I. Market News: One Step Closer to Nothing
II. Heroes: AAP, MAY, EL, CA, IPIC, CMGI
III. Goats: HWP, FNLI, ISLI, LOJN, HELX
IV. Investing News: What Is An Analyst?
MARKET CLOSE
DJIA: 4989.95, up 20.59
S&P 500: 600.07, up 2.73
NASDAQ: 1045.03, up 0.55
MARKET NEWS
The Dow rose close to that much-hyped but ultimately meaningless 5000 mark today. America Online is putting together a big series of articles to mark the impending event. The Fool will take part with an offering titled "The Dow at 5000: Who Cares?" Keep your eye out for it.
HEROES
Merrill Lynch lent a hand to Amway Asia Pacific <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:AAP)") else Response.Write("(NYSE:AAP)") end if %>, driving shares of the Southeast Asian network marketing concern up $2 7/8 to $32 3/8 in heavy volume. An analyst at the firm upgraded the stock to "near-term above average" from "near-term hold," maintaining his "long-term buy" rating. Sifting through the analyst double-speak, the gentleman was attempting to communicate that he thinks the share price will rise in the next few weeks as well as over the next year. Amway Asia Pacific is the exclusive distributor for Austrailia, China, Hong Kong, Macau, Malaysia, New Zealand, Taiwan and Thailand and many think that it will benefit from the rising standard of living and the hunger for American goods in the region. Earnings growth last quarter was a little spotty, however, which had caused the stock to sell off significantly.
Maybelline <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:MAY)") else Response.Write("(NYSE:MAY)") end if %> rose today when the successful initial public offering of Estee Lauder <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EL)") else Response.Write("(NYSE: EL)") end if %> floated all cosmetic boats higher. Maybelline rose $1 5/8 to $24 5/8 on higher than average volume while Lauder, which came public at $26, had its first trade at $32 1/2 and closed up $2 from there at $34 1/2. Both cosmetics giants probably look really attractive to money managers looking to get out of volatile technology issues right now. Interestingly, Estee Lauder offered about 16 million shares but only about half traded today, meaning that some of the people who got in on the IPO actually *kept* the stock, as opposed to IPOs like Netscape and General Magic which had volumes on the first day higher than the amount of shares offered.
Computer Associates <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:CA)") else Response.Write("(NYSE:CA)") end if %> surged $3 3/8 to $58 1/4 today after a tout by Money Magazine, home of the financial industry's Everyman, Dan Dorfman. Investors discovered in the December issue of Money released today that Computer Associates was one of the "eight S&P 500 stocks to buy now," along with Cigna, Citicorp, Chemical Bank, King World Productions, Philip Morris and Mobil. Money Magazine neglected, however, to include any information about the past performance of similar selections. Apparently just an oversight on their part -- certainly they report such numbers in a Foolish manner. Otherwise, what credibility would they have? Computer Associates, by the way, is a software company dominant in the client/server and systems management arena that tends to buy out other developers rather than do its own development. CA recently acquired Virginia-based LEGENT software.
Interneuron <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:IPIC)") else Response.Write("(NASDAQ:IPIC)") end if %> got a jolt from a Food & Drug Administration (FDA) panel today -- a committee that WASN'T put on furlough by the budget impasse. Shares of Interneuron rose $3 3/4 to $19 1/4 after the company's anti-obesity drug, Redux, won a recommendation for approval from the panel.
CMG Information Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CMGI)") else Response.Write("(NASDAQ:CMGI)") end if %>, which operates in part an Internet venture capital fund, rose $10 3/4 to $57 3/4 as Internet fever continued to burn. The thinly traded stock---with a float of roughly 4.5 million shares---is particularly volatile. Macintosh modem manufacturer Global Village <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:GVIL)") else Response.Write("(NASDAQ:GVIL)") end if %> surged ahead $2 to $23 1/4 in Internet fever as well. Funny thing is, neither of these companies earns the majority of its profits from Internet access or Internet commerce yet they have been swept up in a huge tidal wave. Investors looking for a nice internet short might want to check these two puppies out.
GOATS
Hewlett Packard <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:HWP)") else Response.Write("(NYSE:HWP)") end if %> slumped $4 3/4 to $88 1/2 in spite of reporting earnings that were slightly ahead of expectations. The sequential decline in fourth quarter gross margins is what had some momentum players bailing out of the Palo Alto-based manufacturer of computers and computer peripherals. Rumors that the company would smash estimates might account for some of the downside volume today. Analysts explained that the gross margin fell because the company sold more computers and printers than anyone expected -- these products carry lower gross margins and tend to pull down overall gross margins when they are more pronounced in the product mix. MF Boring follows Hewlett Packard over in the Boring Stocks folder -- check over there for his reaction, which is probably pretty much the same as the one here at the Evening News -- *overreaction*.
Franklin Quest <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:FNQ)") else Response.Write("(NYSE:FNQ)") end if %> to fall today, down $1 1/8 to $19, after Hambrecht & Quist came out with a "hold" rating on the stock. The analyst was motivated by a conference call with the company yesterday -- a conference call MF Templar reported on in his Neocontrarian folder (in the Let's Talk Investment Approaches message boards) right after it finished up. In fact, MF Templar reported last night he had sold Franklin Quest for the same reasons the analyst put a hold on the stock today. The analyst cut his first quarter estimates to $0.57 EPS and estimates for the full year down to $1.90 EPS. His 1996 estimates were $2.32 EPS, suggesting that the stock only trades at an 8 or 9 multiple on its forward earnings. However, with tax loss selling exacerbating over the coming weeks, this is a stock that interested investors should look to buy in mid to late December at lower prices.
