INDEX:

I. Market News: Stocks Gain Momentum Late
II. Heroes: Penn Traffic, Ann Taylor, Intuit, Spyglass, Maxtor
III. Goats: Franklin Quest, Nutrition/Life, John Q. Hammons, Pet Practice
IV. Investment News: Is Kulicke & Soffa Repeating Intel's Disaster?
V. Calendar: Thursday's Economic Events

MARKET CLOSE

DJIA: 4766.68, up 11.20
S&P 500: 584.23, up 2.73
NASDAQ: 1040.51, up 4.45

MARKET NEWS

After remaining flat for most of the session, stocks picked up a little steam late in the afternoon to register respectable gains for the day. Weaker-than-expected economic data from the purchasing managers boosted the bond market, but did little for stocks as most investors are keeping at least one eye on the children in Washington who are playing chicken with the nation's budget.

HEROES

As if on cue to underscore our point in yesterday's news about the potential danger involved in shorting stocks, MF Shorty got it in the pants today as supermarket chain Penn Traffic <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:PNF)") else Response.Write("(NYSE:PNF)") end if %> clawed its way up $1 to $11 7/8. MF Shorty shorted the company in the Shortfolio, a collection of shorts including Coca-Cola <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:KO)") else Response.Write("(NYSE:KO)") end if %> among others. MF Shorty's take on Penn Traffic is that the company is basically outclassed, with lousy service and a huge debt-load. Check out of the Shorting Stock folder over in the Let's Talk Investment Approaches area. Even with today's surge, MF Shorty is still way ahead on his Penn Traffic short and the folder has made for a fascinating discussion of how margin plays into shorting. . . something you don't see too often.

Sometimes a stock can fall so far, so fast that just about any excuse for news will prop it up. Ann Taylor <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:ANN)") else Response.Write("(NYSE:ANN)") end if %> was just such a stock today, up $7/8 to $11 7/8 after the CEO confirmed that the company will break even or show a small profit in the third quarter, in line with analysts' estimates. CEO Sally Frame Kasaks stated that the company has sold a significant amount of its fall fashions at full price and had reduced its inventories per square foot by 20% to 25%. Ann Taylor had been recommended eons ago as an alternative to The Gap <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:GPS)") else Response.Write("(NYSE:GPS)") end if %> when Fool Editor Tom Gardner was looking for a retail stock. Given the performance, Tom has to feel good about his choice of The Gap. Although Ms. Kasaks has alleviated a lot of the near-term uncertainties, Ann Taylor still presents a troubling profile given the amount of debt the company has added in the past few months.

Intuit Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:INTU)") else Response.Write("(NASDAQ:INTU)") end if %> continued to show that the best thing that ever happened to the company was calling off the merger with Microsoft last year. Intuit, up $6 3/4 to $78 3/4, would have been purchased at $42 1/2 (split-adjusted) otherwise. Microsoft would have gotten quite a deal if they had managed to pull it off. Today Intuit was talking about a version of Quicken with Netscape's Navigator built in and providing free Internet access as a way to hasten the move to online banking, where the company's real future lies. The CheckFree IPO later this month gives Intuit a boost as well; it holds a substantial interest in CheckFree and will benefit from CheckFree's newly capitalized ability to expand.

Spyglass <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SPYG)") else Response.Write("(NASDAQ:SPYG)") end if %> surged for the fourth day in a row, up $7 to $56 3/4 after reporting income of $0.20 per share versus $0.15 in the same period a year ago. The Internet company also added more than a dozen partners to its roster this quarter, including CheckFree, Prodigy, CompuServe, and Netscape. The Internet trade show taking place this week in Boston has also buttressed shares of all Internet related companies lately. Spyglass focuses on dealing with big companies rather than trying to tap into the more volatile consumer market, and as a result has been relatively quiet compared to Netscape, UUNet, and a number of other Internet-related companies. However, at least in the near term, it will be the businesses rather than individual consumers that generate the real revenues.

