INDEX:
I. Market News: Dow Sets Record On Crash Anniversary
II. Heroes: Computer Assoc., Cordis, Koss, Open Envt., Cohu
III. Goats: General Instruments, GMIS, Nokia, Citation Computer
IV. Investment News: Whipping a Dead Horse at Apple?
V. Calendar: Friday's Economic Events
MARKET CLOSE
DJIA: 4802.45, up 24.93 (RECORD)
S&P 500: 590.65, up 3.21 (RECORD)
NASDAQ: 1046.97, up 1.60
MARKET NEWS
The DJIA rose to a new record high this afternoon after President Clinton all but conceded that a seven-year plan to balance the budget was possible. (The President wanted to extend the process over ten years but Republicans have adamantly pushed for a seven-year time horizon.) Given a glimmer of hope that the recent political gunfight over the budget and the debt ceiling might be ending, investors flew back to blue chip stocks. The Nasdaq had a more muted reaction as investors struggled to keep up with earnings season.
Where were you eight years ago today? Remember a little ditty called "Black Monday?" It goes something like this: the Dow drops 500 points and then recovers about 250 of those lost points over the next two days. We know you hear about the 500-point drop all the time, but many of those who would like to instill terror in your heart neglect to mention that two of the biggest one-day gains ever for the Dow occurred on the two days following Black Monday. The Daily News is certain all sorts of gooroos are using today's anniversary as another excuse to make you afraid and turn your money over to them so they can hold it 80% in cash and 20% in 3-month Treasury bills. Don't let people like Granville give you heart palpitations; this guy has not made a single correct market call since 1982. Sure, CNBC has him and his clones on all the time, attempting to one-up each other with dire predictions, but just say "no" and remember that Friday and Saturday are anniversaries of huge one-day gains. That would be Foolish.
HEROES
Computer Associates <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:CA)") else Response.Write("(NYSE:CA)") end if %> is one of those stealth technology companies that continues going up, and up, and up. The software concern rose $3 7/8 to $48 7/8 after announcing that operating net in the second quarter beat analysts' expectations by 10%. The actual raw earnings were distorted by the recent acquisition of LEGENT Corp., which Computer Associates bought out a few months back. Computer Associates is one of the few technology companies that does not base its dominance on any one product or set of products; rather, the company is a conglomeration of acquired properties fueled by a "gobble-to-grow" approach. Can companies with big appetites like Computer Associates beat the market over the long haul without dominance in particular kinds of chips or particular kinds of software? Alex. Brown seems to think so, having upgraded the company's stock today from "Buy" to "Strong Buy."
Cordis Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CORD)") else Response.Write("(NASDAQ:CORD)") end if %> popped up $21 5/8 to $107 5/8 today after Johnson & Johnson <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:JNJ)") else Response.Write("(NYSE:JNJ)") end if %> announced its intention to buy the company for $100 or $105 per share. Cordis manufactures a wide array of angiography and balloon dilator catheters for use in cardiology. Johnson & Johnson believes that this business meshes well with its worldwide dominance in coronary stents---the tiny metal scaffoldings that are inserted with balloon catheters. Hmmm, maybe the synergies are there? Cordis does not seem to think so, as they have spurned Johnson & Johnson before, preferring to remain autonomous. Cordis's position is supported by the recent move by Eli Lilly <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:LLY)") else Response.Write("(NYSE:LLY)") end if %> to spin off its Guidant <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:GDT)") else Response.Write("(NYSE:GDT)") end if %> property, freeing a cardiac device maker from a larger pharmaceutical and medical products giant. It is always interesting to see two similar companies pursue different strategies and then compare which is more successful in the long term. Should Johnson & Johnson snap up Cordis Corp., you will be sure the Daily News will follow the progress of both this pairing and the Eli Lilly-Guidant spin-off.
We'll be blunt here and say we don't know this stock's story, but it sure looks like an interesting turnaround. Koss Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:KOSS)") else Response.Write("(NASDAQ:KOSS)") end if %>, up $1 1/4 to $6 3/4, currently has no analyst coverage. The shares are just off of their 52-week low, having traded down to $5 1/4 recently. Koss's last quarter explains the shares predicament, as it reported $0.04 versus $0.10 a share in the same period a year ago. But today's earnings told a different story, up 21% to $0.23 per share. Koss makes consumer electronics equipment, most notably speakers, headphones, and tape/record care products. The investors packet is burning its way to Fool HQ even as we type.
