INDEX:

I. Market News: Strong Earnings Bolster Tech Stocks

II. Heroes: Musicland, Kent, Biospherics, ArcSys, Spectrum Holobyte

III. Goats: Russell, Network Equip., Procept, Boston Tech., Trimble Nav.

IV. Investment News: Chip Equipment Makers Post Big Numbers

V. Calendar: Friday's Economic Events

MARKET CLOSE

DJIA: 4764.88 up 29.63
S&P 500: 583.10, up 3.64
NASDAQ: 1015.63, up 14.06

MARKET NEWS

Technology stocks made it two big days of recovery in a row. After a string of better-than-expected earnings reports from tech companies---chief among them Texas Instruments <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:TXN)") else Response.Write("(NYSE:TXN)") end if %>, ironically not a Nasdaq stock---the Nasdaq Composite posted another double-digit gain. In economic news, no real surprises in either the Producer Price Index or the Weekly Job Claims numbers.

HEROES

Investors were singing today about Musicland <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:MLG)") else Response.Write("(NYSE:MLG)") end if %>, with the stock rising $1 1/8 to $9 1/8 in spite of bad news about next quarter's earnings. Yep, you read that right. Musicland expects a loss of $0.19 a share in the next quarter, including a $0.10 charge to close 35 additional mall units. The company is also going to take a non-cash write-down of $4.09 in goodwill, which is basically playing around with the balance sheet. Goodwill comes into play when a business is bought for more than its assets are worth and this difference is put on the balance sheet and then amortized over time. Goodwill represents a drag on earnings power as a little chunk is taken out of earnings every year to account for it. With the aggressive store closings and repositioning as a non-mall-based chain of superstores, Musicland appears to be offering investors a chance at growth for a change.

Kent Electronics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:KNT)") else Response.Write("(NYSE:KNT)") end if %> rose $4 3/4 to $45 3/4 after reporting earnings a dime ahead of consensus estimates, according to First Call, representing a zinging 78% outperformance. Kent was halted at the open today because of an order imbalance and proceeded to shoot up in price for most of the day. Kent distributes electronic connectors, wire and cable, passive and electromechanical products, and local area network (LAN) interconnect wiring products. Its earnings growth has been powered by the LAN business, making the company an interesting play on networking.

Biospherics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:BINC)") else Response.Write("(NASDAQ:BINC)") end if %> rose $2 1/8 to $11 5/8 as the company returned again to investor favor after a negative Dorfman report in mid-September smashed the shares. Biospherics has developed an alternative to sugar that can be used by diabetics and is furiously working a deal with a European food manufacturer to test the product. Although no news was released that the Daily News could find, we suspect that production in Europe has either begun or is pretty close to beginning, sparking a rally in the shares.

ArcSys <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:ARCS)") else Response.Write("(NASDAQ:ARCS)") end if %> rose $6 3/8 to $44 1/8 after reporting earnings wildly ahead of expectations. ArcSys makes software that allows semiconductor engineers to develop new chips, and will consolidate soon with Integrated Silicon Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:ISSS)") else Response.Write("(NASDAQ:ISSS)") end if %>, which was up $3 5/8 to $31 7/8 on news of ArcSys's earnings. ArcSys was supposed to earn $0.38 per share for all of 1995 and now has $0.34 in trailing earnings, suggesting that the estimates for this recent IPO are much too low. IKOS Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:IKOS)") else Response.Write("(NASDAQ:IKOS)") end if %> and Cadence Design Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:CDN)") else Response.Write("(NYSE:CDN)") end if %> also manufacture software for semiconductor design.

Troubled software company Spectrum Holobyte <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SBYT)") else Response.Write("(NASDAQ:SBYT)") end if %> rose $1 3/4 to $12 1/2 on talks that Softkey <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SKEY)") else Response.Write("(NASDAQ:SKEY)") end if %> is eyeing the company as a possible takeover. Problem is, Softkey is denying the rumors. Spectrum Holobyte is best known for its Civilization and Colonization games. Softkey is the combination of three money-losing software companies that merged some 18 months ago to form a great new growth company, which is why so many people readily believed that it might gobble up the money-losing operations of Spectrum Holobyte. Softkey did announce a $300 million convertible debt offering yesterday for an acquisition, so somewhere out there is a software company in the red that will get cashed out by Softkey.

