I. Market News: Dow Pauses, Nasdaq Plummets
II. Heroes: NetStar, Pittston, Iomega, Fisher Sci., Digital Systems
III. Goats: Micron Tech, Haemonetics, Sonic Sol, Net Express, Norand
IV. Investment Perspective: Semiconductors Take a Beating
V. Calendar: Tuesday's Economic Events
MARKET CLOSE
DJIA: 4983.09. down 6.86
S&P 500: 596.85, down 3.22
NASDAQ: 1029.47, down 15.56
MARKET NEWS
The great Dow5000 watch was put on hold today. The index cleared the millennial milestone a couple of times during the session, but was unable to hold it this afternoon. Technology stocks continued to get slaughtered, however, the Nasdaq Composite losing another 1.5%. Today's specific victims were the semiconductor equipment makers (see details below).
HEROES
NetStar <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:NTSR)") else Response.Write("(NASDAQ:NTSR)") end if %> continued to surge, up $4 to $19 1/2, in the wake of a series of presentations made to institutional investors two weeks ago. NetStar makes gigarouter products that compete with Cisco Systems' <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CISC)") else Response.Write("(NASDAQ:CISC)") end if %> offerings for the Internet access provider business. Apparently the institutions believe that NetStar offers a cheap way to buy into Internet network equipment, given that most of these stocks trade at incredible valuations, such as Ascend Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:ASND)") else Response.Write("(NASDAQ:ASND)") end if %>. Without any published estimates, it is hard for a Fool to figure out what to think of this company. MF MOM in the Networking folder in the Industry Research area has been keeping a pretty close eye on this puppy (as well as sending the writers of the Evening News dunning e*mail for not including it in the Heroes write-up sooner). She is the person to corner and ask about NetStar's viability going forward.
Pittston Minerals <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:PZM)") else Response.Write("(NYSE:PZM)") end if %> popped $1 3/8 to $10 7/8 on news that one of the company's subsidiaries involved in a joint venture has found large deposits of nickel sulfide in Australia. The deposit is estimated to be about 440,000 metric tons, grading 14% nickel with minor copper, cobalt and arsenic values. The high-grade zone is open at depth and is part of a land parcel with other potential deposits. What this means as far as the profitability of Pittston Minerals going forward is for a metallurgist and not the Evening News to answer; Fools of the mining persuasion, however, might want to give Pittston the once over.
Iomega <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:IOMG)") else Response.Write("(NASDAQ:IOMG)") end if %>, a stock with one heck of a lot of Foolish followers, raced ahead $6 1/64 to $40 9/64 today on news that Brous analyst Rosencrans stated that he anticipates raising his $0.28-per-share estimate for fiscal 1995 shortly, meaning that the fourth quarter looks pretty good. Iomega makes a removable mass storage device that has been getting rave reviews from industry rags as well as growing acceptance from microcomputer manufacturers. SyQuest's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SYQT)") else Response.Write("(NASDAQ:SYQT)") end if %> competing product has met with much more success in the past and many investors believe, particularly coming out of Comdex with a number of awards, the road is open for Iomega. Check out the Iomega folder in the Motley Fool's Stock Boards for the best coverage on the planet.
Legg Mason Group published their annual ''Thanksgiving List" of stock selections, giving Fisher Scientific <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:FSH)") else Response.Write("(NYSE:FSH)") end if %> a bit of a boost today, up $1 1/2 to $34. The irony in Legg Mason's publication is that last year's list underperformed the S&P 500 by more than 11%, although to be fair they held their 10 stocks for the entire year---not a restriction anyone managing a real portfolio has to abide. An investment group including members of the Bass family also revealed today that they have a 6.9% stake in Fisher Scientific, another reason for the stock's rise today. Fisher Scientific makes---guess what---scientific instruments.
A recommendation on the right stock in the right industry can really mean a lot. Digital Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:DGTL)") else Response.Write("(NASDAQ:DGTL)") end if %>, which got the nod from Dain Bosworth today, rose $2 to $11 7/8 on heavy volume. Bosworth analyst Glenn Powers initiated coverage of the company with a "buy," citing an earnings estimate for fiscal 1995 of $0.75 a share. Digital Systems provides telephone-call-processing computer software, systems and services, a fairly hot item in the brave new world of networking.
