Knowing Gazelle Behavior

There is big money to be made in those fast-growing companies known as “gazelles,” but oh, the risk. Indeed, finding the right gazelle to bet on can be just as much of a gamble as picking a winner at Santa Anita.

Gazelles, a favored term to describe companies growing at 20% or more annually, are on the rise nationwide, with an estimated 250,000 now in existence.

Such companies can be a boon to local economies as well as to investors who put their money on the right gazelle early on--and have the stomach to handle the roller-coaster ride these stocks often take.

“Since the beginning of public markets, there has always been the idea that the higher the risk, the higher the reward,” said business professor Jon P. Goodman, executive director of EC2, a business incubator project affiliated with USC. “Are these gazelles good investments? Absolutely. No question. But I have a high tolerance for that type of risk; other people don’t.”

In the accompanying list, The Times ranks the fastest-growing publicly traded gazelles nationwide in the last 12 months, as measured by sales growth. (A similar list published May 6 in the Times 100 section ranked California-based gazelles for 1996.) The list compares data for the most recent four quarters with the previous four.

Of course, high annual sales growth doesn’t necessarily mean these companies are profitable. Indeed, most of the companies are not profitable now and won’t be for several years. But fast revenue growth can be exciting to Wall Street because sales bursts may indicate a small company is on its way to becoming a big company.

Many such companies are in volatile industries; the bulk here are in communications, biotechnology and computer software. A few are in the energy or real estate industries.

The three gazelles leading the list posted sales growth of more than 3,000%. They are Guilford Pharmaceuticals, a Baltimore-based biotech and drug company; data systems firm Eltrax Systems in Minnetonka, Minn.; and Internet auctioneer Onsale, a Mountain View, Calif., firm.

“Growth doesn’t always mean risk. Obviously you have to look at stock price volatility,” said James B. Cloonan, director of the American Assn. of Individual Investors in Chicago.

Cloonan, who maintains a portfolio of little-followed small companies, advised that often it is these types of companies that can make investors rich.

“Small stocks are the only place where an investor can really find a bargain,” Cloonan said. “Some of these companies that are growing are solid and have good cash positions.”

It’s important for investors to remember, however, that although many gazelles may qualify as bargains, others may turn out to be disasters, if earnings growth never materializes from their rapid sales growth.

What’s more, for much of the past year--at least up until May--smaller stocks in general have been out of favor on Wall Street.

With gazelles, Cloonan cautions against relying too heavily on the numbers--such as stock price-to-book-value ratio (share price divided by the company’s per-share net worth).

“Sometimes I don’t believe in all these ratios, because what you are really buying is the future growth of a company,” he said. “You need to be visionary, in a sense.”

The future looks bright for Guilford Pharmaceuticals, a 4-year-old firm that has seen its sales increase more than 4,000% to $30 million in the most recent four quarters. It is the nation’s fastest-growing gazelle.

Guilford just had its first profitable year, and the company’s stock price has more than doubled from $11 at the end of 1995 to its current $26.25 a share on Nasdaq.

Investors are betting on big success for a Guilford product that delivers site-specific cancer chemotherapy. If a person has a brain tumor removed, the company’s product is left behind in the brain after surgery to administer chemotherapy to surrounding tissue only, not to the entire body.

“There’re many fewer side effects than with traditional chemotherapy,” said Nick Landekic, vice president of business development at Guilford, which has plans to develop similar products to treat other cancers. “The best is yet to come,” he says.

Not surprisingly, that sums up the view of most gazelle managements. Typically, these are technology-driven companies that see a business or consumer need and are first to rush in to fill it.

The second-fastest-growing gazelle on the list is Eltrax Systems, whose primary business is hospital information systems. The company is growing through acquisitions of other profitable data companies, said company President Mack Traynor.

In the last 13 months, Eltrax has acquired five data firms that specialize in “wide-area network” systems, including Datatech, a San Juan Capistrano company, and Techline, based in Agoura Hills. The other firms are in Phoenix, Cleveland and Raleigh, N.C.

