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Making the list

Being singled out has its consequences

Hardly a week goes by that there isn't another report or survey ranking companies on everything from corporate citizenship to investment performance. Sometimes it is a matter of pride to be included on these lists, other times it is reason to hide.

Obviously, being selected as a component for a prestigious stock market index is something to crow about. That was the case for three San Diego companies in the past week.

The managers of the Nasdaq Biotechnology Index announced that eight new companies are being added to the index starting Monday, May 20. The three local companies that meet the criteria for being included are Amylin Pharmaceuticals (Nasdaq; AMLN), Diversa Corp. (Nasdaq: DVSA), and Ligand Pharmaceuticals (Nasdaq: LGND).

"Diversa is delighted to be included in the Nasdaq Biotechnology Index, joining the ranks of the industry leaders," said Karin Eastham, Diversa's chief financial officer. "Our investor relations team has worked hard under unfavorable market conditions to maintain investor interest. As a result, we have met the trading volume, share price and market cap criteria for inclusion in the index."

Amylin is involved in the development of potential drugs for the treatment of diabetes and other metabolic disorder. Diversa use genomic technologies for the rapid discovery of products from genes and gene pathways. Ligand develops and markets drugs that address unmet needs for patients in the area of cancer and skin diseases.

The addition of these companies in the Nasdaq index compliments several other local companies that are already members of the biotech barometer. They will be joining Arena Pharmaceutical Inc. (Nasdaq: ARNA), Idec Pharmaceuticals Corp. (Nasdaq: IDPH), Invitrogen Corp. (Nasdaq: IVGN), Isis Pharmaceuticals (Nasdaq: ISIS), and Neurocrine Biosciences (Nasdaq: NBIX).

The next couple of weeks will bring major changes to the 21 indexes that are administered by the Frank Russell Co. More than $214 billion is invested in mutual funds that are linked to these indexes that are calculated strictly by market capitalization rankings.

"This annual tune-up recalibrates Russell's U.S. Indexes to today's market realities," said Kelly Haughton, a senior executive at Russell. "It also serves as a clear, unbiased measure of the shifts in relative valuations of value and growth stocks over the past 12 months."

On June 7, Russell will announce what companies are being added or deleted from its stock indexes. That event is as anxiously awaited as the Academy Award nominations. For instance, last year 527 companies were dropped from the Russell 3000 Index, an all-inclusive index of the 3,000 largest companies in the U.S. determined by market value.

Analysts at Salomon Smith Barney each year try to anticipate changes that will be announced by Russell. Among the companies that they believe will be added to the Russell 2000 Index is Petco Animal Supplies (Nasdaq: PETC). The San Diego-based operator of more than 560 animal supply stores held its initial public stock offering in February at $19 a share and has seen its price hold steady in the mid-$20s.

And, of course, it never hurts to be called a good corporate citizen and Business Ethics Magazine bestowed that honor on Qualcomm Inc. (Nasdaq: QCOM). Last month, the San Diego wireless technology company was ranked number 18 on the list of the 100 Best Corporate Citizens.

"Making it on to the Business Ethics list means that a company is serving a variety of stakeholders very well," said Marjorie Kelly, editor and publisher of the magazine. "The list itself, based on data from an impartial social rating agency, represents the cream of the crop among the S&P 500."

However, there are some lists that shine a less than flattering light on a company. That would certainly include the "Focus List" of companies that is compiled by the California Public Employees Retirement System, or CalPERS. This year's list includes Lucent Technologies (NYSE: LU), NTL Inc. (OTC: NTLD.OB), Qwest Communications (NYSE: Q), Cincinnati Financial (Nasdaq: CINF) and Gateway Inc. (NYSE: GTW)

CalPERS says that the recent headlines in the business community should serve as a wakeup call for troubled companies.

"The Enron (PNK: ENRNQ) debacle should have caused every single company in America to re-examine their own corporate governance practices," said William Crist, who heads up the group that manages $150 billion on behalf of 1.3 million state and local employees.

In the case of Gateway, CalPERS claimed there is "a lack of complete independence on the company's audit and nominating committees." The group is also critical of the fact that Theodore Waitt, Gateway CEO and chairman, also chairs the nominating committee.

A proposal to address the governance concerns expressed by CalPERS was rejected by Gateway shareholders at the company's annual meeting last week. But, company officials did say they were in discussions with the pension fund.

Being added to the CalPERS "Focus List" may be a short-term embarrassment; the long-term effects can be very beneficial for all parties involved.

A study by Wilshire Associates found that stocks on the list trailed the Standard & Poor's 500 Index by 89 percent in the five-year period before being targeted by the fund. However, the same stocks outperformed the broad market by 23 percent in the following five years.

A lot of Gateway shareholders would not mind at all if the stock price benefits from the so-called "CalPERS Effect."


Chamberlin's financial analysis column appears each Monday in the San Diego Daily Transcript. Chamberlin also reports daily on stocks and local business on NBC 7/39 and on "Money In The Morning" on KOGO 600 AM.

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