Open Environment <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:OPEN)") else Response.Write("(NASDAQ:OPEN)") end if %> recovered $1 1/4 to $8 1/4 today, although shareholders take little solace in this fact, as the stock was up to $23 last month. Earnings came in on the low end of the company's revised expectations---$0.08 per share. Originally, analysts expected $0.13 per share, which explains why the stock has been so beaten up. Open Environment focuses on client/server software that allows companies to create applications. The company only came public in the spring. Its timing on the IPO, as well as its timing on making an announcement last Tuesday that earnings would not be up to snuff, left a lot to be desired. It might otherwise be a great company, though. Again, an investors packet is streaking through the U.S. mail to Fool HQ.
MF Templar and the Neocontrarian portfolio (located in the Let's Talk Investment Approaches message boards) had a bang-up day today. Cohu <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:COHU)") else Response.Write("(NASDAQ:COHU)") end if %> beat MF Templar's $0.62-per-share estimate by $0.05, although it came fairly close to his revenue estimate. That means that margins improved even more than anticipated. Cohu was up $1 1/2 to $32 3/4 today on the report. Allstate <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:ALL)") else Response.Write("(NYSE:ALL)") end if %> joined the Neo stocks reporting today, busting through $0.80-per-share estimates to report $0.90. Losses from disasters were lower than analysts expected and the company posted solid revenue growth of 7%-8% across its product lines. Allstate was up $1 1/4 to $39 on the news.
GOATS
General Instruments <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:GIC)") else Response.Write("(NYSE:GIC)") end if %> caused a lot of consternation in the brokerage community today when it reported earnings that were in line with expectations but down 10% from a year ago. Apparently the company told analysts in the conference call that the fourth quarter was going to be pretty dismal, considering that J.P. Morgan, S.G. Warburg, and Merrill Lynch all broke out the scissors as soon as the conference was done and snipped their ratings on the instrument manufacturer, driving the stock down $7 to $20. General Instruments supplies equipment to the cable and satellite television industry and competes with Scientific Atlanta <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:SFA)") else Response.Write("(NYSE:SFA)") end if %>, among others, also down $1 3/8 to $12. Scientific Atlanta reported lousy earnings earlier in the week, sending that stock into a tailspin. Apparently Baby Bells and cable companies are simply not buying equipment to build the information superhighway as quickly as many gooroos had originally anticipated. All those projects you have seen canceled by the Regional Bell Operating Companies (RBOCs) went straight to the bottom line of General Instruments, Scientific Atlanta, and their peers. This might be a buying opportunity, but only if you have absolute clarity about future earnings being better than those currently priced into the stock and one heck of a strong stomach. Not recommended.
GMIS Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:GMIS)") else Response.Write("(NASDAQ:GMIS)") end if %> fell $2 1/2 to $11 3/4 after reporting earnings that were 39% below analysts' estimates. What exacerbated the sell-off even further was GMIS's warnings to its shareholders that the fourth quarter would be terrible as well---significantly below analysts' consensus estimates of $0.40 per share. Given the nasty fourth quarter, GMIS has decided to load up on charges, taking them for litigation costs, patent infringement costs, and accelerated capitalized software development costs. Companies often take the opportunity of a previously announced bad quarter to take any charge they can find in order to make future quarters look better in comparison. GMIS makes medical decision support systems.
Remember those slowing cellular sales Motorola talked about last week? Well, for companies without substantial semiconductor operations, those slowing cellular sales spell DEATH. Nokia <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:NOK/A)") else Response.Write("(NYSE:NOK/A)") end if %> dropped $8 3/8 to $60 1/2 today when investors realized that slowing U.S. cellular sales translated into lower operating margins. An overreaction to news that any sensible investor should have already expected? No one can claim it is a surprise that U.S. cellular sales are slowing; it was the big news last Tuesday, for crying out loud. More proof that professional investors just are not paying attention. It looks like the institutions waited until a bad earnings release to notice the trouble and start dumping. Individual investors had the brains to exit earlier or to hang on for the long haul.
Citation Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CITA)") else Response.Write("(NASDAQ:CITA)") end if %> was down $1 1/8 to $4 3/8 on a terrible quarter, earning only a penny compared to $0.16 per share in the year-ago period. But bad earnings are not necessary to trip a stock these days. TelCom Semiconductor <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:TLCM)") else Response.Write("(NASDAQ:TLCM)") end if %> dropped $1 to $9 1/4 today in spite of reporting earnings growth of 75%.