Maxtor Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MXTR)") else Response.Write("(NASDAQ:MXTR)") end if %> popped up $1 9/32 to $6 9/32 today when Hyundai offered $6.70 per share for the remaining outstanding shares Hyundai doesn't already own. Maxtor makes and markets hard disks for desktop and mobile computers and this move suggests that Hyundai continues to be interested in breaking into personal computer related products. Hyundai reported that it held a 39.8% stake in Maxtor in June of 1994, and speculation has raged ever since about whether they would scoop up the remainder.

GOATS

Franklin Quest <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:FNQ)") else Response.Write("(NYSE:FNQ)") end if %>, in MF Templar's Neocontrarian portfolio, got hammered today, down $1 1/4 to $22 5/8. Franklin Quest has been down on light volume for the past few days, and a call to the company today revealed that institutional brokerage William Blair analyst Chuck McDonald cut his rating on the stock from Buy to Hold. McDonald told the Evening News that he lowered his rating on Franklin Quest because of a slight drop in their customer retention rate (from 90% to around 85%) and because of increased competition from smaller start-up companies imitating Franklin's success. The higher end of the planner market has become more competitive as a number of companies are entering through multiple sales channels. Franklin Quest makes personal productivity products, specializing in planners and inserts, selling these through retail, mail-order, and seminar channels.

Nutrition for Life <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:NFLI)") else Response.Write("(NASDAQ:NFLI)") end if %> topped yesterday's 12% drop with another fall today, down $4 to $31. The company had absolutely no news to prompt the drop and traders attributed that old bogey man "profit-taking" as the villain. Ronnie Meaux, the company's Treasurer, summed up the situation candidly, "I think the market just determined that the shares were priced too high." The Houston-based company distributes vitamins, minerals, and weight management products. It recently emerged as a hot momentum stock after it completed a reverse-split that brought the share price into a range that was at least semi-respectable. It is a statistical oddity, as well, given that most companies under-perform the market after a reverse split.

John Q. Hammons <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:JQH)") else Response.Write("(NYSE:JQH)") end if %> reported a solid quarter yesterday, with earnings up 100% from last year's pro forma levels. The stock traded down $1 7/8 to $9 7/8 today, however, as a result of a clause in that report where Hammons stated that although cash flow from operations is not expected to be affected negatively by opening of new hotels, higher depreciation charges will hurt earnings in the seasonally slower fourth and first quarters. By introducing uncertainty into the near-term picture, these great earnings were ignored by the investing masses, prone to hysterical fits of panic. Does a quarter or two of higher depreciation charges change the long-term picture on this issue? Probably not. John Q. Hammons remains optimistic about earnings beyond these two quarters.

Pet Practice <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:VETS)") else Response.Write("(NASDAQ:VETS)") end if %> was howling today, down $1 1/2 to $11 after reporting earnings apparently not in line with expectations. It's hard to tell since no analysts follow this publicly traded veterinarian chain. In fact, figuring out how much they made per share actually required a calculator. You know a company is not actively traded when they report earnings and don't bother to break them down into per-share numbers. Perhaps all this talk of Medicaid and Medicare cutting has scared owners of this stock as well. Then again, maybe not. Regardless. . . Woof!

INVESTING NEWS: Intel Redux? Well. . . Not Exactly

Does this story sound familiar at all?

A problem is discovered with a semiconductor-related product manufactured by an industry giant. A minute defect that will only affect a minority of sophisticated users has been detected by the company. The product is the company's most recent iteration of advanced technology that dominates the world market. Wall Street has a seizure in response to the news, convinced that dire things await the company and that the future is indeed bleak. The stock plummets as nervous investors move out to find other opportunities.

Intel Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:INTC)") else Response.Write("(NASDAQ:INTC)") end if %> and its Pentium chip fiasco circa late 1994, right? Wrong. This is Kulicke & Soffa <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:KLIC)") else Response.Write("(NASDAQ:KLIC)") end if %> today.

