Everything old is new again. In a previous article, "To 'e' or not to 'e'", May 2001, we observed that industrial distributors were struggling with esoteric e-commerce ventures. In late April, W.W. Grainger wrote off MaterialLogic and "new Grainger" became "old Grainger" again. Richard Keyser says "B2B" now stands for "back to basics" at Grainger. A sharp focus on fundamentals and core competencies is back.

Including a recently announced $38 million charge, we estimate that Grainger lost more than $125 million on its digital businesses since the first quarter of '98. Although quarterly losses peaked at $16 million in the second quarter of 2000, eliminating MaterialLogic will erase some $20-25 million in annual operating losses. Grainger's e-business foray not only took their eye off the ball, it cost them real dollars.

What does Wall Street think? The news of the Material Logic write-off was met with at least two immediate upgrades from brokerage firms (including Robert W. Baird & Co.). As of this writing, Grainger's stock is up more than 20 percent since the announcement. Over the same time period, the S&P 500 is up less than four percent.

"Pure plays" and "clean," efficient business models have typically been afforded premium valuations by Wall Street. "The Street," like Grainger, learned its lesson after making a costly jaunt into speculative ventures. Everything old is, indeed, new again.

The stocks in our Industrial Distribution coverage list have heated up over the past month and have performed quite well in general. Grainger (due in large part to factors noted above) led the pack with a 28 percent gain through 5/18/01. Fastenal, with the second-largest market cap on our list, has also done well — up 19 percent. Apparently, as investors "look through" the next couple of quarters, they are gravitating towards industrial distributors with larger market capitalizations.

It will be interesting to see when or if the market gives a lift to stocks with smaller market caps, slower growth rates and more highly leveraged balance sheets. We would expect this to happen later in the cycle as we start to see tangible evidence of a recovery.