By Tom Shean - The Virginian-Pilot, December 30, 2006

For meat-processor Smithfield Foods Inc., it was the abundance of fresh meat and depressed earnings from its hog-production unit that dragged down its stock price by 16 percent.

At electronics retailer Circuit City Stores Inc., it was the intense competition for holiday sales of flat-screen TVs that helped cut its stock price by 16 percent.

Among shareholders of Smithfield and Richmond-based Circuit City, 2006 was a year to forget.

However, the year proved rewarding for shareholders of several other public companies in the region. Shares of Amerigroup Corp., the Virginia Beach-based provider of managed care, soared more than 80 percent despite lingering concerns about a fraud verdict against the company in federal court in Chicago. Amerigroup has challenged the verdict and said it was prepared to appeal.

Meanwhile, Dollar Tree Stores Inc. jumped 26 percent amid heightened confidence in the Chesapeake-based retailer's expansion strategy. And stock in rail-carrier Norfolk Southern Corp. climbed 13 percent despite expectations that a slowdown in industrial activity will cut demand for its services. The gains for these stocks matched or exceeded the 13 percent increase in the Standard & Poor's 500 index for 2006.

One factor that bolstered the performance of many stocks, including Norfolk Southern's, were active share-repurchase programs. Norfolk Southern, for example, disclosed in October that it bought back and retired 17.1 million shares at a cost of $730 million.

Earlier this month, Dollar Tree Stores said it reached agreements with investment bankers Goldman, Sachs & Co. to buy back $100 million of its shares. The repurchases, Dollar Tree said, will be part of a $500 million buy-back program announced Nov. 21.

Richer dividends, too, lured investors. After changes three years ago that reduced the taxation of dividends, "corporate boards have been under enormous pressure to increase dividends," said Jim Flinchum, principal of
Bay Capital Advisors, a Virginia Beach money-management firm.

But along with the celebration over the stock market's performance in 2006 is heightened wariness about the coming year.

"We've made a 16.5 percent move since the market's bottom in July," said Wayne F. Wilbanks, principal and chief investment officer at the Norfolk money-management firm Wilbanks, Smith & Thomas Asset Management. "We're due for a 10 percent correction."

Wilbanks expressed concern about two particular sectors - utilities and commercial-property real estate investment trusts - because their yields, he said, may turn out to be less than some investors assumed.

"People have become immune to the interest-rate risks in utilities and REITs," he said.

However, "the backdrop is still good for equities with low interest rates, low inflation and an expanding global economy," he said.

An enormous force in the market during 2006 - the purchases of stocks by private-equity funds - will continue next year, Wilbanks predicted. "Every time we get a dip, these guys are buying like crazy," he said.

Dominion Resources Inc., Richmond-based parent of Dominion Virginia Power and other utilities, rose 9 percent for the year partly because of its decision to sell most of its natural gas-and-oil exploration and production business. By some estimates, Dominion stands to collect more than $10 billion when the sale is completed next year.

Bank stocks, including those in some of the region's community banks, posted respectable gains in 2006 given the narrowing spread between short-term and long-term interest rates. Most banks rely heavily on this spread to generate their net interest income, an important source of earnings.

At Monarch Financial Holdings Inc. in Chesapeake, shares jumped 38 percent, while stock in Hampton Roads Bankshares in Norfolk was up 13 percent for the year. North Carolina-based Wachovia Corp., whose shares advanced 8 percent in 2006, was able to overcome investor dissatisfaction over its acquisition of a large California savings bank at a time when the housing market was weakening.

Banks, however, will face a more difficult environment in 2007, analysts predicted, because problems are likely to materialize in some of the commercial and residential projects they financed in recent years. That would require banks to set aside greater provisions for loan losses, which would put pressure on their earnings.

"At this juncture, we're not looking for a dramatic rise in bad loans in the new year," the investment advisory service Value Line said in a Nov. 24 report on bank stocks.

"But some increase appears likely. The benign credit quality situation for the past few years led many banks to add less to their loan-loss reserves than they charged off."

Reach Tom Shean at (757) 446-2379 or tom.shean@pilotonline.com.