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FTI holds forth in turbulent '07

The Baltimore Sun

In the midst of any stock market crisis, there's opportunity.

That's what investors saw for FTI Consulting Inc. during the subprime mortgage meltdown. The Baltimore-based company advises businesses on crisis management and restructuring, and its stock soared 121 percent last year as it is expected to bring in more business from companies needing to change their business plans in the wake of the debacle.

The rise of FTI's stock demonstrates how the subprime crisis dominated stock markets in 2007 for beneficiaries as well as casualties. The effects reverberated through the stock market, as an array of companies swooned from defaults on loans made to consumers with poor credit histories, from the end of the housing boom, and a credit market that cut off easy credit.

FTI ranked as the best performer among 85 Maryland-based companies, followed by Lanham-based software company Vocus Inc. Vocus' stock vaulted 106 percent, according to Bloomberg data. Just over one-fourth of the stocks posted positive returns for the year, while 14 stocks lost more than 50 percent of their value.

Baltimore-based First Mariner Bancorp suffered as loans it made to people with less-than-perfect credit went bad and its stock plunged 69 percent. Municipal Mortgage, also based in Baltimore and better known as MuniMae, was down 54 percent as investors appeared to link the company to the subprime mess.

A look at the biggest losers for the year on the Standard & Poor's 500 stock index, a broad measure of the market, shows the subprime-related carnage. The financial services sector including investment banks that invested heavily in mortgage-related securities was down 30 percent.

And as consumers were no longer able to take money out of their homes through refinancing to spend, department stores as a group declined 35 percent.

The consumer finance sector that includes credit cards also fell about 30 percent.

Yet the S&P; 500 index gained a respectable 3.5 percent last year, and a flurry of private equity buyouts and corporate takeovers helped propel the Dow Jones industrial average to a record high in October before the housing downturn brought it down.

That's because many fundamental economic barometers were strong in 2007. Corporate earnings rose, and the gross domestic product continued to grow. Oil prices remained high, but prices at the gas pumps didn't budge much for the second half of the year. And while credit became tighter, interest rates remained low, so borrowers are still getting decent rates.

"It's a tale of two markets for the year," said Bill Keller, investment director at PNC Wealth Management in Baltimore.

"The markets have done well if you strip out certain areas," he said. "Anything to do with the housing and financial sectors has been a challenge, and consumer discretionary companies have struggled because for five years we have talked about consumers spending based on the value of their homes."

Many investors and companies tried to get out of the way of the subprime collapse.

MuniMae took the extraordinary step of putting out two press releases last year to explain what the company does not do: subprime home loans, or any single-family mortgage lending, for that matter. The company finances real estate and clean energy development projects.

MuniMae also had problems of its own in 2007. A number of accounting problems have kept it from filing financial statements for more than a year. But company executives were clearly worried about any perceived connection to subprime.

"The stock went down and folks were wondering what was going on," Chief Executive Officer Michael L. Falcone said. "We put out the announcement to alleviate concerns."

Some companies couldn't get out of the way. The S&P;'s regional bank sector, for instance, dropped more than 30 percent last year amid subprime concerns. While some banks weren't making the loans, many bought mortgage-backed securities that have soured as an investment.

Provident Bankshares Corp., the largest Maryland-based bank, recently reported $58 million in unrealized losses on mortgage bonds and other debt securities. Its stock fell 40 percent last year.

As for financial companies, T. Rowe Price Group Inc., the Baltimore-based investment firm, dumped hundreds of millions of dollars of subprime holdings in late 2006. Its stock jumped 39 percent in 2007.

But cross-town rival Legg Mason Inc. stumbled. The company has been weighed down by a series of setbacks, including exposure to debt issued by so-called structured investment vehicles backed by mortgage securities. Its stock fell 23 percent last year.

Strong earnings growth helped drive stock gains at Vocus as well as Baltimore Gas and Electric Co. parent Constellation Energy Group Inc., which rose 49 percent, and United Therapeutics Corp., a Silver Spring biotech that was up 80 percent. United jumped more than 35 percent in one day in November when it reported its net income increased by 75 percent.

Meanwhile, Medifast Inc., the Owings Mills maker of diet meals, sharply cut its earnings forecast for 2007; its stock dropped 61 percent. And stock in Vanda Pharmaceuticals Inc., an unprofitable Rockville drugmaker, declined 72 percent. Both were among 2006's best Maryland performers.

TVI Corp., the Glenn Dale manufacturer of decontamination shelters, and Lanham-based Radio One Inc. ranked among the worst stocks in 2006 and continued their losing streaks.

Stock in TVI sank 88 percent. CEO Richard V. Priddy was ousted in April after the company's audit committee uncovered questionable overpayments to a supplier.

Broadcaster Radio One saw the departure of Chief Financial Officer Scott Royster, and the company is under investigation by federal regulators looking into misdated stock option grants. Its stock fell 65 percent.

As for 2008, T. Rowe Price's John Linehan, a fund manager, is an optimist. He said stocks are attractively priced, and that the economy is "diverse and stronger than people think." That means that while some parts of the economy might continue to suffer, there will still be buying opportunities.

"The million-dollar question is, does the contagion spread? Can the issues we're seeing in housing and subprime be contained or will they spread to the overall economy?" Linehan asked. "My sense is we have a little more to go with the housing downturn, but with interest rate cuts and the economy growing, we'll be able to work our way through."

laura.smitherman@baltsun.com

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