GOATS
Micron became Micro today. . . at least as far as investors' profits were concerned. Micron Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:MU)") else Response.Write("(NYSE:MU)") end if %> tanked, down $5 1/4 to $49 7/8 today, mostly the result of investors bailing out of chips on decaying sentiment on Wall Street about the entire industry. Micron Electronics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MUEI)") else Response.Write("(NASDAQ:MUEI)") end if %>, recently spun off from Micron Technology, was smashed when the analyst at CS Boston cut his fiscal 1996 earnings estimates. Micron Electronics lost $3 3/4 to $14 5/8 as investors factored in the new $0.81 estimates compared to the old $1.22 number. William Gurley of CS Boston is the only analyst who covers the firm, which gives special weight to his comments about the company's future earnings.
Why should a downgrade from "strong buy" to "buy" cause a stock to get killed? Haemonetics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:HAE)") else Response.Write("(NYSE:HAE)") end if %> lost $1 7/8 to $17 1/2 today when an analyst at Alex. Brown did just that. Investors have been feeling queasy about the company ever since the American Red Cross terminated a number of contracts with the company regarding platelet apheresis equipment and disposables. Apparently institutional investors who could not digest this news on their own saw the Alex. Brown downgrade, done for this very same reason, as a reason to act. Last week's announcement by Franklin Quest <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:FNQ)") else Response.Write("(NYSE:FNQ)") end if %> yielded similar results; the stock sank more after an analyst cut his rating than it did on the actual bad news which prompted the analyst to cut his rating in the first place. Yet another example of how an informed individual investor can react more quickly than ossified institutional investors to the same darn news.
Sonic Solutions <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SNIC)") else Response.Write("(NASDAQ:SNIC)") end if %> is finally no more in the Fool Portfolio. . . and lost $5/8 to $6 3/4 as news of the Fool's move sent the stock lower. Apparently, Sonic Solutions is thinly traded enough that even the ol' Motley Fool can cause a blip in the stock. The manufacturer of video and audio editing equipment and software has been a real disappointment for the past three quarters in a row and represents the only time that the Motley Fool and newsletter writer Michael Murphy have agreed. Given the Fool's affect on this stock, investors in more speculative, less-liquid issues should realize the power that many penny-stock promoters command, and should make them all the more cautious about getting involved in these issues.
Network Express <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:NETK)") else Response.Write("(NASDAQ:NETK)") end if %> slipped $1 1/2 to $10 7/8 today on news that it bought English-networker Fivemere Ltd. for $10 million in cash and 475,000 in newly issued shares. The market apparently reacted to the speculation that Network was overpaying for the English company, which makes ISDN-based internetworking products for the financial information services market. The acquisition effectively increases Network Express's revenues by 33%, suggesting that concerns about the price of Fivemere might be overblown.
Uncertainty, more than any other factor, can absolutely kill a stock. When investors cannot even be certain about past results, they bail out in droves. Norand <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:NRND)") else Response.Write("(NASDAQ:NRND)") end if %>, down $2 3/8 to $13 1/4 today, dug its own grave when it reported that 1994 and 1995 results must be restated because of a delay completing an audit for the year ended August 31st. Norand was a huge loser a few months ago, covered in detail by the Evening News, suggesting that investors may have over-reacted to the bad news about the audit.
INVESTMENT PERSPECTIVE: The Chip Scare
Semiconductor and semiconductor-related issues were down big time today. If you have managed to start reading the Evening News today before checking your portfolio and you own any of these issues, you might want to take a peek at the quote screen. They are down---every one of them.
