After beating the S&P 500 for five years straight, the Star Tribune 100 couldn't keep the pace last year despite strong sales and profits.

A good performance, but only polite applause.

Minnesota's biggest companies boosted overall sales and profits in double digits last year, but investors were not impressed. The market value of the 100 companies that make up the Star Tribune 100 rose just 2.5 percent in the past 12 months, far slower than the 9.3 percent growth of the Standard & Poor's 500, and it also trailed most other major indexes.

It was the first time in five years that the Star Tribune 100 trailed the S&P 500. Ninety of the 100 companies delivered higher sales in 2006 than 2005; 75 posted profits and 72 added jobs -- but only 54 saw their market values rise.

Medical device giant Medtronic Inc. illustrates the disconnect: Sales rose nearly 10 percent and profits jumped nearly 39 percent. But market capitalization (that's the share price multiplied by the number of shares outstanding) dropped 13 percent as investors shaved $8.6 billion in market value off the company. And Medtronic was not alone. It was the same story at 3M, Best Buy and ADC Telecommunications.

What's gives? Several factors explain the valuation gap, and geology -- not geography -- is perhaps the biggest.

"We just weren't Texas last year," said Michael Swanson, senior economist at the Minneapolis office of Wells Fargo & Co. Swanson is referring to the oil patch, where high oil prices boosted the earnings and market values of energy companies last year. High global energy prices largely explain the S&P 500's big gains. Oil giant Exxon Mobil posted the largest annual profit in U.S. history last year ($39.5 billion). The Star Tribune 100 does not contain many companies that benefit from higher commodity prices.

But one exception proves the rule: global fertilizer giant Mosaic Inc., which joined the Star Tribune 100 in 2006. At Mosaic, a Cargill Inc. spinoff, sales dropped 5 percent and earnings sank 67 percent. But the company's market value has doubled in the past 12 months.

The reasons? Higher fertilizer prices on world markets; relatively cheap natural gas prices (a raw material for making fertilizer), and the ethanol boom, which is prompting U.S. farmers to plant a record-size corn crop this spring to cash in on demand for the fuel.

"That's a pretty good combination for profits," Swanson said. "Mosaic is one of the lone companies on the Star Tribune 100 to benefit from a run-up in commodity prices."

Besides geology, Swanson and Christopher Puto, dean of the Opus College of Business at the University of St. Thomas, believe two other factors are in play: the law of averages in general and special controversies in the health care sector, where Minnesota companies have a strong presence.

Swanson said overall valuations on Minnesota companies were due for a breather. "After you have outperformed for five years, that becomes impossible to sustain," he said. Statisticians call it "regressing to the mean." Think of it as economic gravity -- nothing goes up and stays there. The same dynamic is already happening in the energy sector; with oil prices stabilizing -- and alternative fuels increasingly competitive -- it's unlikely that the oil giants will repeat last year's performance.

Our assessment of Minnesota's largest companies reveals a diverse corporate landscape strong in financial services, retail, manufacturing and health care. Minnesota is home to 19 Fortune 500 companies, the second-highest concentration of headquarters firms per capita in the nation, behind Connecticut. These big Minnesota companies, and their high-paying headquarters jobs, have long been significant contributors to the local economy and the state's cultural climate.

In 2006, however, a scandal over backdating options at UnitedHealth Group has already cost the big health insurance provider its longtime CEO, and regulators are still investigating the company. UnitedHealth is the largest company on the Star Tribune 100, measured both by sales and by market value. Although its sales jumped 54 percent, primarily because of acquisitions last year, its market value dropped 6.4 percent, or $4.9 billion.

At Medtronic and St. Jude Medical, meanwhile, past success selling expensive medical devices has slowed considerably, especially heart defibrillators. This comes after several thousand of the $30,000 heart-shocking devices were recalled in 2005 and 2006 in actions by Medtronic and rival Guidant Corp. (now Boston Scientific Corp.) Also, questions about the effectiveness of some widely used devices, such as drug-coated heart stents, have depressed stock prices in that industry.

"The investing public is understandably swayed by the media," Puto said. "This does not mean that these companies are in trouble, but it does mean that they are undervalued."

Where do we go from here?

Three economists interviewed last week by the Star Tribune expect the economy to grow in 2007, but not as fast as it did in 2006, when gross domestic product (GDP) grew 3.3 percent.

Wells Fargo's Swanson said he sees "notable strength" in three Minnesota sectors: health care, financial services and retail.

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