INDEX:
I. Market News: Stocks Regain Ground in Late Trading
II. Heroes: Network Express, IVI Pub., MEMC Elec. Mat., Oakley, MediImmune
III. Goats: Videonix, Genemedicine, Syncor, Sunrise Medical
IV. Investment News: Scare Tactics Drop Healthcare Sector
V. Calendar: Monday's Economic Events
MARKET CLOSE
DJIA: 4741.75, up 37.93
S&P 500: 579.70, up 2.98
NASDAQ: 1025.54, up 7.97
MARKET NEWS
Attention Motley Fool message boards readers! Apparently, some people have been unable to use the "Find New" feature or, at times, even access the boards. Rest assured, AOL is working diligently on the problem and we continue to harass them at every turn! The posting and reading of messages should work fine; it is just the "Find New" access that seems to be the sticky wicket at the moment. Bear with us while we fix the problem.
We here at The Fool hate unsubstantiated rumors perhaps more than anyone, so the following is simply a recap of a story broken in Business Week magazine. A story in that publication claims that Dan Dorfman is under investigation for potential improprieties in his relationship with Donald Kessler, a stock promoter and frequently quoted Dorfman source. Dorfman denies any wrong-doing and is on a leave of absence from Money Magazine in order to address the accusations. We'll follow the story here at The Fool, but as much as we pick on Dorfman, we won't accuse him of anything illegal without proof. If he's guilty, so be it. If not, we don't want to be accused of trying him here. On to the real news!
Despite better-than-expected third-quarter Gross Domestic Product numbers and a rise in the University of Michigan Consumer Sentiment Survey dimming hopes of a rate cut, stocks recovered some of the week's earlier losses this afternoon. Economists can't agree on what these strong economic numbers mean for a potential interest-rate cut by the Federal Reserve, but it seems that the possibility of a cut lies as much in the budget wrangling as it does in economic numbers.
HEROES
Network Express <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:NETK)") else Response.Write("(NASDAQ:NETK)") end if %> awakened from its slumber today, up $7/8 to $8 3/4 on news that it is going to snap up privately held Fivemere Ltd., a leading provider of ISDN networking products based in merry old England. Network Express recently reported earnings that were ahead of expectations, but the stock traded sideways, much to the consternation of shareholders. Fivemere brings to the table dominance in the U.K ISDN market as well as increasing by almost 50% Network Express's trailing revenues. The analyst at Unterburg Harris cut the shares to "hold" after its third-quarter earnings report because he thought that Network Express "did not meet expectations." Perhaps with the addition of Fivemere, they might next time around.
IVI Publishing <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:IVIP)") else Response.Write("(NASDAQ:IVIP)") end if %> is the latest stock to get caught up in the online, Internet frenzy. Up $1 to $10 1/2 today, shares forged ahead on the news that revenues could double because of a pact with AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:T)") else Response.Write("(NYSE:T)") end if %> to supply medical information through AT&T's online consumer service. One analyst was particularly apoplectic on the news, remarking that IVI Publishing actually stands a chance of making a profit in the first quarter because of this alliance and increased sales of its CD-ROMs. IVI Publishing is an electronic publisher of health and medical information---big surprise there.
An analyst's comments about "stellar" third-quarter earnings from semiconductor manufacturer MEMC Electronic Materials <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:WFR)") else Response.Write("(NYSE:WFR)") end if %> propelled the stock ahead $2 3/8 to $31 1/8. Terry Ragsdale of J.P. Morgan raised his estimates to $2.57 a share for the current fiscal year from $2.14 and also increased next year's estimates to $3.21 from $2.73. Imagine our surprise to hear that J.P. Morgan recently underwrote the initial public offering for MEMC Electronic Materials; does this make them perhaps less than objective in their evaluation? MEMC processes silicon wafers which are later made into chips by other companies.
Is it Sunglass Hut <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:RAYS)") else Response.Write("(NASDAQ:RAYS)") end if %> all over again? As we reported yesterday, Oakley, Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:OO)") else Response.Write("(NYSE:OO)") end if %>, a recent public issue, blasted through pathetic earnings estimates, posting a 50% earnings gain over the year-ago period. The stock shot up $3 to $34 3/8 on the news. Will Oakley follow in the footsteps of specialty retailer Sunglass Hut which has been a monster stock? Trading at 117 times trailing earnings, the stocks would appear to have a lot in common---same industry, high mutliples, fast earnings growth. Anyone who is a Sunglass Hut fan might want to check Oakley out. The danger with Oakley, of course, is that its product could be just another flavor of the month. Remember glacier glasses?
