INDEX:
I. Market News: Market Crumbles Under Tech Stocks
II. Heroes: Newbridge Net., Three-Five, Geerlings & Wade, Gander Mntn.
III. Goats: Cirrus, Misc. Audio & Video Chips, Oxford Health, Read-Rite
IV. Investment News: SoundView Sparks Technology Flight
V. Calendar: Wednesday's Economic Events
MARKET CLOSE
DJIA: 4797.03, down 16.98
S&P 500: 586.32, down 2.14
NASDAQ: 1043.87, down 18.27
MARKET NEWS
Analyst downgrades in the technology sector (see Investing News below) sparked a tremendous panic sell-off on the Nasdaq. Down at one time more than 20 points, the Nasdaq closed off 18 points, the equivalent of 85 or 90 Dow points. The Dow held up a little better for most of the day, but it succumbed to the pressure in the afternoon and shed 17 points as well, closing under 4800.
HEROES
Newbridge Networks <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:NN)") else Response.Write("(NYSE:NN)") end if %> continued its trend opposite the direction of technology stocks today. Normally this is bad news for shareholders, but today it was great as the stock rose $3 1/4 to close at $35 7/8. The troubled Canadian manufacturer of networking equipment benefited from an Alex. Brown upgrade to "buy." Newbridge has been a dog over the last 12 months, shedding around 8.2% in the biggest technology rally since the 1967 'Tronics boom. Analyst Nick Coutros apparently believes the much-talked-about turnaround for the company is underway.
Three-Five Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:TFS)") else Response.Write("(NYSE:TFS)") end if %>, featured in the Evening News last week, continued to claw its way toward higher ground, regaining $1 1/8 to $23 1/8. Today must have been the day when all the technology stocks which lost money over the last 12 months made money while all the winners took a bath---Annual Reversal Day! A darn shame no one warned us. Product development problems have made 1993's hottest stock, Three-Five Systems, a dog this year, reporting two ugly quarters in a row. Apparently investors anticipate a turn-around and rotated into the shares today---probably from a stock on our Goats list.
Continuing Big Loser Turnaround day, shares of Geerlings & Wade <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:GEER)") else Response.Write("(NASDAQ:GEER)") end if %> made a move up $1 to $7 1/8 on heavy volume. The direct mailer of vintage wines was cut in half last month when it reported less-than-vintage earnings and stated that it was having problems getting permission to mail wine to a couple of key states. Geerlings & Wade maintained high growth until then by moving into two or three new states each quarter, several quarters in a row. Can things be as bad as investors thought when they killed the shares after its reported loss? Apparently not for some investors.
Gander Mountain <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:GNDR)") else Response.Write("(NASDAQ:GNDR)") end if %> shares popped up $1 1/8 to $6 3/4 on no news, according to the company. In fact, the company cannot explain at all why the stock rose today---today of all days. A quick look at the performance over the last 12 months, a period in which they lost 34% in a great market for small caps, confirms that they are just another participant in Big Loser Turnaround day. The manufacturer and retailer of outdoor clothing has hired Smith Barney to either help it turn things around or to sell itself to the highest bidder. Contrarian sentiment today picked it as a favorite, perhaps hoping that it's close to a deal? Maybe? Perhaps they think regulators are so busy sorting through all of the options activity from Friday before the International Paper buyout of Federal Paper Board that they have no time to check out insider activity here. We sure as heck hope not.
GOATS
Cirrus Logic <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CRUS)") else Response.Write("(NASDAQ:CRUS)") end if %> led the graphic and audio chip stocks lower today with news that one of its biggest customers has cut back orders. Cirrus was down $12 3/4 to $28 today, stating that next quarter's earnings per share (EPS) would be 10-15% below consensus estimates because of the change. Speculation on the Street was rife about which company canceled, and all eyes focused on Intel Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:INTC)") else Response.Write("(NASDAQ:INTC)") end if %> and Packard Bell as the possible culprits. Cirrus Logic stressed that this was a third-quarter aberration and that it foresees revenue growth in the double digits for the fourth quarter ending in March, and in the 40-60% range by next fiscal year. Even if Cirrus comes in at $0.20 to $0.21 a share for the third quarter and has top-line growth only in the double digits for the fourth quarter, coming in around $0.33 per share, the company will make $1.35 this year and around $2.00 next year. Trading at 13 to 14 times next year's estimates with long-term growth projected in the mid-20s, Cirrus might make an interesting speculation.
Given that the deficit in orders was the result of one customer decreasing its "forecast demand," the question of whether this hit comes as a result of a slowing chip market or one of the big ten personal computer manufacturers getting smashed by competitors seizing market share is anyone's guess. It is important to remember that despite the hype surrounding the PC stocks, the industry remains absolutely cut-throat, with fierce competition for market share. Many analysts speculated that Packard Bell's lost market share was the real problem. Packard Bell contracts with Intel to make motherboards with Cirrus chips, explaining why analysts initially thought Intel was linked to the decreasing orders. (In effect, they were.)
