INDEX:
I. Market News: Financial and Semiconductor Stocks Get Hammered
II. Heroes: CMG Information, 3DO, Border's Group, Oak Technology
III. Goats: Butler Int'l., Insilco, A.G. Associates, First Mississippi
IV. Investment News: Credit Worthy or Delinquent?
V. Calendar: Thursday's Economic Events
MARKET CLOSE
DJIA: 4753.68, down 29.98
S&P 500: 582.47, down 4.07
NASDAQ: 1026.47, down 12.77
MARKET NEWS
Financial Services, Insurance, and Semiconductor stocks pulled the market down today. The only apparent reason for the sell-off in financial companies was a worry brought about by The Money Store's potential rising delinquency rate on home equity loans (see Investing News). Doesn't take much to make the market nervous these days. Keep focused on the long-term, Fool!
HEROES
Internet hysteria caught up with CMG Information <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CMGI)") else Response.Write("(NASDAQ:CMGI)") end if %> a day late, boosting the stock $6 1/4 to $32. Adams Harkness analyst Mark D'Annolfo played up the company as an overlooked Internet concern, raising the stock from Hold to Buy today. CMG Information recently announced that it is reconfiguring itself around the Internet, selling a profitable fulfillment services division and focusing more attention on its @Ventures subsidiary, which invests in Internet related companies and technologies. The current estimates available for the company should be ignored by any intrepid souls who are interested in the company, as those numbers include the soon-to-be-sold fulfillment service operations. Whether or not dumping its cash-generating business and investing the proceeds from the premature sale of Booklink Technologies to America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:AMER)") else Response.Write("(NASDAQ:AMER)") end if %> for about one-tenth its value is a good idea is up for grabs.
Rumors about whether 3DO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:THDO)") else Response.Write("(NASDAQ:THDO)") end if %> is about to cut a deal with a big Japanese concern have been floating around for a few weeks now. The stock jerked up $2 1/2 to $12 5/8 today when the rumors finally were verified; Matsushita has signed a definitive agreement to become a partner in the development of 3DO's 64-bit M2 graphics technology. In return for $100 million in seed money, Matsushita will have exclusive rights to use the M2 technology to power future consumer and commercial products. In return for turning over the rights to this technology, 3DO gets to stay in business.
Border's Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:BGP)") else Response.Write("(NYSE:BGP)") end if %> clawed its way back up today, rising $1 3/8 to $16 5/8 after a brokerage made positive comments about it. Border's was recently spun off from KMart <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:KM)") else Response.Write("(NYSE:KM)") end if %> in KMart's policy of divesting itself of any retail property that might actually grow. Tragically misnamed, the company is actually comprised primarily of WaldenBooks and WaldenSoftware outlets. The Journal's Small Stock Focus section picked Border's as a stock most likely to benefit from the "holiday" effect, a misguided perception that retail stocks usually rise over the Christmas season. Maybe people were doing their Christmas stock shopping before Halloween?
Oak Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:OAKT)") else Response.Write("(NASDAQ:OAKT)") end if %> received a helping hand from Needham today, rising $6 to $51 after the brokerage raised its rating from Buy to Strong Buy. In the research report, the analyst cited Oak's strong earnings trend over the past two quarters as the principle reason for the upgrade, raising his earnings estimates as well. Oak Technology is the largest supplier of single-chip CD-ROM controllers for multimedia PCs---not a bad market to dominate these days.
GOATS
Butler International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:BUTL)") else Response.Write("(NASDAQ:BUTL)") end if %> dropped $2 3/8 to $5 1/4 after the temporary services company reported that the third quarter would break even and that the full year would fall below analysts' estimates of $0.60 per share. Chief Financial Officer Raymond Lacroix has resigned even though the company is blaming its problems on relocation of its administrative operations to St. Louis. The move impaired billing and collection services and caused extra interest and administrative costs. So why did the CFO resign? Did he mismanage the move or is there something more going on?
Insilco <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:INSL)") else Response.Write("(NYSE:INSL)") end if %> lost $6 to $33 7/8 as analysts piled on the company when it reported disappointing third-quarter results. Southcoast and McDonald & Co. both downgraded the issue, citing problems ahead. Insilco's automotive division registered slipping margins and slow growth for the third quarter in a row, raising red flags everywhere. The Rolodex division's product mix has shifted toward lower margin electronic items, as well as additional marketing costs. Insilco's $0.63-per-share earnings after a $0.78-per-share charge for amortization of goodwill was below McDonald & Co.'s estimates of $0.80, prompting their downgrade.
A thinly traded semiconductor equipment stock, A.G. Associates <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:AGAI)") else Response.Write("(NASDAQ:AGAI)") end if %>, plunged $6 to $25 today on concerns about the company's backlog and tax rate. AG Associates' backlog only increased by $1 million, slower than its previous rate of growth. The company's tax structure was also fairly complicated this year because they were operating under a deferred income tax status. Next year, the company's effective tax rate will increase to 41% from this year's 35%. Analysts expected the effective rate this year to be somewhere between 35% and 38%, which explains why the company was handily beating estimates throughout most of the year.
