2000: the year in review

By Staff -- Industrial Distribution, 2/1/2001

Last year started off with the dot-com rage. Anything with an Internet strategy saw significant price appreciation, as evidenced by the NASDAQ topping out in March at 5,132, a 26 percent return in just over three months. W.W. Grainger, with its array of Internet strategies, also rose significantly, increasing 19 percent by the end of March.

However, as investors started to question the valuations of many technology initiatives, the NASDAQ collapsed and ended the year at 2,471, 52 percent off its March highs and down 39 percent for the year. At the same time, Grainger fell as much as 57 percent from its high and finished the year down 24 percent. Although the Dow and S & P 500 faired much better, they were negatively impacted by the technology sell-off and a slowing economy.

Unfortunately, industrial distributors were not immune to poor market conditions and the Fed's efforts to slow the economy, as evidenced by the ID/Baird Index finishing 2000 down 16 percent. Although the technology crash didn't help distributors' stock price, the main reason for poor performance within the group can be attributed to the slowing economy. Many indicators point to a slowdown, including GDP recently registering its slowest quarter in four years, the National Assn. of Purchasing Management index below the crucial 50 mark for several consecutive months, and declining leading indicators and industrial production.

Despite these negatives, several distributors saw price appreciation late in 2000 as investors transferred money out of technology issues and into more stable, undervalued business models like distribution. Companies like Fastenal, MSC and Grainger rose 19, 23 and 60 percent respectively from November 17 through December 5-despite the NASDAQ falling five percent and the Dow and S & P 500 rising three and one percent respectively during the same time period.

Despite the outlook for a slowing economy, we remain encouraged about the prospects for distributors in 2001. In fact, many of the top distributors look at economic slowdowns as a chance to pick up market share from weaker competitors. Additionally, construction spending seems to be holding, fuel costs are subsiding, and the Fed has loosened its monetary tightening bias.

David J. Manthey, CFA, is a research analyst with R.W. Baird & Co., Milwaukee, Wis. He can be reached at (414) 765-3774 or e-mailed at dmanthey@rwbaird.com.