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Stocks had a good year

Investors love a good story.

Chindex International Inc., a Bethesda-based provider of Western health care in booming China, announced this year that it would market the first preferred-provider health insurance plan there. The company also turned in two quarters of profits after nearly two years of losses. Its stock zoomed ahead 271 percent in 2006.

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Osiris Therapeutics Inc., a Baltimore adult stem-cell company, went public in August. Within a few months, it revealed that its lead drug shows promise as a treatment for pain- ful Crohn's disease. Then Democrats took control of Congress, raising hopes of more government funding for research. Its stock jumped 130 percent.

Both are among the top 10 best-performing stocks of 2006 out of 100 publicly traded companies in Maryland. Other stocks that posted triple-digit annual returns were more biotech companies, Vanda Pharmaceuticals Inc. and BioVeris Corp.; GSE Systems Inc., which makes real-time simulation and training software; Medifast Inc., a maker of low-calorie shakes and bars; Universal Security Instruments Inc., producer of fire alarms and other devices; and W.R. Grace & Co., a bankrupt chemical maker.

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"Ultimately, if investors like the story it's because of some potential for growth or a new product that will turn into earnings," said Thomas Carroll, a health care analyst at Stifel Nicolaus & Co. in Baltimore.

On the flip side, investors hate to be disappointed. Of the 10 top stocks in 2005, eight posted declines this year.

Legg Mason Inc., after basking in the afterglow of its mega-deal with Citigroup Inc. in 2005, saw its shares sink this year.

Likewise, stock in Coventry Health Care Inc. slumped after benefiting from last year's deal to acquire a health-benefits services company. Foundation Coal Holdings Inc. shares were down after its initial public offering in late 2004, and Jos. A. Bank Clothiers Inc. fell after large gains last year.

The 2006 investing year, which closed at the end of trading Friday, was a banner one for stocks. The Standard & Poor's 500 stock index, a basket of the largest U.S. companies, roared ahead 14 percent, more than quadruple the 2005 increase. But, of course, there were ups and downs. Here's a look back:

Overall, stocks rose in the first few months only to dip in the summer amid higher oil prices and inflation fears. Stocks rebounded again when the Federal Reserve stopped raising interest rates, at least for the time being, and oil prices eased. Then, with the midterm elections and hurricane season no longer weighing on investors' minds, the Dow Jones industrial average notched record highs time and again.

"It was a classic midterm election year, which historically have followed a similar pattern," said Jeff Kleintop, chief investment strategist for PNC Wealth Management in Pittsburgh. "It never really matters to the markets who wins, but the question of who will run certain committees and oversee regulation creates a lot of worries for big industries," he said. "Once the election is resolved, markets tend to rally because they know what's likely to come out of it."

Perhaps the biggest boon for stocks in 2006, when compared with the year before, came when the Fed decided to take a break - after 17 interest-rate increases. Many investors are now convinced the policymakers are largely done with their campaign to ensure inflation doesn't flare out of control. By contrast, investors had no clue throughout 2005 when the Fed would back off.

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"There's a growing consensus that the Fed has tightened interest rates enough to slow the economy but not so much to throw us into recession," said William L. Paternotte, a partner at Brown Investment Advisory & Trust Co. in Baltimore. "The Fed's next move probably would be to move rates down, although that may not be for several months."

Biotech winners

One of Maryland's key sectors - biotechnology - had some big winners this year. After the birth of the industry just three decades ago and years of losses, there are an increasing number of profitable companies. The number of biotech drugs and vaccines in the U.S. market has grown from five in the early 1990s to 155, according to T. Rowe Price Group Inc.

Vanda Pharmaceuticals saw its shares soar 155 percent after its IPO in April. The Rockville company got its biggest boosts when it reported that experimental drugs for insomnia and schizophrenia proved effective. BioVeris, a vaccine maker in Gaithersburg, rocketed 200 percent. And Digene Corp., also of Gaithersburg, gained 64 percent.

"Biotech was one of the hottest industries in the late '90s, and it kind of took a hit along with a lot of the dot-coms," said Kevin McIntyre, an economics professor at McDaniel College in Westminster. "Now IPO activity is coming back, and biotech is seen as having long-term potential with the graying of America and a greater demand for pharmaceuticals."

But the sector also was littered with stock market declines this year. Two other IPOs, Emergent BioSolutions Inc. and Iomai Corp., both of Gaithersburg, fell 5 percent and 28 percent, respectively. And United Therapeutics Corp. of Silver Spring, beset by management changes, profit declines and setbacks in clinical drug trials, fell 21 percent after holding a top 10 spot in 2005.

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Health care in general, tarnished by a stock-option backdating scandal at United Healthcare Corp., was hit hard this year.

In the case of Coventry Health, the Bethesda-based health insurer that dropped 12 percent for the year, its troubles began when it came in below analysts' expectations for the first quarter, in part because payments under the federal prescription drug benefit did not ramp up until later in the year. Rockville-based pharmacy benefit manager HealthExtras Inc., also among the top 10 last year, slipped 4 percent.

Some companies in the telecommunications and technology sectors emerged from the pack. Kleintop of PNC said telephone companies have benefited from consolidation and a push to compete with cable providers. Also, technology, as well as telecom firms, may benefit from more corporate spending on equipment to improve productivity. That's because many companies face slowing earnings growth after nearly four years of double-digit quarterly increases.

Baltimore-based GSE Systems jumped 436 percent from about $1 per share at the start of the year, and Tessco Technologies Inc., a Hunt Valley electronic equipment wholesaler for wireless systems, rose 96 percent.

Legal victories

Meanwhile, rising profits fueled stock price increases of 119 percent at Universal Security and 140 percent at Medifast. Both companies are based in Owings Mills. Medifast also appeared on last year's top 10.

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Grace, which was forced into bankruptcy five years ago, scored several legal victories this year, including dismissal of part of a criminal case, and some speculated the Columbia-based company might have assets left over after settling asbestos lawsuits. Its shares were up 111 percent.

As for next year, it might be a lucrative resolution to invest in stocks. According to Larry Puglia, a vice president and portfolio manager at T. Rowe Price in Baltimore, U.S. equities appear cheap relative to bonds, and the interest-rate environment and earnings outlook could support "moderate" gains, especially from current valuations.

"It wouldn't surprise if the market was up another 8 to 10 percent in 2007," he said.

laura.smitherman@baltsun.com


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