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INDEX:

I. Market News: Roller-Coaster Day Leads to Another Dow Record
II. Heroes: Emulex, Breed Technology, Ezcorp, Telebit
III. Goats: Boyd Gaming, Children's Discovery, Xeta, Wonderware
IV. Investment Perspective: Video Rentals Getting Rewound
V. Calendar: Thursday's Economic Events

MARKET CLOSE

DJIA: 5199.13, up 21.68 (RECORD)
S&P 500: 620.19, up 2.51 (RECORD)
NASDAQ: 1061.71, down 4.18

MARKET NEWS

After briefly climbing above the 5200 mark, the DJIA spent the afternoon playing to-and-fro games, ultimately setting another record in this year of records for the Blue Chip index. Technology issues, however, slumped as the explosive internet stocks lost steam, dragging the Nasdaq down for the second day in a row since setting its own new record high on Monday.

HEROES

Network software and component manufacturer Emulex <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:EMLX)") else Response.Write("(NASDAQ:EMLX)") end if %> soared $1 5/8 to $14 1/4 today, partially on rumors that the company is a target of the SOES "bandits." SOES, Nasdaq's Small Order Execution System, is abused by the so-called "bandits" who take advantage of the fact that market makers sometimes cannot update their price quotations fast enough. They blitz the market makers with orders, pushing the shares higher and higher, cashing out at the end of the day. Although Fools often have not-so-nice things to same about the market makers and the degree to which they gouge individual investors via spreads, market manipulation by smaller traders really does not serve the individual investor either.

A long overdue rally in shares of Breed Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:BDT)") else Response.Write("(NYSE:BDT)") end if %> continued today, with shares rising $1 3/8 to $20. The maker of components for airbags and other automobile technology gadgets has been under a lot of pressure in the past few months as concerns about slowing auto sales have hit all of the component manufacturers hard. Breed was a momentum play in the early days of airbags and a lot of that money has worked its way out of the stock as growth has slowed dramatically. The company recently stated that revenue growth will level off for the next two years before beginning to pick up again three to five years down the road, suggesting an annualized revenue gain of 15-20% over the entire five-year period.

Ezcorp Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:EZPW)") else Response.Write("(NASDAQ:EZPW)") end if %> rallied $1 11/32 to $5 19/32 today after last night's earnings release looked, on the surface at least, pretty bad. The company reported a fiscal 1995 loss of $1.33 a share versus $0.42 in the year-ago period because of a number of charges. As a result, however, the company will close 15 of its locations completely, consolidate 17 others and begin to liquidate its $27 million jewelry inventory to raise cash. Pawn shops overall have been disappointing investments and none of these companies, which include Cash America <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX:PWN)") else Response.Write("(AMEX:PWN)") end if %>, has proven any different. Caveat emptor.

Telebit <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:TBIT)") else Response.Write("(NASDAQ:TBIT)") end if %> was routing profits to investors today, moving ahead $1 1/8 to $7 3/8 on rumors that larger networking companies might consider the company an acquisition possibility. Telebit, which provides remote access solutions for computer networks, recently introduced a low-cost line of ISDN routers that cost less than $1000 a pop. This is the same market that Gandalf Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:GANDF)") else Response.Write("(NASDAQ:GANDF)") end if %> is making its name in, although both stocks may be slightly ahead of themselves. Check out the Networking folder in the Industry Research area for MF MOM's take on both stocks and their relative values right now.

GOATS

Montgomery Securities was fairly active today cutting stocks, with analyst Amy de Rahm turning negative on shares of Boyd Gaming <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:BYD)") else Response.Write("(NYSE:BYD)") end if %>, knocking $7/8 off its share price to $10 5/8. Her cuts were based on lowered earnings projections for Boyd's Kansas City operations because of slower-than-expected opening results as well as an increasingly competitive nationwide market. Donald Trump's marquee stock, Trump Hotel and Casino Resorts <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:DJT)") else Response.Write("(NYSE:DJT)") end if %>, was off $5/8 to $20 3/8 as well in the generally negative market for gambling issues.

