14.07 7.36
Wachovia (WB) 49.78 42.68 16.63 7.10
Washington Mutual (WM) 35.46 28.64 23.79 6.81
Newmont Mining (NEM) 9.76 3.75 160.58 6.02
Nissan Motor (NSANY) 19.61 13.65 43.74 5.97
Wells Fargo (WFC) 79.52 74.15 7.24 5.37

 Stocks with the Largest Losses in Market Value

Market Cap
as of 12-12-02
( $ Bil )

Market Cap
as of 12-31-01
( $ Bil )
in %
in $
General Electric (GE) 258.73 397.89 -34.98 -139.16
Intel (INTC) 118.52 211.09 -43.85 -92.57
Tyco International (TYC) 33.62 117.58 -71.40 -83.96
AOL Time Warner (AOL) 58.08 136.60 -57.48 -78.52
IBM (IBM) 135.73 208.37 -34.86 -72.64
Citigroup (C) 187.76 253.72 -26.00 -65.96
Microsoft (MSFT) 292.39 356.91 -18.08 -64.53
Pfizer (PFE) 187.82 251.56 -25.34 -63.74
Home Depot (HD) 60.55 119.32 -49.26 -58.77
Bristol-Myers Squibb (BMY) 46.74 98.68 -52.63 -51.94

A big reason why the prices of some stocks have plunged is that investors have reacted with understandable disgust to accounting shenanigans, poor management, and a lack of effective corporate governance. Tyco (TYC), which has lost more than $83 billion in market value so far this year, is an example of what happens when management runs amuck. Former CEO Dennis Kozlowski ran Tyco, not for the benefit of Tyco shareholders, but for personal aggrandizement. Along the way, management used accounting gimmickry, and perhaps outright fraud, to boost revenues and profits. Although a number of value-oriented mutual fund managers, such as Bill Miller at Legg Mason Value (LMNVX), have purchased large positions in Tyco, Morningstar analyst Jonathan Schrader points out that Tyco destroys shareholder value because it doesn't generate economic profits above its cost of capital.

General Electric, a stock that lost close to $140 billion in market value, has the dubious distinction of leading the list of equity market capitalization destroyers. Besides investors' worry about the sustainability of GE's earnings growth rate, Schrader highlights the lack of sufficient disclosure at GE--particularly at the sprawling GE Capital unit--which makes it difficult for investors to assess how much risk it's taking on in its investment portfolio. Schrader believes capable managers run GE, but the stock trades above its fair value estimate of $28 per share.

The market decline may have hit technology and telecom companies first, but the bear market's value destruction has become ubiquitous. The top 10 market capitalization losers represent a broad cross section of the market; health care, media, finance, retail, industrial conglomerates, and computer hardware and software are all represented.

The price declines, however, may have been excessive for a couple of the biggest value destroyers, and may create some opportunities for long-term investors. Morningstar analyst Tom Goetzinger contends that Home Depot (HD), which is currently trading at a 25% discount to his fair value estimate of $36 per share, makes a compelling investment. Goetzinger believes CEO Bob Nardelli is successfully transitioning this wide-moat category leader into a slower- growth firm more focused on operating efficiencies and cost control. Morningstar has purchased shares in Home Depot for the Tortoise Portfolio, which is designed for long-term investors who can tolerate volatility. (Note: The Tortoise Portfolio can be found in the Morningstar StockInvestor newsletter.)

Morningstar also has purchased shares in drugmaker Pfizer (PFE), which has lost close to a fourth of its value this year. Todd Lebor, Morningstar's pharmaceutical analyst, thinks this low- risk, wide-moat stock should be a core part of any diversified portfolio, at the right price. Pfizer, whose merger with Pharmacia (PHA) should extend the company's double-digit growth rate a few more years, currently trades about 20% below Lebor's $37 fair value estimate.

The top 10 value creators aren’t quite as diverse as the top 10 value destroyers. Many of the firms showing gains this year are in the consumer products, health care, or financial services industries.

The three companies that created the most equity market value during 2002, Procter & Gamble (PG), United Parcel Service (UPS), and Kraft Foods (KFT), all share some important traits. Most plainly, all three stocks are considered "defensive" because they provide the sorts of basic goods or services people and firms need, even during a recession. All three companies have pursued focused, durable growth strategies, and are led by shareholder-committed CEOs with long tenures at their companies. Strong market positions and good leadership translates into wide economic moats for Procter and UPS, and a narrow moat for Kraft.

Be cautioned, however, that these stocks are expensive because investors have been willing to pay a premium for their stability. With the recent elevation of A.G. Lafley to the CEO post at Procter and the acquisition last year of Clairol, Procter--up 11% this year--has signaled a commitment to pursue growth in the beauty care segment. Morningstar analyst Carl Sibilski’s fair value estimate for Procter & Gamble is $75 per share. Analyst Jonathan Schrader would love to get a stake in UPS’ fantastic delivery network, but the company--up 16% this year--trades above his fair value estimate of $55. Kraft, which also has appreciated 16% this year, is in the same position. Morningstar analyst David Kathman thinks Kraft is realizing cost savings and synergies as a result of its 2000 merger with Nabisco, but even with optimistic growth assumptions, his fair value estimate is $36.

Given the understandable revival of interest in dividend yields, it’s worth taking the time to look at the two highest-yielding stocks on our list, both of which may be decent long-term values. Bristol-Myers Squibb (BMY), which yields about 4.5%, is down more than 50% this year. Analyst Todd Lebor thinks the stock could be worth more than its current fair value estimate of $33 per share, if the investigations into Imclone (IMCL) and Bristol’s revenue reporting don’t turn up any serious wrongdoing, and Bristol's new management team delivers on its growth initiatives. Morningstar analyst Rich McCaffrey points out that Washington Mutual (WM), which yields about 3% and is up over 20% this year, has delivered double-digit revenue and earnings growth across different interest rate environments. McCaffrey’s fair value estimate for the stock is $47 per share.

Matthew Scholz has a position in the following securities mentioned above: PFE. Find out about Morningstar’s editorial policies.