They May Not Sound Hot, But They're Staying On Top.

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Author: Hindo, BrianPalmeri, Christopher

HOT GROWTH CLASS OF 2004

If you've filled out forms at the doctor's office lately, you'll understand why Quality Systems Inc.'s stock has been on a tear. Doctors and nurses are drowning in a sea of paperwork, and Quality Systems' software can digitize it, from patient data to appointment records to treatment outcomes. Net income for the Irvine (Calif.) company has doubled, to $16 million, in the past two years. As a result, investors have been rewarded with a total return of 232%, the best among all Hot Growth companies from our 2004 list.

Each year BusinessWeek looks back at how the Hot Growth companies from two years earlier have fared. That allows time to accommodate any business hiccups and make fairer comparisons with indexes. A glance back at the Class of '04 shows that a majority have done pretty darn well. Overall, 64 posted positive returns, compared with 28 in the red. (Eight companies have been merged or acquired.) As a group, the cap-weighted return for the Hot Growth alumni registered 28.3%. That's not as high as the small-cap benchmark Russell 2000, which returned almost 40%, but it handily beats the 22.7% return for the Standard & Poor's 500-stock index and the Dow Jones industrial average's 16.3%.

As with the larger small-cap stock universe, the advance in the Hot Growth companies was not led by one particular sector. The trend of non-industry-specific, broad-based gains "is going to continue to play out for years to come," according to James O'Shaughnessy, a senior managing director at Bear Stearns and a small-cap expert. A look at the best and worst performers (table) shows that companies from similar sectors show up on both sides of the ledger. For example, hip retailer Urban Outfitters Inc. has managed to continue a torrid run, while teen merchant Hot Topic Inc. has struggled.

By and large, the top performers among the Class of '04 got there not on a wave of industry enthusiasm but by delivering results. Perhaps no company exemplifies such steadiness better than ANSYS Inc., a maker of simulation software for engineers and designers. Through good times and bad, ANSYS has hit or beat earnings targets for 34 consecutive quarters. CEO James E. Cashman credits unfaltering reinvestment -- 20% of revenues -- into research and development.

Over the past few years the small-cap stock world has attracted an influx of hedge fund money, always on the lookout for alternatives to the staid and stagnant blue-chip companies. The relatively scarce information and the volatility of more thinly traded stocks "play right into [hedge-fund managers'] hands," says William McVail, a small-cap fund manager at Turner Investment Partners.

Of course, increased attention from hedge funds isn't always a good thing. Witness what has happened at Navarre Corp., a Minneapolis distributor of music, software, and video games. In 2005, it suffered a series of blunders, including an earnings restatement, a late financial filing, and a debt-laden acquisition that has yet to pay off. The stock's total return has sunk more than 55%, pushed down in part by massive short-seller interest.

In the evanescent world of Hot Growth companies, it's surprising that the most enduring ones frequently sound so boring. Central European Distribution Corp. (CEDC), a Polish liquor distributor and perennial Hot Growth name, ANSYS, and Corporate Executive Board, a clearinghouse of strategy research for big companies, don't have sexy names. But they have managed sustained growth that's anything but humdrum. "We're not a boom and bust company," says Thomas L. Monahan III, Corporate Executive Board's CEO. Sometimes it's just a matter of simply doing exactly what you say you're going to do.

PHOTO (COLOR): STALWART William Carey, CEO of liquor distributor CEDC, in Warsaw

                               TWO-YEAR
                             TOTAL RETURN*

QUALITY SYSTEMS                  232.0
ANSYS                            205.0
Cognizant Tech Solutions         194.1
Alliance Resource Partners       136.5
Corporate Executive Board        110.3
Jos. A. Bank Clothiers           109.5
Conn's                           105.8
Healthways                       102.5
Urban Outfitters                 101.0
Central European Distribution    100.6

                               TWO-YEAR
                             TOTAL RETURN*

NAVARRE                          -55.9
CORINTHIAN COLLEGES              -51.3
UNIVERSAL TECHNICAL INSTITUTE    -44.6
JETBLUE AIRWAYS                  -44.4
BRADLEY PHARMACEUTICALS          -43.4
CAREER EDUCATION                 -42.4
MULTIMEDIA GAMES                 -38.0
HOT TOPIC                        -33.4
FOSSIL                           -33.3
TUESDAY MORNING                  -32.1