Kulicke & Soffa is the world's largest manufacturer of "back-end" semiconductor equipment. Dominating the world market for wire bonders, the company's only competition is from Japanese companies who are currently mired in a horrific dollar-yen exchange rate. Wire bonders connect wires to semiconductor chips and have become increasingly sophisticated as companies like Intel Corp., Cyrix, and NexGen all begin to manufacture advanced central processing units beyond the next generation beyond the Pentium. Intel Corp., in fact, demonstrated the Pentium Pro today to the world---a day when Kulicke & Soffa stock should be soaring in response to the need for hundreds of sophisticated wire-bonders to replace the motley mass that is currently churning out 486 chips. So why did the stock plunge $8 1/4 to $26 3/4 today?

The Willow Grove-based corporation reported today that it has pulled its proposed secondary offering because of a recently discovered problem with its latest gold ball bonder, the 1488 Turbo automatic gold ball wire bonder. In the days leading up to the road show for the secondary offering, about half of the 1488 Turbos began to fail a minute specification in final testing. The diameter of 67 of the 68 gold balls on the 1488 Turbo must be within a tolerance of 2/10,000ths of an inch in order to meet their specifications. About half of the units the company has produced have had two or three balls failing to meet the criteria rather than the allowed single ball. The problem only affects the very high-end companies which have tight tolerances and Kulicke & Soffa believes that many of its customers, if willing, could work around the defect.

The comparison with the Pentium problem stops here, though, for three reasons. The first is that none of the products failing to meet specifications have been sent to customers. Kulicke & Soffa has sold more than 1,000 of the bonders this year with no reported problems and maintains that no equipment with this problem has been shipped. There may be little or no impact to earnings if they can fix the problem within the next few weeks. Unlike Intel's situation where literally thousands of defective products were shipped, Kulicke & Soffa has all of its defective units safely at its factory. This allows the company to work with customers on a case-by-case basis, essentially proposing a "work-around" for customers whose applications might not need the same precision as these specifications require.

The second reason is that any money Kulicke & Soffa will spend this quarter fixing the problem will come out of the gross margins. They do not anticipate any one-time charges related to the situation. If Kulicke & Soffa has to set up a reserve for machines next quarter, this will also come from the gross margins. Intel, by comparison, took a significant one-time charge for its Pentium problems.

The last difference is not numerical, but qualitative. Although the situation would not have been revealed so soon if the company had not been involved in a secondary offering, which increases scrutiny because of the increased demands for disclosure in the prospectus, Kulicke & Soffa came forward immediately and assured investors that it will meet customer demands and that it will not ship any defective products. Andy Grove of Intel, by comparison, was content to wait until he was forced into a recall after the company initially told customers there wasn't really a problem at all.

Kulicke and Soffa feels more than comfortable with the current range of estimates on its quarter to be reported next week, which is from $0.76 to $0.81 per share. Since there are no machines in the field with this problem and no defective machines were shipped in September, the next quarter's earnings will not be affected by this recent development. In fact, the company just added a second shift to meet demand in the last quarter, and has not slowed down manufacture this quarter despite the problem. Kulicke & Soffa will attempt to determine what is causing the defect while producing on schedule, keeping machines that do not make the specifications in its factories for retro-fitting.

The stock fell because of the uncertainty of the situation, pure and simple. Officials at the company will not say if this will cost money or not. They do not even know what is causing the problem yet, and have machines they can't ship sitting around as a result. With ten weeks left in the quarter, however, the company could still get its act together and meet estimates. The problem, of course, is that this is by no means a sure thing. In the end, it comes down to a judgment about the management and whether it can pull this off. Investors who were unwilling to take that chance pulled out of the stock today. Since the company doesn't know how much this will cost, no analysts have changed their numbers on the stock yet. The long-term picture, out more than two quarters, still remains intact. With the demonstration of the Pentium Pro today and Intel's announcement of a new fab for CPU production in Ireland two weeks ago, the long-term picture is actually better than it was a few weeks ago. Is this an opportunity created by near-term uncertainty or, as the technical folks like to say, "is the market telling us something because it knows better than us?" As the Evening News is never going to let the market tell us it knows better, we prefer to go with the former.

CALENDAR: Thursday's Economic Events

---Initial Unemployment Claims (8:30)
---September Factory Orders (10:00)
---Weekly Fed Data (4:30)

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