“We clearly have a consolidation strategy. We will continue to grow until we have a national presence,” Traynor said.

Gazelles can spring up anywhere, of course, but the greatest number have been born in California, Arizona and Texas, with California home to nine of the 20 fastest-growing on the list.

The top-ranked California entry is Onsale, which conducts auctions over the Internet 24 hours a day. These are primarily auctions of computers and electronic products, though other items--such as Omaha steaks--have been sold this way too.

Sort of a Home Shopping Network for computer geeks, Onsale has seen its annualized sales jump more than 3,500% to $7.2 million. Onsale has one of the few Web sites that is profitable.

The company was the first to go public among those whose primary business is a Web auction site. Onsale offered shares at $6 apiece in April; the stock closed at $8.375 on Nasdaq on Monday.

Other California companies on the list include San Francisco-based Meridian Industrial Trust ($23.50 on Monday on the New York Stock Exchange), a real estate investment trust that owns, acquires and manages industrial buildings nationwide; NetVantage ($7.75, Nasdaq), an El Segundo maker of switching devices for computer network systems; and Los Angeles-based SmarTalk ($15.25, Nasdaq), which sells prepaid phone cards.

Besides potentially being attractive investments, gazelles help boost the economy and give credence to the American idea that all things are indeed possible through hard work, gumption and some good ideas, said business professor Goodman.

“They have two fundamental purposes to an economy. One, they create jobs. And two, they create other companies,” Goodman said.

“These types of companies also create hope, the fueling of the fundamental belief that in America all things are possible. That’s the fundamental driver not only of our economy but our quality of life.”

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Fleet-Footed Small Companies

Fast revenue growth in a small company can be exciting for Wall Street--not that the excitement will last. Here are the fastest-growing companies among those with annualized sales of $10 million to $50 million. Despite the rapid sales growth, stocks of many of these companies--known as gazelles--have fallen in price this year, as investors have soured on smaller stocks. Many of these companies are still showing negative earnings per share (EPS) and won’t be profitable for several years.