The only explanation that is being proffered by the financial media is a mildly negative story in this weekend's issue of Barron's, quaintly titled "Memory Lane." The story focuses on the decline in pricing on dynamic random-access memory (DRAM), the best known suppliers of which are Micron Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:MU)") else Response.Write("(NYSE:MU)") end if %> down $5 1/4 to $49 7/8 today and Texas Instruments <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:TXN)") else Response.Write("(NYSE:TXN)") end if %>, which lost $3 1/4 to $56 1/2. The problem with DRAM is that the spot prices are declining dramatically, in part due to double ordering in May for November delivery. As the computer manufacturers are finding they need less than they ordered, the chips are being shoved out into the "gray" market, causing spot prices to crumble under the influx of supply.
The short-term dip in the price of DRAM harkens back to the historical pricing trend, which has seen prices drop by 20-30% as fierce competition as well as technological advances have driven the costs down---at times precipitously. Investors are cutting and running at this dangerous sign of nascent cyclicality in the chip market. Historically, semiconductors have been deeply cyclical, meaning that it is either boom or bust; either they make a lot of money or they are losing money. Just like the paper, steel, automobile and storage industries, competition has been cut-throat and pricing occasionally suicidal.
Instant recall of the topsy-turvy nature chips have shown historically is augmented by the slew of new production set to come online for DRAM chips in the near-term. Hitachi and Texas Instruments, IBM and Toshiba, Micron Technology, Motorola, Seimens, Fujitsu and Lucky Goldstar are all springing into the market in the U.S., each announcing fabrication plants that will be complete at the latest by 1998. This and increasing production yields that allow manufacturers to make more chips from the same amount of silicon wafer is scaring the pants off of traders.
So, the problems with DRAM currently are:
1) Spot-prices are down due to double ordering last May.
2) Although Micron Technology currently is the only pure-play in DRAM, many diversified, large-capitalization companies are looking to get in on the action.
3) Yields are increasing, meaning that even without new factories the chip supply will increase.
None of this is new information. In fact, the above has been the bear case for Micron Technology the entire time the stock was running up and making new highs. The actual fact that spot-prices are decreasing is really the only "new" piece of information, although this was reported a week or two ago in most of the financial press. Additionally, although the volatile spot price has caved, the more stable contract price has not suffered as much. Suffice it to say, none of the above can really be considered a revelation.
So why did the DRAM related stocks get crushed today? Why are all of the semiconductor and semiconductor equipment stocks down so much today? The only answer that really makes any sense are those old Wall Street stand-bys---fear, uncertainty and profit-taking. Investors can no longer be sure what is going to happen next. As a result, they are discounting the worst case scenario and giving more intrepid investors an opportunity to profit from the fear. Although sentiment has turned decidedly negative in the past few weeks toward the chip and chip-related companies because of a slew of high-profile downgrades (discussed in Friday's Investment Perspective), that sentiment crystallized today in a dramatic way.
The question investors must ask themselves is where are our opportunities to profit from any potential mispricing? The Evening News's consistent thesis has been that the capacity discussed will be added, which is bad for the chip stocks, but good for the chip equipment stocks. The Evening News has added the disclaimer that companies producing "proprietary" and not commodity chips should continue to do well over the foreseeable future, continuing their solid growth pattern. Investors should be concerned if a chip company is producing a product that anyone else can make, even if it is the lowest-cost producer (i.e. Micron Technology). But they should feel confident that companies with specialty chips (i.e. C-Cube Microsystems) should continue to produce solid earnings growth and the Street with eventually value them fairly.
With the chip equipment companies, Wall Street is discounting two scenarios simultaneously. Scenario One has chip companies aggressively adding capacity and buying heavily into chip equipment for increased productivity, throughput and yields, driving the price of chips down. Scenario Two has the chip companies making less money because of declining chip prices and therefore cutting back on their capital spending. Without the new influx in capacity in Scenario One, however, Scenario Two cannot happen. Both Scenarios cannot be discounted over the same time-frame without being inherently contradictory. Perhaps the Evening News, several months hence, will set new standards in accountability by saying how wrong it was for suggesting that chip equipment and proprietary chip stocks can produce significant and solid earnings growth over the next 12 to 24 months, but as we see it now, this is the scenario best supported by current facts.
CALENDAR: Tuesday's Economic Events
---September Merchandise Trade Balance (8:30)
Byline: Befumo/Sheard (MF Templar/MF DowMan)