GOATS

Russell Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:RML)") else Response.Write("(NYSE:RML)") end if %> lost $2 3/4 to $23 1/4 today when Merrill Lynch broke out the shears and cut the company's intermediate-term rating from "buy" to "hold." The analyst did not need a crystal ball to make this cut, either, as Russell Corp. informed investors late yesterday that its net income for the third quarter would be 50% of what it was in the same period last year. Russell Inc. manufactures "activewear" and licensed sports apparel. Gross margins are under pressure from competition, higher raw material costs, and higher costs from domestic manufacturing. Gross margins will continue to be under pressure in the fourth quarter, but will show improvement in 1996.

Network Equipment <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:NWK)") else Response.Write("(NYSE:NWK)") end if %> reported earnings 125% ahead of last quarter and two cents ahead of consensus expectations. So why was the stock off $1 3/4 to $36 5/8 today? Frankly, it is a mystery to us here at the Daily News. The company gained in gross margins and saw profit margins sky-rocket as the company leveraged higher revenues off of relatively fixed costs for sales, marketing, administration, and research. There was no news of a secondary offering that we could find, nor dire warnings of future slowdowns. With a P/E of only 23, today's sell-off is inexplicable.

Procept <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:PRCT)") else Response.Write("(NASDAQ:PRCT)") end if %> fell $2 9/16 to $3 5/16 today, and we even found a reason! Clinical trials for the biotechnology company's PRO 2000 treatment for HIV have been halted because the drug is having a toxic effect on some patients, although no patients have gotten sick in a "clinically significant" manner. Sounds like a little damage control to the News, though, as we wonder what non-clinically significant illness is if it can stop drug trials. The company is burning $750,000 a month and has only $7 to $8 million in the bank, meaning that it will have to produce *something* to sell or require a cash infusion in about 10 months. Sound like a great short? Too late---once a stock goes below $5, it is not marginable and cannot be shorted.

Former Fool favorite Boston Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:BSTN)") else Response.Write("(NASDAQ:BSTN)") end if %> was caught in the Nasdaq downdraft earlier in the week and is still falling, down $1 1/2 to $12 1/4, as investors become increasingly jittery about the company's prospects. Trading at 24 times earnings, the company is expected to bring in $0.85 per share in 1996, which would put it at a more favorable 14 times forward earnings. With last quarter's disappointment and estimates for the year recently being notched downward by Merrill Lynch, sentiment is not with this provider of voice mail and other services to the Regional Bell Operating Companies (RBOCs). We are still rooting for Boston Tech here at Fool HQ, but remain happy that we took a profit at around $19 a mere two months ago.

Trimble Navigation <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:TRMB)") else Response.Write("(NASDAQ:TRMB)") end if %> dropped $2 to $20 1/4 today after missing estimates, having only grown earnings by 5% in the most recent quarter. Trimble has been a momentum investor favorite and is probably in for a world of hurt if its quarterly increases begin to slow, particularly given the hysterical over-reactions that many so-called "professionals" have demonstrated in the recent choppy market. We here at the Daily News wonder if these guys really believed that the market only moved in one direction. Trimble makes global positioning devices that allow sailors, pilots, and hikers to figure out exactly where they are in the world. Pretty cool stuff, if you ask us. Trimble has estimates of $1.07 five quarters out and has a compound annual growth rate listed as 35%, suggesting that the current price puts it at only 20 times earnings and might represent a buying opportunity.