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Rank company/ One-year One-year Monday YTD Ticker symbol/ sales sales in stock % price Industry description growth* millions close change 1. Guilford Pharmaceuticals GLFD Biotechn. & drugs 4,234% $30.2 $26.25 12.9% 2. Eltrax Systems ELTX Computer networks 3,836 37.9 6.69 2.9 3. Onsale ONSL Retail (technology) 3,527 26.0 8.38 ** 4. Magnum Hunter Rescs. MHR Oil & gas operations 2,417 16.3 6.19 39.4 5. Edison Control EDCO Electronic instr. and controls 1,625 13.7 3.63 -19.4 6. NetVantage NETVA Electronic Instr. and controls 1,525 28.9 7.75 -13.9 7. SmarTalk TeleServices SMTK Communications svcs. 1,236 21.3 15.25 -10.3 8. Sonus Pharmaceuticals SNUS Biotechn. & drugs 1,231 21.3 28.25 -5.0 9. Extended Stay America STAY Hotels & motels 1,212 26.9 15.25 -24.2 10. Meridian Industrial Trust MDN Real estate operations 1,083 43.3 23.50 11.9 11. Cycomm International CYI Communications eqpmt. 1,042 16.0 2.88 -6.1 12. Applied Cellular Techn. ACTC Software & programming 999 36.8 3.63 -30.1 13. Gilead Scis. GILD Biotechn. & drugs 995 38.1 31.38 25.5 14. EarthLink Network ELNK Software & programming 973 32.5 13.00** -4.49 15. Greenbriar GBR Health-care facilities 972 38.7 23.00 64.3 16. Titan Exploration TEXP Oil & gas, integrated 802 38.7 9.38 -21.9 17. Excite XCIT Computer svcs. 798 20.9 12.88 25.6 18. Yahoo YHOO Computer svcs. 767 26.9 37.00 117.7 19. Wireless One WIRL Broadcasting & cable TV 729 17.5 3.00 -54.7 20. BroadVision BVSN Software & programming 662 14.8 7.75 -1.6 21. American Communications ACNS Communications svcs. 661 16.7 7.38 -31.4 22. Triathlon Broadcasting TBCOA Broadcasting & cable TV 612 22.6 7.00 -13.9 23. Open Market OMKT Software & programming 609 31.2 11.25 -16.7 24. Infoseek SEEK Computer svcs. 607 19.5 5.38 30.7 25. MindSpring Enterprises MSPG Computer networks 575 26.1 11.06 80.6 26. Lycos LCOS Computer svcs. 561 17.2 11.38 8.3 27. Sequus Pharmaceuticals SEQU Biotechn. & drugs 554 36.8 6.28 -60.7 28. Atrix Laboratories ATRX Biotechn. & drugs 550 10.4 10.75 0.0 29. Hospitality Worldwide Svcs ROOM Furniture & fixtures 481 40.6 7.63 13.0 30. Inland Resources INLN Oil & gas operations 474 13.6 8.50 1.5 31. United Intl. Hldgs UIHIA Communications svcs. 463 15.8 11.25 -8.2 32. Southern Mineral SMIN Oil & gas operations 430 12.5 5.13 -12.8 33. Intek Diversified IDCC Communications svcs. 414 19.2 2.00 -60.6 34. United Payors & Providers UPUP Business svcs. 396 41.6 13.75 0.0 35. CyberMedia CYBR Software & programming 383 49.0 18.88 19.8 36. Metal Management MTLM Computer peripherals 380 41.4 13.00 235.5 37. Monterey Homes MTH Real estate operations 375 14.7 7.75 3.3 38. Neurocrine Biosciences NBIX Biotechn. & drugs 370 25.9 9.38 -6.3 39. AccelGraphics ACCL Computer networks 369 28.1 5.00 ** 40. Brandywine Realty Trust BDN Real estate operations 364 17.6 20.75 32.7 41. ESC Medical Systems ESCMF Medical eqpmt. & suppl. 360 25.0 24.25 -4.9 42. Acres Gaming AGAM Office eqpmt. 350 18.6 7.88 28.4 43. Delia’s DLIA Retail (catalog and mail order) 348 39.4 21.63 8.8 44. Gothic Energy GOTH Oil & gas operations 337 16.0 1.95 -17.8 45. Hector Communications HCCO Communications svcs. 318 25.9 8.88 22.4 46. Assisted Living Concepts ALF Health-care facilities 314 25.4 27.50 80.3 47. Cellular Technical Svcs. CTSC Software & programming 300 37.5 10.50 -47.5 48. WavePhore WAVO Communications eqpmt. 299 18.7 8.25 20.0 49. C/Net CNWK Computer svcs. 278 19.5 27.13 -6.5 50. Advanced Tissue Scis. ATIS Biotechn. & drugs 277 18.4 11.31 18.3

Rank Trailing one-year EPS 1. $0.13 2. -0.20 3. 0.03 4. 0.02 5. -0.35 6. -2.36 7. -0.25 8. 0.84 9. 0.08 10. 1.51 11. -1.74 12. 0.22 13. -0.64 14. 15. -0.80 16. -0.03 17. -3.85 18. -0.08 19. -3.24 20. -0.56 21. -10.19 22. -1.23 23. -2.09 24. -0.97 25. -1.48 26. -0.60 27. -0.64 28. -0.42 29. 0.32 30. 0.50 31. -2.21 32. 0.36 33. -0.83 34. 1.05 35. -0.21 36. -0.20 37. 0.13 38. 0.56 39. 0.07 40. -0.12 41. 0.31 42. 0.24 43. 0.27 44. 0.08 45. 0.37 46. 0.18 47. -0.03 48. -0.76 49. -2.09 50. -0.62

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Note: All data except stock prices are as of June 20. Companies traded on major exchanges surveyed. Industry descriptions by Market Guide. For more information on Market Guide, go to https://www.marketguide.com

* One-year data is for the most recently available four quarters. Growth is compared with previous four quarters.

**IPO after Jan. 1

Sources: Market Guide; Bloomberg News