Reporting earnings 11% below consensus expectations and getting panned by Dorfman today pre-determined where First Mississippi's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:FRM)") else Response.Write("(NYSE:FRM)") end if %> stock would end up, down $2 5/8 to $21 7/8 on the day. Dorfman reported that someone told him that commodity chemical companies will see earnings decrease and that insiders have been selling their shares. The group could be on the top of another economic cycle after several years of growth, says our favorite gooroo. Dorfman also included Englehard Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:EC)") else Response.Write("(NYSE:EC)") end if %>, Scotts Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SCTT)") else Response.Write("(NASDAQ:SCTT)") end if %>, Sterling Chemical <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:STX)") else Response.Write("(NYSE:STX)") end if %>, Cabot Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:CBT)") else Response.Write("(NYSE:CBT)") end if %>, Chemfab Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CMFB)") else Response.Write("(NASDAQ:CMFB)") end if %>, and Monsanto Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:MTC)") else Response.Write("(NYSE:MTC)") end if %> in his group of potentially troubled chemical companies.
INVESTING NEWS: Concerns Over Credit Quality
American General <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:AGC)") else Response.Write("(NYSE:AGC)") end if %>, a diversified insurance and finance company, fell $1 7/8 to $33 1/2 today, continuing to plummet after yesterday's report that its consumer finance division sustained a 14% drop in earnings in its fiscal third quarter. More frightening to the market was what the company apparently implied in a conference call---that some of the consumer finance business it has added in the past year has been of "lesser quality" than they originally believed and may not have been appropriately priced. Translation: We might take a bath if and when these people stop paying.
When The Money Store <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MONE)") else Response.Write("(NASDAQ:MONE)") end if %> followed this bombshell with news that its 30-day delinquencies jumped 118 basis points to 5.47% of home equity loans serviced, all hell broke loose. The stock plummeted $12 5/8 to close at $42 1/2, in spite of reporting earnings 20% ahead of expectations and announcing a five-for-two split. The delinquency percentage for The Money Store was substantially higher than its August tally and this, along with American General's warning, sparked a broad sell-off in all consumer lending companies.
It was concerns over consumer credit quality and whether the financing companies were seeing a peak in the lending cycle which seized traders, triggering a rash of sell orders. Consumer credit quality is a major concern because lending companies only make money if people can pay their bills. For a white-bread finance company like American General, a slew of delinquencies would be devastating since they do not price their lending for high credit risks. The veiled warning by American General and The Money Store's rise in overdue loans were enough to send a tremor through the entire financing sector, including a host of credit card companies whose core business is completely unrelated to The Money Store's woes. This can be traced back to higher charge-offs for bad debt found in Dean Witter Discover & Co.'s <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:DWD)") else Response.Write("(NYSE:DWD)") end if %> recent earnings statement.
Basically, the market has been worried about this for a while and was looking for an excuse to panic---pretty much the same as with technology stocks since late September.
Worries about a peak in the lending cycle come from a different quarter, stemming mainly from American General's earnings reports. The fact that earnings from American General's consumer loan operations were down substantially brings to the fore the question of when the rapid clip in credit growth stop? When will Americans have taken on enough debt and simply stop borrowing?
As is always the case with a wide-ranging panic sell-off, the facts don't quite justify the ferocity of the reaction. For starters, American General's problems don't necessarily translate into the market as a whole. Why American General's relatively small consumer credit division has suddenly been elevated to a bellwether for the industry is beyond our ken. The fact that they are not charging enough for risky customers is simply a localized problem. Companies like The Money Store, Aames Financial <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:AAMS)") else Response.Write("(NASDAQ:AAMS)") end if %>, Olympic Financial <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:OLYM)") else Response.Write("(NASDAQ:OLYM)") end if %>, and Credit Acceptance Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CACC)") else Response.Write("(NASDAQ:CACC)") end if %> specifically target poor credit risks and structure their rates to do this properly, charge-offs and all.
As for the Money Store's rise in delinquencies, mitigating factors do exist. In September, The Money Store apparently made a transition from one software system to another in the servicing and collection area. The people who were supposed to be monitoring and pursuing these deadbeat accounts were preoccupied with this transition. The 20% increase in non-payers was matched by a "20 percent temporary loss of efficiency. . . [that] explains why the delinquency numbers were at that level," said Markeeta McNatt of The Money Store's Investor Relations Department.
Whether the sell-off will continue tomorrow or bargain hunters will poor into the market and begin to support the stocks is anyone's guess. A quick glance at the valuations suggests that today's sell-off might not have been completely without merit; these companies have risen at a furious pace since the beginning of the year.
CALENDAR: Thursday's Economic Events
---Initial Unemployment Claims (8:30)
---September Durable Goods Orders (8:30)
---Weekly Fed Data (4:30)
Byline: Befumo/Sheard (MF Templar/MF DowMan)