INDEX:
I. Market News: Analyst Comments Boost Tech Sector
II. Heroes: Kerr Group, BancTec, Siliconix, Telular, SGS-Thomson
III. Goats: VMARK, Platinum Software, ShoLodge, Serv-Tech, Roberds
IV. Investment News: The Flat World of Short-Term Forecasting
V. Calendar: Thursday's Economic Events
MARKET CLOSE
DJIA: 4735.25, up 14.45
S&P 500: 579.46, up 1.93
NASDAQ: 1001.57, up 18.10
MARKET NEWS
Analyst upgrades on technology stocks boosted the Nasdaq Composite significantly today, recovering a portion of the index's recent losses. Specifically, Goldman Sachs raised its exposure to technology stocks for its asset allocation model from 22% to 35%. In addition, a number of the bellwether technology stocks were upgraded by the likes of PaineWebber, Merrill Lynch, and Goldman Sachs. Does this mean the correction is to have been a short-lived one? Or are these brokers manufacturing a bounce in order to dump more positions? Only their confessors know!
HEROES
A Boring stock suddenly gets exciting? Kerr Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:KGM)") else Response.Write("(NYSE:KGM)") end if %>, up $1 5/8 to $8 1/8, which has significant operations in home canning supplies of all things, has decided to put itself up for sale. Lehman Brothers has been contacted as the company considers its options in the consolidating packaging industry. Kerr forecasted a second-half loss in excess of the $0.29 per share that it lost in the first half of the year. Reduced sales of home canning supplies, adverse growing conditions, and continued cost-price pressures in the plastic products business killed the company's margins.
BancTec Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:BTEC)") else Response.Write("(NASDAQ:BTEC)") end if %> popped up $2 1/4 to $20 1/4 today when Smith Barney initiated coverage with a "buy." BancTec, a Dallas-based company, offers banks one-stop shopping for their transaction outsourcing needs. Estimates on BancTec call for $1.83 in fiscal 1997, seven quarters away, and ongoing 15.88% annual growth after that. The company's shares currently trade at about 11.5 times these forward estimates, suggesting that the stock has as much as 40% upside from here if it can command a 16 multiple in 1997. The danger is the ongoing consolidation in the banking industry, which is taking out many of the smaller players for whom BancTec processes transactions. Recognition International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:REC)") else Response.Write("(NYSE:REC)") end if %>, which is being acquired by BancTec, also rose $1 to $11 3/4 on the news.
Siliconix <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SILI)") else Response.Write("(NASDAQ:SILI)") end if %> shot up $6 1/8 to $30 5/8 today when it announced that net income exploded 152% in the most recent quarter. Siliconix is notable because it belongs in a sector that has been tarred and feathered by gloating bears lately---semiconductor chips. Siliconix manufactures a broad array of products, including field-effect transistors, analog switches, integrated circuits, and mospower transistors---mostly straightforward electronics components. Performance like this and Altera's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:ALTR)") else Response.Write("(NASDAQ:ALTR)") end if %>, in conjunction with the 28% increase in semiconductor earnings in Motorola's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:MOT)") else Response.Write("(NYSE:MOT)") end if %> latest earnings, suggests that the sector is alive and well in the third quarter.
Investor's might have soured on Motorola yesterday, but shares of Telular Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:WRLS)") else Response.Write("(NASDAQ:WRLS)") end if %> leapt $2 1/4 to $13 1/4 today based on a contract between the two companies. Telular is to be the preferred supplier of fixed wireless subscriber equipment to cellular joint ventures for Motorola's Network Ventures Division. Hey, wasn't it a slowdown in growth in this very unit of Motorola's that caused the whole market to crater yesterday? So why are people buying up shares of Telular when they have cut a deal with this slowing unit? Perhaps the unit is not slowing all that much after all? Perhaps going from 25% growth to 20% still keeps you heads and shoulders above most of the market, eking out a moderate 8% increase?
France and Italy's SGS-Thomson Microelectronics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:STM)") else Response.Write("(NYSE:STM)") end if %>, sometimes called the European Motorola, rose $2 3/4 to $45 5/8 today on news that the company's net profit increased by 48% in the third quarter. Gross margins have been hanging in above the 40% mark for a few quarters running, based on the run-away growth in the integrated circuit business as the company leverages fixed operating costs. With the huge global concern coming in 10% ahead of expectations, SGS-Thomson's performance augurs well for semiconductors, particularly for Neocontrarian holding Philips NV <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:PHG)") else Response.Write("(NYSE:PHG)") end if %> in MF Templar's Neocontrarian folder.