Other video and audio chip stocks were down on Cirrus's bad news today. Trident Microsystems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:TRID)") else Response.Write("(NASDAQ:TRID)") end if %> fell $1 7/8 to $32 1/8, Chips & Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CHPS)") else Response.Write("(NASDAQ:CHPS)") end if %> was left behind, reduced $3/8 to $9 1/2, and S3 <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SIII)") else Response.Write("(NASDAQ:SIII)") end if %> lost $1 7/8 to $14 3/8. Companies which make static random access memory (SRAM) also lost out today: Cypress Semiconductor <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:CY)") else Response.Write("(NYSE:CY)") end if %> slipped $2 to $16 3/4, Integrated Silicon Solutions <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:ISSI)") else Response.Write("(NASDAQ:ISSI)") end if %> was thrashed for $1 1/2, closing at $27 1/4, and Integrated Device Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:IDTI)") else Response.Write("(NASDAQ:IDTI)") end if %> lost $7/8 to $18 7/8. The downgrades on LSI Logic <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:LSI)") else Response.Write("(NYSE:LSI)") end if %> pressured this gang lower.
Oxford Health Plans <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:OXHP)") else Response.Write("(NASDAQ:OXHP)") end if %> was savaged for $13 1/8, finishing at $69 1/4 today. This was one of the biggest drops since early this year when healthcare stocks were punished on fears about increased medical loss ratios in spite of increasing revenues and profits. And lo and behold, Oxford's medical loss ratio jumped to 78.1% from 75.9% a year ago. Beating estimates by a penny, Oxford dimmed the celebration by forecasting a tough fourth quarter, one which could fall to the low-end of analyst expectations because of increased marketing costs, higher administrative costs and the expense of a newly installed computer system. Oxford's results should not be that much of a surprise to the market given that Mid-Atlantic Medical and a number of the HMOs have reported similar problems. Value Health <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:VH)") else Response.Write("(NYSE:VH)") end if %> lost $2 1/2 to close at $23 today after reporting ugly earnings and suggesting earnings growth would slow to 16-18% next year as it restructures. Check out MF Uptrend's Healthcare folder in the Industry Analysis message boards for more details.
Read-Rite <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:RDRT)") else Response.Write("(NASDAQ:RDRT)") end if %> brought the storage sector lower by announcing it would put $250 million into added manufacturing capacity next year. Read-Rite was off $2 to $35 1/8 on the news, which signals even uglier price wars ahead for component makers. Hutchinson Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:HTCH)") else Response.Write("(NASDAQ:HTCH)") end if %> and the soon-to-be combined Seagate Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:SEG)") else Response.Write("(NYSE:SEG)") end if %> and Conner Peripherals <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:CNR)") else Response.Write("(NYSE:CNR)") end if %> are the most threatened by this move. Hutchinson lost $3 3/4 to $54 1/4, Seagate shed $3 3/8 to close at $44 7/8 and Conner fell $1 5/8 to $18 1/8. The storage industry has been characterized by particularly brutal competition and many sellers are reacting ahead of the price-cuts they believe will come as more capacity comes on line.
INVESTING NEWS: Whittington & Kurlak---Chip Killers
Yellow police tape blocked off the New York Stock Exchange today. Beyond the temporary barricade, investigators and reporters milled about, careful not to step on the chalked outlines of the corpses littering the floor. A tidy hand neatly cribbed the name of each victim in the upper corner of its cut-out shape: Micron Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:MU)") else Response.Write("(NYSE:MU)") end if %>, LSI Logic <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:LSI)") else Response.Write("(NYSE:LSI)") end if %>, Texas Instruments <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:TXN)") else Response.Write("(NYSE:TXN)") end if %>. . . the list seems endless.
Officials were not commenting on the blood-bath which occurred on the floor of the exchange and no political figure has stepped forward to offer a calm and reasoned explanation. Across the country, market-makers were reporting even more gruesome slayings among the loosely-affiliated Nasdaq stocks than those witnessed on Wall Street. Was this gang activity, akin to drive-by shootings? Did some criminal conspiracy mark these stocks for death?
Above all these queries, one question burns in the minds of bemused individual investors---who is to blame?
Sometimes investing can be more like detective work than conventional research; you are often confronted with the "corpse" first and then forced to make a thorough-going investigation to locate the culprit. Today's pullback in the Nasdaq was no exception; it was well underway before the first bits of news even began trickling out of the conventional sources. CNBC's talking heads verbally rounded up the usual suspects without really beginning to tackle the specifics of this event until well past noon. "High valuations, low dividend yield, corrections are good for the market, they have to happen periodically," ad nauseum.
A number of concomitant events mushroomed into today's nasty sell-off. Any one of these factors by itself should not have caused such outright hysteria. Taken together, they struck at the heart of investors' fears regarding technology, particularly in the semiconductor and semiconductor equipment stocks.