INTERSOLV <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:ISLI)") else Response.Write("(NASDAQ:ISLI)") end if %> succumbed today, falling $4 5/8 to $11 after it reported a second quarter loss of $0.52 EPS versus estimates of a $0.14 EPS profit. Even if you go through the statement and pull out the complicated one-time charges, operating net income was $0.05 EPS -- still a disappointment. Volpe Welty lowered the company to "buy" from "strong buy" because the company had "lost business momentum," possibly the understatement of the year. What does INTERSOLV do? They're involved in the ultra-hot data warehousing solutions market, the next generation of database applications.
LoJack <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:LOJN)") else Response.Write("(NASDAQ:LOJN)") end if %> plummeted $5 to close at $11 1/4 when it reported today that earnings would be "near the low end" of analysts' expectations. The key New York/New Jersey markets are experiencing slow growth and the company is taking steps to correct its advertising focus. LoJack makes tracking devices for automobiles that operate well in urban areas.
Helix Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:HELX)") else Response.Write("(NASDAQ:HELX)") end if %> stumbled today, down $3 to $32 on absolutely no news. The semiconductor equipment company recently boosted its dividend payment by 127% to a pretty hefty 3.1%, which in this market is nothing to sneeze at. The entire semiconductor equipment group slumped today as investors apparently took their losses or their profits and decided to hop on the Internet train, or the consumer products train, or the oil services ... or whatever the heck the next hot industry is. Semiconductors are dead. Kaput. Fini. At least according to the market. The Fool who values hefty dividend yields, long term earnings growth and a company diversified beyond the narrow semiconductor market might want to take an extra good look at Helix Technology.
INVESTING NEWS: What Is An Analyst?
As semiconductor and semiconductor-related issues have begun to crumple after a long advance, initiated in part by a series of analyst downgrades, some of the commentary in the Motley Fool has gotten rather ugly.
Paranoid fantasies about analysts making comments to move the "market" for multi-billion dollar companies fails to get at the heart of the real dilemma that analysts face -- the fact that they, much like professional money managers, are judged primarily by performance. Instead of worrying about one large portfolio, however, analysts need to be concerned about the multitude of institutional clients that have been sold their analysis and have bought from the analyst's firm based on his or her advice.
Analysts have their performance tracked and measured just like any other financial professional -- the difference is that for analysts performance is not based on the actual change in assets. Rather, the analyst is scored based on the stock price at the moment of recommendations. This means that Rick Whittington of SoundView, for instance, gets credit for buying Micron Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:MU)") else Response.Write("(NYSE:MU)") end if %> at the price his first "buy" recommendation came out. When he declares "hold" a few months later, he gets credit for selling it, according to the scoring system used by both Institutional Investor and the annual Wall Street Journal/Zacks Investment Research -- the premiere ranking services for institutional investors.
If a firm does not have enough of its analysts make the roster of Institutional Investor or the WSJ/Zacks reports, they lose business. Institutions, like mutual fund investors, tend to chase the performance of the items that were hot last year. In the case of analysts, it means if they make one of the sacred lists for an industry for the past year, their career is made. They suddenly have their choice of various firms to hop over to. When they can make the list a few years in a row, they get to write their own ticket. High performance in these annual surveys can mean the difference between working at some small regional concern and working at one of the Big Six brokerage houses.
Many have speculated that analysts purposefully downgrade stocks in order to create buying opportunities for clients. Although in thinly traded issues this might be possible, when you are talking about multi-billion dollar companies, this becomes a little unworkable. In fact, many times one analyst can upgrade and another can downgrade and the market will pick one, almost at random it seems. The real point is this *game*, to provide a short term buying opportunity, would actually work against the analyst in the yearly game of trying to rack up the biggest and best return covering their industry, where the real careers are made.
Certainly, the analyst system of rating companies is something that the individual investor should view with the deepest of skepticism, if not suspicion. The conflicts of interests that analysts next door to investment banking operations have are tremendous. The very fact that a company will pull business from a firm based on what the firms analyst is saying is a manipulative and coercive factor that should make *any* individual investor look at a buy recommendation twice. However, the Evening News staff maintains that it is the game of trying to make careers by racking up big returns that make analysts get whacky with their ratings.
Many investors on the Fool were quite upset when various downgrades of semiconductor and semiconductor equipment stocks occurred. In the face of the tremendous run-ups that these companies have had, unless investors believe that the only direction is up, some caution moving toward the end of the year in an industry that is traditionally cyclical might actually be warranted. The downgrades to "short-term neutral," basically meaning that the stock will not explode over the next month or two, seem pretty accurate thus far and also appear to reflect the reality of professional money managers taking profits, changing allocations and looking toward what industries will outperform next year.
Although many companies have all been tarred with the same brush, it has been said many times in this column that the more commodity-oriented semiconductor companies that are not adding any sort of intellectual value to their product are in for problems as more and more capacity comes on line next year. Conversely, the ramp-up of capacity means capital spending -- but at the same time the market is discounting the capital equipment companies, saying that lower profits at semiconductor companies will mean less capital spending next year. Right now, the market is pricing companies as if *both* are going to happen -- which is the more likely scenario is a question no one is answering. Instead, the analyst community has hedged its bets, taken their "profits", and set itself up to look good in the annual rankings. Nothing more, nothing less.
Have a great weekend. :)
Byline: Befumo/Sheard (MF Templar/MF DowMan)