This year's bottom is truly a bust.
One year after besting the Star Tribune 100 in growth and profitability, Minnesota's 50 smallest public companies -- we call them the Bottom 50 -- struggled mightily last year against a weak economy, tight credit and volatile markets.
Profit from the Bottom 50 -- public companies that have sales of $34.7 million to $584.4 million -- plunged 84 percent, to $19.4 million. While collective sales rose 8.4 percent, the group lagged behind the ST100 (up 9.8 percent). And all of this excludes MoneyGram International Inc. (No. 68), whose exposure to bad investments in subprime mortgages resulted in a whopping $1 billion loss.
Overall, 36 of the Bottom 50 companies saw their market values fall in 2007 -- 34 of those dropped in double digits. Notable losers include Wilsons the Leather Experts Inc. (No. 60) and Buca Inc. (No. 62), two retail chains mired in endless restructuring and executive turnover.
None of this surprises Richard Perkins, president of Wayzata-based Perkins Capital Management, which manages the Perkins Discovery Fund. When the economy gets rough, investors tend to flee riskier small-cap stocks toward the relative stability of larger corporations. Smaller companies are also thinly traded, making them more susceptible to market swings, he said.
"You get that whipsaw," Perkins said. "On the way down, they go down faster. When the bottom is reached, they go up faster."
Not everyone in the Bottom 50 made out poorly. Buffalo Wild Wings Inc. (No. 58) continued to post solid growth in sales and profitability.
And investors flocked to online university Capella Education Co. (No. 64), pushing its market value up 74.2 percent, to $931.4 million; the company raised $84 million in its initial public offering in 2006. Dolan Media Co. (No. 70), Compellent Technologies (No. 94) and Virtual Radiologic Corp. (No. 79) also had successful IPOs in 2007.
Possis Medical Inc. (No. 85) and Lifecore Biomedical Inc. (No. 86) were recently sold for $361 million and $239 million in cash, respectively.
High CEO turnover
The rest of the Bottom 50 should only be so lucky. When the economy turns sour (many economists believe the United States is already in a recession), consumers spend less.
For retailers, two things tend to happen: Stores close and CEOs leave. Christopher & Banks Corp. (No. 51), Lenox Group Inc. (No. 54), Wilsons, Caribou Coffee Co. Inc. (No. 61), Buca and Famous Dave's of America Inc. (No. 71) all have seen CEOs resign over the past year or so.
Wilsons Chief Executive Michael Searles' departure this month came as the Brooklyn Park-based specialty retailer is attempting to resuscitate its stock, which is trading at about 25 cents a share.
By the end of May, Wilsons will close as many as 160 of its mall stores. The 100 remaining stores will be turned into accessories stores called Studio, as the company abandons its name and its once-strong reputation as a seller of leather coats.
Restaurants in particular have been hit hard. Food retailers face not only a slowdown in traffic, as consumers eat at home more to save money, but also rising commodity costs.
"It doesn't matter if you are a small or big restaurant chain when consumers don't have as much discretionary income," said Nicole Miller Regan, an analyst with Minneapolis-based Piper Jaffray & Companies. But "smaller companies will be hurt disproportionately, because of a lack of liquidity. They are not going to be as well held."
In January, Buca Chief Executive Wallace Doolin stepped down after the company reported a 10 percent drop in fourth-quarter revenue. Sales at restaurants open at least a year declined 2.4 percent for the quarter, ending a streak of 12 consecutive quarters of gains.
For the year, comparable sales grew only 0.7 percent and revenue fell 3.3 percent, to $245.6 million. Buca is exploring strategic options, including a sale.
Caribou Chief Executive Michael Coles departed in November. The company, which more than doubled its stores under Coles, has not turned a profit since 2002. The stock, which traded at $14 a share when the company went public in 2005, now goes for less than the price of its strawberry banana smoothies (about $2.75 a share).
The company closed 28 stores last year, and plans a similar number of closures for 2008, trimming the weaker stores and exiting some markets entirely. Nebraska saw all four of its stores close.
CEO departures are not limited to retailers. Medical device maker EV3 Inc. (No. 59) ousted Chief Executive James Corbett this month, as the company continues to struggle with integrating its acquisition of FoxHollow Technologies Inc., which it acquired in October for $780 million.
EV3 also said first-quarter sales are expected to be about $101.3 million, about 5 percent below its earlier estimate of $107 million. The company said it is likely to lower its annual profit forecast next month. It has already done so twice in the past six months.
In January, Vital Images Inc. (No. 87) CEO Jay Miller resigned, after a year that included two missed earnings forecasts, a yearlong 50 percent decline in the company's stock price and an industrywide sales slowdown. The company makes software that analyzes CT scans.
Bottom of the barrel
But no Bottom 50 company could outdo MoneyGram in sheer ferocity of loss and misfortune.
So far, St. Louis Park-based MoneyGram, the nation's second-largest money transfer firm, lost a staggering $1.6 billion on bad bets on securities linked to subprime mortgages. The Securities and Exchange Commission recently launched an investigation to determine whether MoneyGram properly disclosed its exposure to investors.
Last month, the company reported a fourth-quarter loss of $1.17 billion, or $14.18 a share, largely because of bad investments. A year earlier, MoneyGram posted a fourth-quarter profit of $26.4 million, or 31 cents a share.
As a result, the company sold a majority stake to Thomas H. Lee Partners and Goldman Sachs Group. MoneyGram now trades at less than $2 a share, compared with the $30 a share it commanded last summer.
With the economy likely to sputter for the rest of the year and into 2009, the Bottom 50's prospects don't look promising. But at least they had a good run; over the past five years, the Russell 2000 index of small-cap stocks generated a total return of 100.65 percent, vs. 70.9 percent for the S&P 500 index.
"When [small caps] are good, they are really good," the Discovery Fund's Perkins said. "When they are bad, they are horrible."
Thomas Lee • 612-673-7744