INDEX:
I. Market News: Program Trading Steals Market Gains
II. Heroes: Tommy Hilfiger, NYCOR, Medicus, Amer. Classic Voyages, St. Ives
III. Goats: Int'l Serv., Westinghouse Air Brake, Three Five, ABS, Davidson
IV. Investment News: The Compleat Shorter
V. Calendar: Wednesday's Economic Events
MARKET CLOSE
DJIA: 4755.48, down 1.09
S&P 500: 581.50, down 1.75
NASDAQ: 1036.06, down 3.63
MARKET NEWS
Yes, the message boards are still not working completely. Hang in there! We're harassing the AOL technical people as much as we can.
Today was one of those days when watching the market just makes long-term investors scratch their heads. After rising nearly 50 points in early trading, the DJIA plunged in the afternoon on sell programs, registering a one-point loss for the day. There's probably some Halloween explanation---mutual fund managers ending fiscal years and turning into witches and warlocks and the like. For us Fools, it doesn't mean much except that we need to remember to turn our calendars to November.
HEROES
Although rare, the few bright stars among the apparel stocks are incandescent. Tommy Hilfiger <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:TOM)") else Response.Write("(NYSE:TOM)") end if %> beat analysts estimates by 29% today, causing the stock to surge $5 3/8 to $38 1/8. Earnings increased 69% on a revenue surge of 64%, showing that Tommy Hilfiger had a strong gain in its margins, magnifying the effect of revenue increases. Although it has been a dismal year for retail stocks, companies which specialize in classic and straightforward fashions like Tommy Hilfiger, Kenneth Cole <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:KCP)") else Response.Write("(NYSE:KCP)") end if %>, St. John Knits <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:SJK)") else Response.Write("(NYSE:SJK)") end if %>, Jones Apparel Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:JNY)") else Response.Write("(NYSE:JNY)") end if %>, and Nautica <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:NAUT)") else Response.Write("(NASDAQ:NAUT)") end if %> have all done extremely well as consumers aren't reluctant to snap up their wares.
NYCOR Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:NYCO)") else Response.Write("(NASDAQ:NYCO)") end if %> was revived today, rising $2 7/8 to $5 after Fedders Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:FJC)") else Response.Write("(NYSE:FJC)") end if %> gave this Sleeping Penny Stock a kiss. Fedders has proposed to snap up the existing shares of NYCOR for $6.25 per share in Fedders stock. NYCOR, which manufactures compressors for air conditioners and thermo-electric heat pump modules, fits right in with Fedders's air conditioner manufacturing business. Fedders has had weak earnings of late, partially the result of increases in component costs---which is what this proposed merger should help to control.
Medicus Pharmaceutical <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MDRX)") else Response.Write("(NASDAQ:MDRX)") end if %> was anything but blotchy today. The manufacturer of skin care products lurched forward $3 to $10 3/8 on a 1,500% increase in earnings per share. The company recently underwent a 1-for-14 reverse stock split to bring the share price out of obscurity and has just delivered earnings of a caliber to get some attention from Wall Street. Medicus also announced today the addition of TRIAZ (an anti-acne medication) to its stable of dermatological medications. Statistically, companies under-perform the broader market after reverse splits. Is Medicus Pharmaceutical an exception?
American Classic Voyages <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:AMCV)") else Response.Write("(NASDAQ:AMCV)") end if %> cruised along today, rising $2 to $12 on news that it exceeded consensus expectations by 50%. American Classic operates two cruise lines, American Hawaii Cruises and The Delta Steamboat Company. The stock is down from its two-year high of $20 per share because of massive losses sustained in the first and second quarters of this year, both greater than anticipated, and as a result, the company lost an estimated $0.42 per share for the current fiscal year. However, with the cruise industry growing at a solid 10% a year and American Classic Voyages holding two nice niches in this market, a growth rate of 20% to 25% from here does not seem completely outside of the realm of possibility. Before today's surprise, the company was only expected to make around $0.40 next year, giving it a fair price in the $15.00 range. The stock currently yields 1.7%.
