With the IBO Laboratory Instrumentation and Consumables Stock Indexes up over 20% for the second year in a row, it would seem that one would only have had to throw darts at the list of our industry equities to easily come up with winners. Alas that was not the case for our stock picks for 2007, although overall our group of five picks performed well (up 21%). Our selections of Waters (up 61%) and QIAGEN (up 39%) were quite rewarding, as investors rallied behind their impressive revenues and profit growth during the year. New product introductions and acquisitions, especially for QIAGEN, contributed to a stellar performance.
However, the other three picks were a disappointment. Applied Biosystems (down 8%) failed to charm investors because of its uneven performance during the calendar year, as well as the competitive challenges the company is facing in its sequencing and mass spectrometry businesses. Spectris (down 13%) and Tecan (down 10%) underperformed partly because of their poor sector performance (process and lab automation), but also, as European-based firms, their performance was hurt by the weak dollar.
Making picks for 2008 is even more difficult than last years because of the great uncertainty in the market and because many firms finished the year on a high that will be difficult to repeat. Similarly, some firms performed badly in 2007 and may not yet be considered hot prospects. As is our standard practice, we looked for equities with strong fundamentals. These would include companies that exhibit sharp strategic focus and have the potential for operational effectiveness based on enhanced profitability of operations, innovative product introductions and an emphasis on growth markets, both geographic and end-user. A strong management team and organizational stability, coupled with a global distribution network, were also important considerations. A company’s appreciation of the proper role of acquisitions in growth initiatives is also viewed positively. And lastly, we cannot overlook various technical factors, such as the company’s price to earnings ratio and last year’s growth or lack thereof. Similar to last year, we have selected five top performers from our various equity categories. However, we have limited our consideration to the larger firms, those with a market cap of more than $500 million.
While no company perfectly matches all of our criteria, a few come close and these include Affymetrix, Bio-Rad Laboratories, FEI, Sartorius AG and Varian. All of these firms have a stake in life science applications and are market leaders in one or more technology categories. All five are acknowledged technology innovators. Recent acquisitions, new product introductions and aggressive competitive efforts suggest that customers and investors will like what they see. Both Bio-Rad and Varian finished the year on a high note, but the others are poised to come roaring back in 2008 with above-average stock appreciation.