GOATS
VMARK Software <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:VMRK)") else Response.Write("(NASDAQ:VMRK)") end if %> was thrashed today, slipping $4 1/2 to $7 1/2 on news that the third quarter was a disaster. The company expects to report a loss of $0.02 to $0.05 per share compared to a net profit a year ago of $0.25 per share. Consolidation with its recent acquisition, Easel Corp., distracted the entire company from its core business of selling client/server software. Apparently, employees were going home at night and having nightmares about departmental integration. This is on top of missing expectations last quarter by about 50%. Pacific Growth and Hambrecht & Quist cut the stock from "buy" to "hold" on the news, trimming 1995 estimates by $0.68 a share to $0.25.
Platinum Software <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:PSQL)") else Response.Write("(NASDAQ:PSQL)") end if %> joined VMARK on the whipping post, savaged by $3 today to close at $5. The company stated that it will lose $3.8 million to $4.3 million in its first quarter as a direct result of an abrupt decline in licensing revenues for its Platinum SQL Enterprise product. This software, which runs, incidentally, on a Sybase <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SYBS)") else Response.Write("(NASDAQ:SYBS)") end if %> database, is just not moving for Platinum. The company anticipates taking a second-quarter charge to trim its staff, suggesting that the slowing revenues are perceived as a permanent problem.
ShoLodge <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:LODG)") else Response.Write("(NASDAQ:LODG)") end if %> checked out, down $3 to $9 9/16, when it revealed to analysts that the third quarter would disappoint. Stressing that they would make a profit, ShoLodge stated that its third quarter would bring in between $0.22 and $0.24 per share compared to $0.25 a year ago. Estimates had been as high as $0.42. ShoLodge is a chain of motels attached to Shoney's restaurants, which might have been hurt along with Shoney's by a recent NBC Dateline focusing on poor food quality and service in five restaurants, chief among them Shoney's. As ShoLodge has dramatically turned around in the past year from a money-losing operating to an apparently fast-growing, high-margin business, many speculative investors had piled in the stock. They left today, of course.
Does the Goats column ever get monotonous? Company X is down Y dollars because it announced that the earnings for Z quarter will not be as high as expected? Serv-Tech <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:STEC)") else Response.Write("(NASDAQ:STEC)") end if %> was yet another company in this dubious category, down $1 1/4 to $6 today when officials stated that it would lose $0.16 a share in the upcoming quarter and only make around $0.30 to $0.35 for the entire year. Lower-than-expected revenues from the turnaround maintenance operations are to blame. Serv-Tech provides "innovative" specialty maintenance, engineering, construction, and environmental services to various industries worldwide.
Same-store sales down 10.7%? Let's knock the share price down 10% too! Roberd's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:RBDS)") else Response.Write("(NASDAQ:RBDS)") end if %> lost $1 1/2 to $10 1/2 today based on what the market perceived as one rotten same-store sales number. Even though total sales rose 9.7% for this retailer, investors were in a punishing mood and needed a new retailer on which to take out their frustrations (Ann Taylor, their normal victim, is almost dead.) Now, do lower same-store sales mean that the company is not wasting its money by having sales? And why do people get so wrapped up in same-store sales when total sales are up substantially? You be the judge.
INVESTING NEWS: Growth---Thy Name Is Earnings
Short-term predictions of market movements are fraught with peril. The consistent interchange of opinions flashing across the wires has been dizzying lately, with fundamentalists and technicians alike making wild predictions about the future of the stock market, and heck, the world as we know it. As many investors are calling for a Dow at 3000 today as are a Dow at 7000, and equal numbers of investors are piling into and out of the volatile technology stocks, shouting the same platitudes almost verbatim. The mind-boggling array of big names in various brokerages and from various newsletters across the globe, articulating divergent opinions and radically different market calls, can make one forget what the process of investing is really all about.
Placing itself slightly above the din, the Daily News would like to take this opportunity to remind investors what growth is all about.