Children's Discovery <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CDCR)") else Response.Write("(NASDAQ:CDCR)") end if %> lost $2 3/4 to close at $4 3/4 today after the company reported that earnings for its fiscal fourth quarter would be off quite a bit. This is only the latest in a series of disappointments by the owner and operator of child-care centers, a group that has been disastrous. From Kinder-Care's abysmal performance to a similar mess in much-maligned Discovery Zone, this appears to be an industry where no operators, no matter how experienced or how well capitalized, can control costs and deliver predictable earnings growth.

When more than 25% of the *total* shares in a stock trade, you know it is either going to be a great day or a terrible day. Xeta Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:XETA)") else Response.Write("(NASDAQ:XETA)") end if %>, which had a great day yesterday, had a rotten one today, down $3 to $16 3/4. The communications service provider is one of those thin-float stocks which catch fire and scorch ahead, and has sold for as little as $1 5/8 this year. Xeta has historically focused on telephone equipment for the hotel industry that can account for calls made by various rooms and detect whether or not calls have been answered. The company has recently expanded in 1995 to provide hotels with PBX systems and is attempting to become a one-stop shop for hotels. The company is only selling at 24 times earnings right now, despite the run-up from about $11 at the beginning of the week, and is growing at a rate between 30% and 40%. With a solid cash position and positive cash flow from operations, it might be a part of a diversified portfolio.

Wonderware <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:WNDR)") else Response.Write("(NASDAQ:WNDR)") end if %> lost $4 3/4 to $20 today when it finally confirmed rumors that have been killing the stock for the past week---1996 earnings are going to be soft. The company is putting more money in research and development for its line of automation software. The company's CEO, Norma Farquhar, told a group of institutional investors at a Montgomery Securities conference to expect 13% to 17% earnings growth this year compared to the previous model of about 20%. The company will make $0.20 a share in the fiscal fourth quarter, in line with current estimates. The long term growth rate estimate of 40%+ might need to come down, though.

INVESTMENT PERSPECTIVE: Talk About Getting Your Ticket Punched!

Video rental chains were not stocks to own today as the entire group imploded, selling off dramatically on heavy volume. Hollywood Entertainment <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:HLYW)") else Response.Write("(NASDAQ:HLYW)") end if %> was downgraded after the company contacted analysts last night and guided them to lower estimates, prompting the violent sell-off. The weakness in shares of Hollywood Entertainment, down $8 5/8 to $7 3/4, transferred over to its industry peers, sapping their strength as well. Movie Gallery <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MOVI)") else Response.Write("(NASDAQ:MOVI)") end if %> lost $7 1/8 to $25, Moovies Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MOOV)") else Response.Write("(NASDAQ:MOOV)") end if %> fell $4 1/8 to $11 3/4 and Video Update <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:VUPDA)") else Response.Write("(NASDAQ:VUPDA)") end if %> ended lower, down $5/8 to $7 1/2. Viacom <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX:VIA/A,B)") else Response.Write("(AMEX:VIA/A,B)") end if %>, the parent company of Blockbuster Video, lost $1/4 to $47 1/8 as well today.

It was the fact that the company sought analysts out and suggested that they reduce their earnings estimates which so spooked the Street. The analyst at Alex. Brown had a decided change of heart after the conversation with the company, downgrading shares of Hollywood Entertainment from "strong buy" to "neutral" first thing this morning. Montgomery Securities analyst Bo Cheadle followed suit, trimming his numbers for the company's fiscal 1995, 1996 and 1997 estimates as well as knocking down the company's long-term growth rate.

Bo Cheadle's new numbers are:

$0.44 EPS from $0.48 EPS for 1995;
$0.65 EPS from $0.95 EPS for 1996;
$1.00 EPS from $1.50 EPS for 1997;

40-50% long-term growth from 50% or greater long-term growth for the next five years.

Raymond James analyst Scott Barry, who downgraded shares of Hollywood Entertainment to "neutral" from "buy" and lowered his estimates last week, lowered them again today.

Scott Barry's new numbers are:

$0.44 EPS from $0.48 EPS for 1995;
$0.70 EPS from $0.85 EPS for 1996;
$0.90/$1.00 EPS from $1.35 for 1997.