Yesterday this headline shot across the Dow Jones Newswires: "St. Ives Labs At 52-Week High; Analyst Can't Explain." When Alberto-Culver announced its offer of $15 in cash for each of the outstanding shares of St. Ives Labs <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SWIS)") else Response.Write("(NASDAQ:SWIS)") end if %>, the mystery was solved. St. Ives Labs continued its ascent, rising $1 7/8 to $14 3/8 on news of the $120 million merger. St. Ives is a skin and hair care company with strong brand-name recognition, which is why the shares are attractive to Alberto-Culver. Culver also likes the fact that St. Ives gives them an entry into the skin-care market; previously they have focused purely on hair care products. The acquisition will be non-dilutive to Alberto-Culver in 1996 and accretive thereafter.
GOATS
The world's largest contract cleaning company, International Service Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:ISG)") else Response.Write("(NYSE:ISG)") end if %> of Denmark, tumbled $1 3/4 to $10 1/4 today on a warning that 1995 profits would fall below year-ago levels because of continued difficulties at its US and German subsidiaries. The loss of a number of important contracts and a margin loss from a highly competitive environment will cause earnings per share to fall 20% below the same period a year ago. The company announced this today because a sales campaign that was to pull them out of their funk has also failed miserably.
Westinghouse's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:WX)") else Response.Write("(NYSE:WX)") end if %> cousin, Westinghouse Air Brake <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:WAB)") else Response.Write("(NYSE:WAB)") end if %>, is not doing all that much better than its old parent company, down $1 1/2 to $8 3/4. The company reported earnings that were only marginally above year-ago levels and stated that because of a production slowdown, the fourth quarter would come in below previous expectations. Westinghouse Air Brake manufactures air brakes and related equipment for locomotives, freight cars, and railway passenger cars.
From November of 1993 to October of 1994, Three Five Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:TFS)") else Response.Write("(NYSE:TFS)") end if %> was a wonder-stock, shooting up from roughly $12 per share to an all-time high of $50 per share. Down $1 1/8 to $18 1/8 today, Three Five Systems continues to head back to that multi-year low of $12 per share. Continued bad news in the past two quarters about the delay of two new products has beaten the stock down from its $40 high set last July. Three Five Systems makes LED and LCD technology used in cellular phones, among other products, and has suffered in tandem with Motorola <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:MOT)") else Response.Write("(NYSE:MOT)") end if %> because of inventory problems and a slowdown in cellular sales. With earnings estimates of $1.63 a share for the next fiscal year and a five-year growth rate of 22.5%, this one may be a bargain at 13 times trailing earnings.
ABS Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:ABSI)") else Response.Write("(NASDAQ:ABSI)") end if %> shares dropped $2 5/8 to $9 1/4 today on news that the company has amended its merger agreement with Mercer Forge and A&M Corp. In the new deal, ABS will issue 2.55 million new shares to acquire these properties rather than the previous plan of issuing only 1.6 million shares and taking on interest-bearing debt of $11.6 million. The new deal hurt the stock because ABS Industries was not allowed to assume any more debt and has had to reduce working capital in order to maintain its current senior debt covenants, consequently putting the brakes on sales. Not a sign of a healthy company.
High-flier "edu-tainment" company Davidson & Associates <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:DAVD)") else Response.Write("(NASDAQ:DAVD)") end if %> fell $3 1/8 to $35 1/2 when an Oppenheimer & Co. analyst injected some sanity into the picture. The analyst lowered the stock's rating from Buy to Market Performer and stated that the company is only going to make $0.40 a share in 1995 and $0.67 in 1996. The company is still trading at around 52 times next year's earnings, discounting one heck of a lot of good news. The company has met or beaten estimates all year, however, which has powered the drive since May from the teens to the high thirties.
INVESTING NEWS: Beware the Downside Risk!
Shorting stocks is one of the Foolish methods of beating the market, giving investors a way to profit from otherwise dismal markets. Even though the shorts in the Fool Portfolio to date have met with mixed success, the principle that a sizable short position diversifies your portfolio as well as provides you protection from large-scale down drafts remains sound.