Rick Whittington of SoundView Financial was one of the forces today, breaking out his red pen for the third time this year and making wholesale corrections of his stock ratings. Whittington has the dubious distinction of sparking two of the more brutal sell-offs in technology stocks this year. Today Whittington vented his spleen on the semiconductor equipment stocks, issuing a host of downgrades.
x Applied Materials Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:AMAT)") else Response.Write("(NASDAQ:AMAT)") end if %>, down $5 1/8 to $48 3/4, was cut to near-term ''hold'' from ''buy.'' Whittington maintained his long-term ''buy'' rating.
x Credence Systems Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CMOS)") else Response.Write("(NASDAQ:CMOS)") end if %>, down $2 3/4 to $35 1/4, Lam Research Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:LRCX)") else Response.Write("(NASDAQ:LRCX)") end if %> down $9 to $56, Megatest Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MEGT)") else Response.Write("(NASDAQ:MEGT)") end if %>, down $3 3/8 to $26 7/8 and Teradyne Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:TER)") else Response.Write("(NYSE:TER)") end if %> down $4 1/8 to $29 3/4, all slashed to near-term ''hold'' from ''buy'' and all considered to be long-term ''holds.''
Whittington's cuts came with reductions in the earnings estimates on each of these companies. In lowering his earnings estimates for fiscal 1995 and 1996, however, Whittington only brought his numbers closer to the rest of Wall Street's expectations. His estimates are still higher than the consensus estimates for each of these issues. Another peculiar factor in this downgrade is his choice of stocks. Pairing Megatest and Teradyne for a downgrade makes sense because of the upcoming merger between the two companies, so in reality, only four stocks were downgraded by SoundView today. Of these four stocks, one was kept at a long-term "buy," suggesting that if your outlook is 12 months or more, he still believes there's some profit to be made in this issue.
Essentially, Whittington is trying to do to semiconductor equipment stocks what he has been trying to do for the last few months with his downgrades in the SRAM makers; he wants to call the top in the shares of each company perfectly. Three of his "four" downgrades are trading at 15 times his estimates for next year, suggesting that this is his cut-off point for a ratings move to "hold." The fourth company, Lam Research, will lag behind Applied Materials in earnings growth next year, according to consensus estimates, although it does carry a lower multiple. Taken as a whole, these "downgrades" simply move estimates into line with the consensus and suggest that the easy money has already been made.
SoundView Financial was not the only brokerage making noise in the chips today. Merrill Lynch & Co. analyst Thomas Kurlak lowered his intermediate-term rating on Intel Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:INTC)") else Response.Write("(NASDAQ:INTC)") end if %> and Texas Instruments <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:TXN)") else Response.Write("(NYSE:TXN)") end if %> to ''hold'' from ''buy,'' while maintaining his long-term ''buy'' rating on each. Intel fell $4 7/16 to close at $66 3/8 and Texas Instruments <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:TXN)") else Response.Write("(NYSE:TXN)") end if %> tumbled $1 5/8 to $60 7/8. Micron Technology Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:MU)") else Response.Write("(NYSE:MU)") end if %> and LSI Logic Corp were cut to short-term "hold" and marked down to long-term "above average." SRAM-maker LSI Logic, which has been a victim at SoundView's hands previously, lost $3 1/2 to $41 1/2. Kurlak is particularly concerned about an oversupply of SRAM chips in some categories, although this could be limited to a few types, with many others remaining in short supply. Commodity chip makers will face pressure next year as more capacity comes on line; this has been the belief of the Evening News for months now, whether they be SRAM or DRAM makers. Picking out which companies make non-commodity chips---that is the tough part.
Micron Technology is one of the more commodity-oriented chip makers. The company has already fallen sharply for the past two days on reports that dynamic random access memory (DRAM) prices on the spot market continue to slip, but fell again today, losing $3 5/8 to close at $60 7/8, on news of the Merrill Lynch downgrades. The commodity pressures here might be overstated, however. Given that most computer manufacturers set DRAM prices by future contracts and don't buy on the spot market, the weighting traders are giving to the decrease in the volatile spot prices might be overdone, especially considering that the spot price remains above the contract price, even after its recent downtrend.
Cirrus Logic Inc., detailed in the Goats column above, was the last nail in the Nasdaq's coffin today. The company, which sells its logic chips to the top 10 personal computer makers, scared the pants off of investors when it reported that one of its customers has reduced its graphic and audio chip orders. No reason was given for the order decrease, but the market assumed it foretells a slowdown in demand across the board, signaling to traders that it's time to head for the exits.
Many-factored pullbacks like today's should not be viewed as disasters, but as opportunities to locate companies that have been battered to unreasonable levels in high volume selling. Last month about this time, the Evening News pointed out that Global Village <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:GVIL)") else Response.Write("(NASDAQ:GVIL)") end if %> had been shellacked, falling to $10 for absolutely no reason other than a general sell-off. The stock trades near $20 today. This is an example of the kind of radical over-reaction that occurs on days like today when institutions sell in order to lock in profits for the year; perfectly good companies just get swallowed up, presenting buying opportunities for the more stalwart individual investors who don't have to answer to a group of shareholders each quarter. Take a few extra minutes tonight and look at the share prices on some of the technology companies you have been following all year. Do they look cheap considering next year's estimates and long-term growth? Have their fundamental stories changed? If not, head out to those message boards and find out which ones you might want to purchase tomorrow.
CALENDAR: Wednesday's Economic Events
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Byline: Befumo/Sheard (MF Templar/MF DowMan)