INVESTING NEWS: Semiconductor Equipment Makers Report Strong Numbers

The first two semiconductor equipment stocks of the earnings season reported today, raising the hopes of many investors that growth will continue to exceed expectations in this group. Spectacular earnings from Helix Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:HELX)") else Response.Write("(NASDAQ:HELX)") end if %> and Aetrium <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:ATRM)") else Response.Write("(NASDAQ:ATRM)") end if %> bode well for the slew of reports due next week from Lam Research <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:LRCX)") else Response.Write("(NASDAQ:LRCX)") end if %>, Aseco <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:ASEC)") else Response.Write("(NASDAQ:ASEC)") end if %>, Cohu <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:COHU)") else Response.Write("(NASDAQ:COHU)") end if %>, and Genus <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:GGNS)") else Response.Write("(NASDAQ:GGNS)") end if %>.

Aetrium <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:ATRM)") else Response.Write("(NASDAQ:ATRM)") end if %> is probably the best indicator of future earnings from other companies, and reported earnings of $0.30 a share, a full nickel ahead of expectations and up 58% from the same period a year ago. Aetrium makes automated test handling equipment for surface mount packages---the same line of business as Aseco and Cohu, which report at the end of next week. Analysts currently expect Aseco, roughly the same size as Aetrium if measured in trailing revenues, to report $0.27 per share versus $0.19 in the year-ago period. If Aseco performs as well as Aetrium, it will notch $0.30 as well and probably prompt a boosting of annual estimates for the third month in a row.

There are three stages in making a semiconductor: preparation, manufacturing, and testing. Preparation involves cutting the silicon into wafers ready for manufacture. Manufacturing involves imbedding the chip with the circuits to make it work. Testing is the last stage and involves checking the manufactured chips in order to ensure that they work, putting them through their paces. Automated test handling equipment is used in the testing stage and takes the chip after its manufactured and puts it into a testing device automatically, thus the name. Aseco, Aetrium, and Cohu all focus on surface mount packages, which represent a radical improvement over the previous thruhole technology.

Earnings estimates for Cohu are a little more tricky to come up with, as no analysts currently follow the stock. However, the Daily News happens to follow this little gem fairly closely and if its automated test handling division has an increase of the same magnitude as Aetrium's, then Cohu will report revenues of $47,555,000 and earnings of $0.62 per share. Of the three companies, the ranking by market share from highest to lowest is Cohu, Aseco, and then Aetrium, suggesting that unless Aetrium stole market share in the quarter, Aseco's and Cohu's results could be even better. Is it possible? That said, using Aetrium's results to model Aseco's and Cohu's is difficult because Aetrium acquired SymTek in the last year, making true growth difficult to parse out.

Helix Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:HELX)") else Response.Write("(NASDAQ:HELX)") end if %> has no direct competition, but its stellar results bode well for many lone niche players like KLA Instruments <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:KLAC)") else Response.Write("(NASDAQ:KLAC)") end if %>, Genus <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:GGNS)") else Response.Write("(NASDAQ:GGNS)") end if %>, OnTrak Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:ONTK)") else Response.Write("(NASDAQ:ONTK)") end if %>, and Kulicke & Soffa <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:KLIC)") else Response.Write("(NASDAQ:KLIC)") end if %>. Helix posted an earnings increase of 89% and increased its dividend 127%, making it actually pretty substantial---a rarity for semiconductor equipment companies. Helix now yields 2.6%, fairly generous, all things considered. Helix beat the estimates listed in Zacks Analyst Watch by two cents.

These two earnings reports today will make the next few days fairly interesting, especially in light of the hysterical selling that panicked professionals engaged in on Tuesday amidst cries that the bull market in technology is over. With few exceptions, earnings results across the board in the last two days have been outstanding, as a quick look at the Today's Earnings feature on the Daily News form will show you. The Daily News continues to remain optimistic about the third quarter and believes that almost all of the shortfalls have already pre-announced.

CALENDAR: Friday's Economic Events

---September Advance Retail Sales (8:30)
---September Consumer Price Index (8:30)
---September Real Earnings

---Hilton Hotels (HLT) 3Q $0.53
---PH Glatfelter (GLT) 3Q $0.40
---Stryker Corp. (STRY) 3Q $0.42

Byline: Befumo/Sheard (MF Templar/MF DowMan)