These earnings estimate decreases come directly from Hollywood's guidance toward lower revenue numbers as well as some decreases in overall gross margins. Same-store sales have not been that great in the video rental industry. Recently, for instance, Movie Gallery reported that same-store sales were "positive," refusing to elaborate further. Hollywood Entertainment had negative same-store sales, continuing to rely on expansion and acquisition to drive the top-line growth. Moovies Inc. and Video Update do not even report their same-store sales numbers.

The video rental chains are tied very tightly to the Hollywood film industry. The strength of box office receipts transfers into heavy rental sales for blockbuster movies. Big hits like "Crimson Tide" and "Apollo 13" drive video sales, whereas a summer with few other memorable hits might weigh on the shares. A quick jump over to the Motley Fool Financial Forum's sister forum, Follywood, would give you a pretty good sense of the weak Thanksgiving offerings from the major studios; nothing scored with the power of last summer's Lion King and Forrest Gump.

Another factor is the overall aversion to retail sales in the general economy at large. Movie rental chains, casual dining locations and apparel stores are putting out terrible numbers in the past few weeks, with few notable exceptions. Even some of the exceptions, like fast-growing Sunglass Hut International, have lost a lot of the sparkle they held earlier in the year, succumbing to the overall trend toward lower retail spending. With consumer credit at all-time highs, people have started to reign in their spending habits---and one of those places they reign them in is movie rentals.

There is some speculation that sales of video tapes versus rentals have decreased overall gross margins as the products are much lower margin than rentals. Looking deeper into the balance sheet, the Forbes magazine article questioning the company's accounting practices also weighed on the shares. Hollywood Entertainment is not writing off old tapes as fast as it is buying new ones. For the fiscal third quarter, the company had only about $11.7 million in depreciation on old tapes while the company bought $21.1 million in new tapes. By way of comparison, Movie Gallery had $3.8 million in amortization costs relative to $19.4 million in rental revenue, a much lower proportion.

The amortization/depreciation question is part of the larger issue of how well a company manages its inventory. One measure of this for the video rental chains is measuring their purchase of new tapes versus their total revenues. Right now, for instance, Hollywood Entertainment's movie purchases represent 50% of its revenues whereas Movie Gallery's represent only 28%---a possible warning flag for the analysts who are looking at the stock as increased movie purchases mean lower gross margins and lower overall profits.

A few weeks ago we wrote that we believed that based on its cash position, Hollywood looked more attractive at beaten-down levels than Movie Gallery for investors who might be interested in getting into the sector. The recent downgrades as well as analysis of the depreciation, amortization and inventory trends have proven us flat out wrong on that call.

The valuations, despite the near-term questions, are still radically low for Hollywood Entertainment. Even with the revised numbers, the shares PEG out at 0.43, suggesting that they are substantially oversold by scared institutions and individual investors alike. The brokerage downgrades signify the analysts' questions about the stocks potential over the next 12 months; anyone whose time horizon is a little longer, however, might eye these shares.

Movie Gallery, which is not saddled with all of the negative brokerage sentiment at the moment, PEGs at 0.58 and is coming off a disappointing fiscal third quarter which it blamed on a lack of summer hits. However, if its estimates are moved down like Hollywood's have been, the PEG begins to look more like 0.75, despite the superiority of inventory management. More speculative is the lightly covered Moovies Inc., which has estimates of $0.80 in fiscal 1996, currently selling at 15 times that number and growing at twice that rate in earnings, but about equal to that in revenues. There are no analyst estimates currently on Video Update. The most speculative possibility here, given that Blockbuster represents a sizable portion of Viacom, is to consider a short since Hollywood Entertainment has more in common with Blockbuster at this point than its smaller industry peers.

CALENDAR: Thursday's Economic Events

---Weekly Unemployment Claims (8:30)
---October Factory Orders (10:00)
---52-Week Treasury Bill Auction (results around 1:30)
---October Consumer Installment Credit (tentative) (3:00)
---Money Supply Statistics (4:30)

Byline: Randy Befumo (MF Templar)