When you "short" a stock, you profit if the stock goes down in value. You accomplish this by borrowing the shares through your broker. The broker then sells these shares and deposits the proceeds in your margin account. You replace those shares in the future (at a lower price, one hopes), profiting on the difference between the two transaction prices. It goes like this:
Motley Fool decides he wants to short Nabor's Noggins <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:NUT)") else Response.Write("(NYSE:NUT)") end if %> because he believes the company's shares are overvalued. Motley gives his broker Chauncy a ring and says, "Chauncy, old chap, can you scrounge up 100 shares of Nabor's Noggins for me to short?" Chauncy replies that he will see if he can find the shares and that he will call Motley back.
A few moments later, Motley's phone rings and Chauncy states that he has found the 100 shares. With the current price of Nabor's Noggins at $10, Motley feels pretty comfortable and tells Chauncy to go ahead and sell the 100 shares. Motley gets $1000 from the transaction (less commissions) and this money is deposited in his margin account.
The next day, Nabor's Noggins pre-releases a bad quarter's earnings results, stating that their flagship Baldy-Shine product was found to cause ulcerative lesions in librarians and NUT has had to pull most of it off the shelves. NUT plunges $5 to close at $5, and Motley spends the evening clapping with glee. Motley dashes off to the phone and calls Chauncy, telling him to buy 100 shares of NUT and return them to whomever he borrowed them from.
So, here's what Motley did:
$1000 Sold 100 shares of NUT at $10, getting $1000
-$500 Bought 100 shares of NUT at $5, costing him $500
$500 Leaving him with $500 of pure profit from the transaction.
Rushing into shorting, however, before one becomes fairly adept at discovering undervalued nuggets can be disastrous. Had the shares of NUT gone up to $20 on news that they were being taken over in a hostile bid from Mr. Ray's, it would have cost Motley $2000 to buy back the 100 shares and he would have lost $1000.
The mechanics of selling short are normally the most confusing part for individual investors, although many people have difficulty trying to figure out what makes a good short. The mechanics are fairly straightforward, since you are just selling and then buying back, rather than buying and then selling. The borrowed shares come from another investor's account; all brokerages as part of their margin agreements force you to allow your shares to be leant out. (One of the ways to make your shares "unshortable" is to make sure they are in a cash account). Another common question revolves around the dividend; the person who is short the stock is forced to pay any dividends to the person he borrowed the stock from.
As for what makes a good short candidate, there are a few schools of thought. The Motley Fool approach normally targets high-fliers trading at spectacular valuations. The danger here is that you might short a really great company, as anyone who shorted Paychex <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:PAYX)") else Response.Write("(NASDAQ:PAYX)") end if %> can attest. Some have suggested you are best served by shorting a low-flier---a stock like KMart <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:KM)") else Response.Write("(NYSE:KM)") end if %> that has so little going for it that things can only get worse. Another alternative is to do paired trades on related companies, where you bet one company will go up and another will go down. For instance, buying Iomega <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:IOMG)") else Response.Write("(NASDAQ:IOMG)") end if %> and shorting Syquest <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SYQT)") else Response.Write("(NASDAQ:SYQT)") end if %> is a perfect example of a paired trade; you are betting that the Zip and Jazz drives will crush the EZ-135.
Although it appears to be spiteful, shorting a stock actually does not hurt the company at all. Whether you buy or sell the stock has no effect on the company or its continuing business. Shorting, in fact, has a long and colorful history, with many of the richest men in the 30s having made portions of their fortunes by shorting the market during the 1929 crash. In fact, shorting has come to be part of everyday speech, with many people telling you not to "sell someone short," or giving you "the long and the short of it" when describing both sides of a problem.
Shorting is a very difficult enterprise, though, because to be successful at it you have to know more than the majority of people who are buying the stock. It is best left as the last feather a Fool puts in his cap before he heads out to beat the market.
CALENDAR: Wednesday's Economic Events
---September Construction Expenditures (10:00)
---October Purchasing Managers' Report (10:00)
---September Composite Indices of Economic Indicators
Byline: Befumo/Sheard (MF Templar/MF DowMan)