Bear necessity: the winner of our stock-contest eked out a 0.6% gain. Not bad. Most of our pickers saw double-digit declines.

• Author: Maley, Frank
• Position: Feature

The question was bound to cause a little discomfort: What happened to those stocks that you said last year were winners? George Shipp's response, though tinged with humor, seemed to erupt from some long-simmering volcano of hurt. "Onnhhh! Onnhhh! Don't talk about last year! Talk about the year before."

His nostalgia for 2001 is understandable. That's when Shipp, chief investment officer for Scott & Stringfellow in Virginia Beach, Va., bested the other experts in BUSINESS NORTH CAROLINA'S annual stock-picking contest. Each panelist chooses three stocks he thinks will produce the biggest average price gain over the subsequent 52 weeks. For the period that ended in October 2001, each of Shipp's selections posted double-digit returns, despite corporate uncertainty that followed the Sept. 11, 2001, terrorist attacks. His portfolio provided a 36.6% average return. In fact, five of our seven panelists finished in the money.

This time around, however, the mighty fell mighty hard. The Federal Reserve whittled the federal funds rate to 1.25%, a 43-year low, yet that did little to stimulate the stock market. The Dow Jones industrial average dropped 10% from October 2001 to October 2002, and the S&P 500 fell 18%. Only one panelist, Frank Jolley of Jolley Asset Management in Rocky Mount, eked out a positive return -- 0.6% for the 52-week period that ended Oct. 18. Shipp's picks -- Duke Energy, MedCath and Capital Bank -- placed him sixth among the seven panelists, with a 16.6% loss on his make-believe portfolio.

The only panelist to finish lower than Shipp, Wes Sutton of Deutsche Banc Alex. Brown in Winston-Salem, explained the carnage by paraphrasing Norm Peterson, a character on the television sitcom Cheers. "It's a dog-eat-dog world, and we've been wearing Milk Bone underwear for the last 2 1/2 years." Shipp and Sutton beat a bingo machine that randomly coughed up balls bearing numbers corresponding to the tickers of North Carolina stocks, but Shipp, for one, wouldn't be consoled. "The machine ought to be embarrassed, too," he quipped.

To be fair, Shipp's picks didn't seem weird or risky when he made them. In fact, the stock of Capital Bank gained 35%, more than any other panelist pick. And MedCath, which builds and runs heart hospitals, netted $1 million in 2001 -- after three straight years of losses -- and boosted its net to $24 million for the fiscal year that ended in September. Still, shares fell 33%. "It's a little bit below the radar screen," Shipp says. "They had an excellent year. They exceeded expectations, but the stock went down a lot anyway. So we decided to pick it again."

He was one of three panelists who picked energy giant Duke last year, only to watch its split-adjusted price sink to seven-year lows, battered by accusations that the company underreported earnings to keep its regulated power rates up, gouged customers in California and inflated revenue through wash trades--selling, then quickly buying back energy at the same price. Perhaps more important, the company revealed in July that net income, which had averaged 18% growth over the previous four years, would likely stagnate in 2002.

Jolley, this year's winner, got burned by Quintiles, the drug researcher that he figured had nowhere to go but up from the $15 at which it was trading in October 2001, but he got a positive return out of insurance giant Jefferson-Pilot and scored big with Coca-Cola Bottling Company Consolidated. Jolley saw that Coke Consolidated's debt was dropping, partly because Fed rate cuts were working some magic on its floating-rate debt and partly because it hadn't done a cash-eating major acquisition in a while. He also had learned of an accounting rule change that would have an impressive, if cosmetic, effect on earnings.

This year, the reigning champ likes last year's big disappointment, Duke, figuring it's still a solid dividend-paying company that will put its troubles behind it before another year rolls around. His dark horse is cable maker CommScope, but not because he sees blue skies ahead for the struggling telecommunications industry. "It's cheap, and they generate positive in the next three to six months out of CommScope. I'm really just looking at it as a depressed issue."

In previous years, panelists often took a shine to banks. In October 2001, four different banks were among the picks, and were rewarded with double-digit price gains on each. This time, most panelists are withdrawing their optimism. "Interest rates are now so low that it's going to be hard for net interest margins to get any better for the banks," Shipp says. "The banks now need some commercial-loan demand, which is certainly spotty, and they need for their loan quality overall to improve."

Another panelist, Bobby Edgerton of Capital Investment Counsel in Raleigh, worries about debt levels in the banking industry. "The tendency during the good times is to expand and take on debt. That's what happened to WorldCom and Tyco and Enron. Things were so good, they just kept expanding their debt. To me, that's what banks have done."

This year, only Jolley and Stuart Vaughn of Greensboro-based McMillion Capital Management put a bank in their portfolios. Both of them chose Wachovia. Jolley thinks it can still wring some savings from its 2001 merger with First Union. "If the environment remains tough, they can cut costs out, where other banks aren't going to be able to do that."

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