Do companies make good stock-pickers? Apparently, investors in MediImmune <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MEDI)") else Response.Write("(NASDAQ:MEDI)") end if %> believe so. Shares of MediImmune rose $7/8 to $10 1/2 today after American Home Products <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:AHP)") else Response.Write("(NYSE:AHP)") end if %>, the gigantic pharmaceutical company, announced its intention to purchase roughly one million of the fifteen million shares outstanding, to the tune of $15 million. American Home Products has been collaborating with MediImmune to develop RespiGam, which has recently finished two Phase III trials. The Street's reasoning is that American Home Products would not invest unless MediImmune had a good thing going with the phase III trials. Unless they have an in with the Food & Drug Administration (FDA), however, they know nothing more than anyone else examining the results might. Before you commit dollars after American Home Products' investment, you might want to check on the results yourself.
GOATS
Videonics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:VDNX)") else Response.Write("(NASDAQ:VDNX)") end if %> plummeted $5 3/8 to $13 1/8 after reporting third-quarter earnings that were flat before a one-time charge related to the acquisition of Nova Systems. News that the release of their Powerscript Character Generator would be delayed on top of the lack of earnings growth spooked investors. Analysts who follow the stock maintained their "Buy" ratings in spite of all this, claiming that the market overreacted.
Genemedicine Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:GMED)") else Response.Write("(NASDAQ:GMED)") end if %>, closed yesterday at $7 5/8. When the company issued 3 million more shares at $6 1/2 today, the stock surprisingly dove $1 1/16 to $6 9/16. Apparently Genemedicine stuck it to shareholders by issuing more shares below the market price. Although not technically illegal, this move certainly left a foul taste in the mouths of investors. Anyone should think very carefully about investing in a company with a track record of hurting shareholders in a move like this or refusing to talk to shareholders at all. There are just too many great companies out there to put up with this sort of behavior.
Syncor International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SCOR)") else Response.Write("(NASDAQ:SCOR)") end if %> fell $1 1/4 to $8 1/4 after management announced projections of a "challenging" year from the anticipated launch of a competing technetium-based heart imaging agent. The new product should hit the market in the first quarter of 1996. Syncor reported a huge increase in earnings last quarter, up 102% from last year's third-quarter earnings. Apparently momentum investors who piled in when they heard that, dove right back out after they heard the latest news. Does this short-term focus create a long-term opportunity for someone willing to look more than a month in the future?
Sunrise Medical Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:SMD)") else Response.Write("(NYSE:SMD)") end if %> dove $8 3/8 to $15 1/8 after the company released news that it is conducting an internal probe of accounting practices used by its Bio Clinic Corp. The company says results may have been overstated during some periods. The probe has delayed release of first-quarter earnings pending further developments. Sunrise's President and Chief Operating Officer, who previously served as president of the Bio Clinic unit, has been placed on a paid leave of absence during the investigation. The tragedy of situations like this is that the individual investor suffers the most from the deception of a high-ranking company.
INVESTING NEWS: Medicare Reform Worries Send Healthcare Stocks Reeling
In 1993, an ambitious, young President, fresh to the White House, embarked upon a radical attempt to reform how Americans receive healthcare. Concerns about the implications of this reform for healthcare companies drove the stocks of pharmaceutical giants, HMOs, hospital groups, and medical equipment manufacturers into the ground. President Clinton had the advantage of having his party represent the majority in Congress, but saw his plans for reform absolutely shut down by a minority party who used scare tactics to paint the proposals in a harsh and critical light, suggesting that they would absolutely devastate healthcare as we know it in America. The stocks recovered only after it became clear to all but the comatose that healthcare reform was not going to happen.
Anyone who bought healthcare stocks in late 1993 and throughout 1994 bought great companies laid low by the worst fear of all---fear of something anticipated but not yet real. Every day investors can see stocks pummeled based on fear of what might happen without any proof that these fears have a basis in reality. It is often the investor who can look beyond the fear and begin to quantify what might happen, making cool and rational judgments about realistic possibilities, who can profit from what can only be termed mass hysteria.
