Best Business Stories of the Year-2002

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An entire city of confident Procter & Gamble shareholders was aghast when this supposedly defensive investment took an unexpected, dramatic tumble. Geri Willis of SmartMoney magazine, well-versed in how pervasive P&G is in its headquarters city, puts into human terms the financial loss and accompanying sense of betrayal felt by retirees and employees. Gerri Willis The Stock that Ate Cincinnati If anything, Don Apking thought he might be erring on the side of caution. After all, the Procter & Gamble retiree is young-just 62-and along with his wife, a retired schoolteacher, he intends to enjoy a nice long retirement. That means he's going to need some real growth from his investments-the kind of growth that, for many investors, means tech stocks. But still, his Cisco Systems stake made him nervous. The stock had more than doubled in the past year. Its rich valuation made it vulnerable to any bad news. His simple solution: He'd sell his shares of Cisco at $110 and put the proceeds into Procter & Gamble. True, that'd make him a little heavy in P&G stock. Its shares would represent a full 25 percent of his holdings. But the stock had been a strong performer for him over the 35 years he worked for the consumer-products giant, and better yet, it looked like a bargain, as its shares had recently slipped to $99 from an all-time high of $118. "Procter had been great," he says. "It had always been very stable." But not this time. On the afternoon of March 7, less than two months after he dumped his Cisco stake, Apking came home from a round of golf and flipped on CNBC. What he saw nearly knocked him over. Procter & Gamble's stock had positively cratered. It had tumbled to $57, a fall of 35 percent from the previous day's close-and a decline of 52 percent from its high. At first, says Apking, "I thought it was a typographical error." But then the reality began to sink in: It was no mistake. He was looking at a loss of seven figures. As Apking listened to the official explanation-there had been a surprise earnings warning, sparked by higher energy and material costs, inventory problems in Europe, increased competition abroad-he could feel his blood boiling. "That's B.S.," he says. "There is no way management should have been surprised. I would have fired the CFO the next day. Someone's head has to roll." Rage against Procter & Gamble is something a lot of people are feeling right now. The stock was supposed to be a bulwark against the onslaught of crazy dot-com valuations, a defensive stock you could count on in good times and bad. Just the day before the earnings surprise, J.P. Morgan's U.S. equity strategist, Douglas Cliggott, had touted P&G shares in a report titled "Buy Some Staples, Sell Some Tech." And Money magazine, which had recommended P&G last year, cited a Banc of America Securities analyst and reassuringly wrote that "current shareholders can let their stomachs settle" in its March issue-just before the plunge. In fact, P&G's stunning reversal came as a shock to even the most experienced Wall Street prognosticators. "Everyone got caught with their pants down," says First Call's Joe Cooper. Professional investors, among them Kemper Growth portfolio manager Valerie Malter, were quick to punish the stock. The earnings warning was the last straw for Malter, who sold a significant part of her fund's stake that morning. "Companies with a focused strategy, good management, and good fundamentals don't blow up," she says. "Companies shouldn't make promises they can't deliver on." The Procter & Gamble meltdown is a stark reminder that no stock is totally "safe," especially in a market like this one. Indeed, things are so high-strung, in the wake of the Internet