Although some will dispute this, a Fool should keep at least one eye on the general direction and condition of the economy. We are not advocating that investors take positions short the long bond because the durable goods order comes in a few percent below expectations---hardly. That is a game that we leave exclusively to the Wise---making short-term decisions based on any set of indicators. No, the Fool should keep an ear to the ground on the economy simply because it is in that environment that the businesses we invest in are operating.
What does a Fool want out of the economy? Ideally, slow and sustainable growth in conjunction with low inflation and low interest rates. The slow and sustainable growth, although not as dynamic as some would like, allows companies to grow their earnings regularly over time without overheating and becoming subject to bubbles that eventually must burst. Low interest rates are necessary because investors don't like to see the actual value of the money they invest deteriorate. Low inflation means that the economy is not seizing up because too many dollars are chasing too few goods. Low interest rates allow businesses and consumers to finance purchases at beneficial rates, allowing them to build factories or buy cars that will provide for years, perhaps even decades, without paying exorbitant levees to banks and other financial institutions. High rates sap the economic will as they divert money that would otherwise be pursuing profit into the pockets of banks.
The United States gross domestic product (GDP), a measure of how much goods and services are produced within America's borders, is popping along at 2-4% these days. This is the aggregate sum of all of the businesses in the United States, public and private. Now, as the companies that come public are often the bucking broncos of the financial world as opposed to future dog food, publicly traded companies tend to grow at a much faster rate than the GDP. This makes sense since no sane investor is going to give his or her money to a business growing at 3-4% per year---or even worse, losing money. These companies have the decency to stay private and just pull the GDP down without hurting the stock market's earnings growth.
Now, if we accept that over the long term, stock price appreciation calibrates pretty closely to growth in earnings per share, and that growth in earnings per share roughly calibrates to the general direction of the economy, we come up with a curious realization: it is through buying common stocks that the individual investor can participate in the growth of the most dynamic companies that make up the American economy. Money invested in the stock market is invested in the future of the American and the world's other economies.
When people make dire warnings about Dow 1000 and Elliot waves with Fibonacci retracements, we really think that these fellows, with all due respect, are losing touch with reality. Sure, Fibonacci numbers show up in leaf patterns and many biological phenomenon. Why they should show up in a market of the fastest growing companies in the world, however, remains beyond the Daily News's ken. It is similar to Christian theologians hypothesizing about the layers of the Heavens and the music of the spheres (and it is always fun to note ironically that many of the founders of technical analysis also believed that the world was flat). But we digress.
The point here is to say that the long-term market performance will be similar to the long-term economic performance, and that unless you think America is going to come to a screeching halt tomorrow, with 20% unemployment, massive bank failures, and widespread loan defaults, chanting "the stock market is too high, the stock market is too high" is similar in spirit to defending blood-letting as a curative process for most common ailments.
The economy is sound. Earnings are growing. (As the third quarter progresses, regardless of the companies pre-announcing bad earnings, you will see companies that are growing at 10%, 20% and even 30% in the quarter and for the year.) Many of these companies will be technology companies, but some of them will be financial companies, some will be in consumer goods; there are so many sectors doing well in this slow growth, no inflation, low rates, and worldwide expansion environment that we are experiencing that you will not even be able to name all of the stellar performers come the end of October. And it is these earnings, regardless of momentum players and day traders and technical analysts, that will buoy shares higher, as they always have.
Even Charles Dow, who created the first major market average and began collecting much of the material that has come to be called technical analysis, was an avowed fundamentalist, believing that in the long term, earnings are what count, and using technical analysis only in the short term to pick entry points. Fools even dispute this utility in the wake of the "random walk" work of the 70s, but hey, as long as you say that it's earnings which matter over the long haul, we won't poke too much fun at you.
Sit back, watch your companies' earnings, and make intelligent decisions, ignoring what the market is telling you your stock is worth. If you have checked the financials, eyed the balance sheet, run the PEG, checked the cash flow, and looked for growing margins and expanding market share, you are leaps and bounds ahead of most so-called "professional" traders, and in fact, most mutual fund managers. They are just as easily dazzled by technicians and newsletter writers and institutional research providers who believe that the market moves in predictable waves and that if you walk too far in China, you might fall off into space.
CALENDAR: Thursday's Economic Events
---Initial Unemployment Claims (8:30)
---September Producer Price Index (8:30)
---Weekly Fed Data (4:30)
Byline: Befumo/Sheard (MF Templar/MF DowMan)