Flash forward to 1995. The Republican majority, without even the benefit of a sitting president, has proposed a radical reform for the Medicare trust fund which has the potential to reduce substantially Medicaid reimbursement. Many once-great stocks have been brought down by the panic that ensued as commentator after commentator proclaims "the end of Medicare as we know it."
Companies like Integrated Health Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:IHS)") else Response.Write("(NYSE:IHS)") end if %>, down $4 1/8 to $22 3/4 after reporting earnings up 24% and in line with consensus expectations, have borne the brunt of this attack. Integrated Health Services currently trades at 10 times trailing earnings and only 7.5 times next year's earnings. Analysts estimate that the company can grow at an average rate of 22.39% annually for the next five years. Integrated Health Services has been crushed as Medicare reform has moved through the House and Senate, but without any logical reason. Even if the reforms were so devastating that Integrated Health Services should see its growth for the next five years *cut in half*, the stock would still be worth between $30 and $33 based on a conservative 10 or 11 times multiple.
Integrated Health Services is far from alone in its plight. Every company in the group has been absolutely pulverized. Living Centers of America <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:LCA)") else Response.Write("(NYSE:LCA)") end if %> fell $3 3/8 to $25 5/8 today, down from $34 a month ago on no news at all. Healthcare & Retirement <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:HCR)") else Response.Write("(NYSE:HCR)") end if %> fell $2 3/8 to $28 3/4, Manor Care <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:MNR)") else Response.Write("(NYSE:MNR)") end if %> tumbled $5/8 to $32 3/8 and Horizon/CMS Healthcare <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:HHC)") else Response.Write("(NYSE:HHC)") end if %> plopped down $1 1/8 to $18 5/8 on news that NatWest was lowering ratings because the current bill on the table "is a disaster" for nursing home companies. The list of casualties is even longer than this, including Grancare <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:GC)") else Response.Write("(NYSE:GC)") end if %> down $1/2 to $13 and Arbor Healthcare <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:AHCC)") else Response.Write("(NASDAQ:AHCC)") end if %> down $1 to $17.
The hysterical reaction from the analyst community is reminiscent of the way that they perceived the "devastating implications" of Clinton's healthcare reform. The fact that the minority party was successfully scaring most Americans in an effective manner was ignored. This time around, the Democrats even have an advantage over the Republicans who stopped healthcare reform; they have a sitting President who is ready, willing, and able to veto the bill.
The Medicare reforms are in the omnibus budget that was passed by the House earlier this week 227-203---very far from the 60% approval the Republicans require to make it veto-proof. Clinton has focused specifically on the Medicaid reforms as nothing short of cruel, with even his press secretary, Mike McCurry, hinting that they were "evil." Given the fact that the measure will pass in the Senate with even less of a majority than in the House, the worries about the Medicare reform represent a buying opportunity in the opinion of the Daily News.
One stock in particular, Sun Healthcare <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:SHG)") else Response.Write("(NYSE:SHG)") end if %>, down $5/8 to $9 3/8 today, is especially interesting for the intrepid. The company has the long shadow of a Health & Human Services investigation hanging over it. At one point in the last 52 weeks, Sun was worth $28 a share. At its current price, Sun has a lost a whopping $850 million in market capitalization based on concerns about the investigation and Medicare reform. With recent cases like Sun's settled for amounts far less than originally anticipated, and the unlikely possibility that Medicare reform will be as crippling as anticipated, the shares, currently trading at 9 times trailing earnings, might prove very interesting for anyone with a longer-term focus. Sun should make $1.55 per share in 1996, which would mean it is trading at six times next year's earnings. Growing annually at a 22% rate, according to Zacks Analyst watch, even a severe decrease in its long term growth rate to 10% would suggest that the stock is worth $15 a share.
As always, investors are urged to do their own homework before buying any stock, no matter how strongly anyone else recommends it. However, the parallels to the great Healthcare Scare and the low multiples that these fast-growing companies are trading at suggests that if you were to buy into a cash-strong retirement care company with good margins, solid market share, and firm growth prospects, you could beat the market over the next 12 to 24 months.
CALENDAR: Monday's Economic Events
---13- and 26-Week Treasure Bill Auction
---September Personal Income and Outlays (8:30)
Byline: Befumo/Sheard (MF Templar/MF DowMan)