INVESTING NEWS: Bottom Fishing in the Techs
Apple Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:AAPL)") else Response.Write("(NASDAQ:AAPL)") end if %>. Advanced Micro Devices <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:AMD)") else Response.Write("(NYSE:AMD)") end if %>. Exabyte <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:EXBT)") else Response.Write("(NASDAQ:EXBT)") end if %>. Sybase <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SBYS)") else Response.Write("(NASDAQ:SBYS)") end if %>. What do these four companies have in common? They are probably the best-known examples of down-trodden technology companies in which value investors have taken substantial positions, claiming that in the long term, they will return to more sensible valuations.
One of the favorite techniques of people touting these stocks is to tell you the numbers without giving you the name. "Hey, this stock has $2 billion in cash and operating margins of $60%! It cannot make enough product to sell, it is so popular! And, best of all, it is a technology company trading at 8 times earnings! How can you pass it up?"
Quite easily, actually.
Bottom fishing in technology stocks is not the same as bottom fishing in most industrial and service companies. The ever-present technology cycle is always there to make obsolete even the strongest companies. A technology company that has stumbled and is focusing more attention on returning its bottom line to the black than on looking toward the future is a company at a substantial disadvantage. This disadvantage is so absolute and so powerful that the numbers, no matter how good they may look, must be regarded with supreme skepticism and a great deal of attention must be paid to the core industry of which that corporation is a part.
Apple Computer is a conglomeration of software and hardware which has a long record of significant mis-steps and poor decisions by management. Its Mac operating system has only maintained its paltry 8% of the worldwide market by sheer ease-of-use and technological superiority over Microsoft's Windows. Apple enjoyed a nice lead over Microsoft's Windows from the beginning---a lead it frittered away by refusing to license its OS or allow manufacturers to clone its computers. Those fat operating margins---the ones that make the company look so good in the abstract---were actually the product of absolutely stupid decisions. Those margins were a bubble waiting to pop.
And pop it did today, with AAPL shedding $2 5/8 to $34 3/4. Apple admitted to shareholders that margins would be heading down next year. The estimate-beating performance it mustered up last quarter was followed up by a terrible quarter, recording numbers decreasing 50% since a year ago. Apple has cut prices in an attempt to bolster sales after realizing about five years too late that quality does not necessarily win out over cheap-but-usable. Management defections caused by the failure of the company to sell itself to IBM and the subsequent straining of that relationship have left Apple Computer in a terrible position, isolated with a tiny market share and still clinging to the manufacture and development of products that it simply cannot manage.
Demand outstripping supply can signify two things: either you have a great thing going or you are being terribly mismanaged. Many so-called value investors have seen Apple Computer all along as an example of the former---a high-quality niche player that will eventually be bought out. Macintoshes control a huge share of the desktop publishing and graphics arts specialty markets, a valuable asset to an acquirer. Unfortunately, Apple overestimates its value by clinging to the notion that it still has a chance to compete in the consumer market. Despite how much cash it has, it still has 80% less than IBM, yet wants to do most of the things that IBM does.
Unless Apple Computer radically repositions itself as a software company, outsourcing all of the manufacture of its products to low-margin producers who can make the prices competitive with IBM-compatible machines, margins are going to get crunched and the company will fritter away the specialty markets it still dominates, allowing other competitors valuable lead time for the umpteenth time in its corporate history. The Apple Computer that exists today cannot survive, and betting on a juicy buyout does not make sense when the company is refusing reasonable offers and insisting that it must remain autonomous. In expressing a desire to remain autonomous, Apple is signifying its allegiance to a failed strategy---that one company can produce the hardware and software for a specific operating system virtually alone. In a global marketplace, churning with competition, this is absolutely the wrong thing to do. It is obvious that Apple cannot manage manufacturing very well at all; the company needs to dump that set of operations and focus on what it does well, partnering up with *anyone* who is willing to dance with them at this point.
The numbers alone do not tell the story at Apple. Technology bottom fishers may wish they do, but they do not. Technology, like most other investments, requires an intimate knowledge of the product and the industry to establish a qualitative "margin of safety." Much like the quantitative margin of safety that Ben Graham extolled and Warren Buffett has profited by, another form of safety lies in concrete and real understanding of the business and the product. The numbers reveal most of the story, but a well-positioned manufacturer of buggy whips in 1910 was not a good investment, no matter how great its margins and how amazing its bank account balance.
CALENDAR: Friday's Economic Events
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Byline: Befumo/Sheard (MF Templar/MF DowMan)