Wednesday, January 3, 1996
MARKET CLOSE

INDEX:

I. Market News: Tech Slaughter, Again
II. Heroes: XOMA, Integra Life Sciences, Foreign Funds
III. Goats: Firefox, Insignia, Vtel, Xeta, Tommy Hilfiger, Fastenal
IV. Investment Perspective: Downgrades Depress Semi Equipment
V. Calendar: Thursday's Economic Events

MARKET CLOSE

DJIA: 5194.07, up 16.62 (+0.32%)
S&P 500: 621.32, up 0.59 (+0.09%)
NASDAQ: 1046.26, down 12.39 (-1.17%)

MARKET NEWS

Technology stocks were quashed after a one-two punch today. A slew of fourth-quarter profit warnings from software companies combined with high-profile brokerage downgrades of semiconductor equipment shares had a cataclysmic effect on the Nasdaq Composite, even as the Dow and the S&P forged ahead. Where were investors sticking their bucks? In the high-yielding Dow stocks, right in line with Beating the Dow (see the Dow Area in the Fool's School) as well as more speculative biotechnology shares and closed-end country funds.

HEROES

Where have investors been turning lately as technology stocks get slaughtered? Biotechnology! Today was no exception, with a number of issues up---some on news, some just on a prayer. XOMA Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:XOMA)") else Response.Write("(NASDAQ:XOMA)") end if %> reported two weeks ago that its E5 gram-negative sepsis treatment cleared an FDA hurdle, which is the only news that could explain its gain of $1 to $5 today. Competitive Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX:CTT)") else Response.Write("(AMEX:CTT)") end if %> rose $2 3/8 to $10 3/4 after Johnson & Johnson <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:JNJ)") else Response.Write("(NYSE:JNJ)") end if %> received approval to sell Renova, a prescription wrinkle cream. Competitive will receive a stream of royalty payments from Johnson & Johnson, which was up $3 3/8 to $87 5/8 on the news and a Salomon Brothers upgrade.

Integra Life Sciences <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:IART)") else Response.Write("(NASDAQ:IART)") end if %>, another development stage biotech firm, rose $1 3/4 to $8 1/2 today when it reported that its Premarket Approval Application for INTEGRA Artificial Skin is approvable. The product would help to protect patients with full-thickness or partial thickness burns from infections. The FDA listed a number of conditions for approval, but this did not dim investor optimism. Advanced Polymer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:APOS)") else Response.Write("(NASDAQ:APOS)") end if %>, which is developing a similar product, apparently rose $1 3/8 to $6 3/4 in sympathy.

What is the other hot area to stick your dollars into as the tech stocks continue to crumble? Emerging markets. Investors suddenly have a renewed love for these 1993 high-fliers, pushing shares of closed-end mutual funds like the India Growth Fund <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:IGF)") else Response.Write("(NASDAQ:IGF)") end if %> up $1 to $14 3/8 and the Taiwan Growth Fund <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:TWN)") else Response.Write("(NASDAQ:TWN)") end if %> ahead $2 3/4 to $23 5/8. What do these two funds have in common? MF Yon in the Foreign Investments folder has been pounding the table on these for months. And after their gains today, they are still among his *worst* performers---suggesting only that the guy has been doing incredibly well. Check out his folder in the new Industry Research Area---Keyword: Sector. The China Fund <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CHN)") else Response.Write("(NASDAQ:CHN)") end if %>, was up $1 1/2 to $13 5/8, incidentally---not Yon-approved, though.

GOATS

Fresh from its initial public offering (IPO) in May, Firefox Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:FFOX)") else Response.Write("(NASDAQ:FFOX)") end if %> got absolutely destroyed today when it forecast lower-than-expected earnings for its fiscal fourth quarter. Down $11 7/8 to $10 3/4, the company stated that it would earn somewhere between $0.08 and $0.135 a share versus expectations of $0.20. Lower software licensing revenues was the reason for the shortfall, something the company has beefed up its management, sales and marketing efforts to improve. Firefox provides networking software for LANs running Novell's NetWare---a problem considering that Windows NT is widely viewed as the successor to NetWare and is rapidly stealing market share. The latest NetWare release, according to industry insiders, was lame. Shiva Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SHVA)") else Response.Write("(NASDAQ:SHVA)") end if %>, which makes similar products for a broader array of platforms, was down $5 1/2 to $67 and FTP Software <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:FTPS)") else Response.Write("(NASDAQ:FTPS)") end if %> lost $3 3/4 to $25 1/4 in sympathy with Firefox's drop.

Insignia Solutions plc <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:INSGY)") else Response.Write("(NASDAQ:INSGY)") end if %> was another software company out today with dire projections for its fiscal fourth quarter, causing shares to be cut by more than half, losing $7 5/16 to $5 15/16. What is the story? It appears that because of lower-than-expected sales of its UNIX-based SoftWindows product in North America, Insignia Solutions will report earnings per share below last quarter. Cowen & Co. was quick to pull the trigger, moving the shares from "buy" to "hold." Another software house, Concentra Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CTRA)") else Response.Write("(NASDAQ:CTRA)") end if %> fell $3 9/64 to $5 5/8 as well on a down forecast for its next quarter.

Another high-flying technology stock that slammed on the air brakes today was Vtel <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:VTEL)") else Response.Write("(NASDAQ:VTEL)") end if %>, which lost $7 to $10 1/4 on---surprise, surprise---pre-announced lower-than-expected fourth-quarter earnings. Revenues are only going to be $23 to $23.5 million, which is below the company's internal projections, meaning that the shares will show a slight profit after a previously announced provision of $0.04 to $0.07 a share for an acquisition. With $15.97 million in revenues in the year-ago period, one has to wonder what the heck the plan called for. $23 to $23.5 million would mean a 44% revenue increase---which seems more than reasonable given that the last four fiscal quarters have shown 40%, 45%, 39% and 44% revenue increases respectively. 45% actually seems on the high end of normal. Considering they made $0.15 a share on only $21 million in revenues last quarter, the fact that they are going to make less money on more revenues---despite the fact they claimed lower-than-predicted product demand and delayed orders due to the government shutdown---just does not jibe. The simple fact is that at 45 times earnings, the company was pretty fairly valued. Cowen & Co. downgraded the stock to "neutral" from "buy."

When we said micro-cap Xeta Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:XETA)") else Response.Write("(NASDAQ:XETA)") end if %> could fall as fast as it went up yesterday, we had no idea the stock would continue down another $3 5/8 to $9 3/8 today. The company reported that fiscal 1996 earnings would probably be below the blow-out 1995 results. President Jack Ingram said: "While we are delighted with this year's results, equaling this performance in fiscal 1996 will be difficult." Equaling the $20 level the shares hit in mid-December will probably be pretty difficult as well. Given the timing, investors cannot even take solace in the fact that it makes a great tax-loss sale. Xeta is a value-added reseller of telecommunications equipment for the hotel/motel industry.

Tommy Hilfiger <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:TOM)") else Response.Write("(NYSE:TOM)") end if %> continued to slide today for no apparent reason, less than a week after troubled "financial correspondent" Dan Dorfman touted the stock. Down $3 3/4 to $38 1/8 today on five times normal volume after going down the same amount yesterday on double its normal volume, it appears that somebody with a lot of shares is dumping. At last count, mutual funds owned 70% of the stock, meaning that there is a lot of potential volume on the downside if managers of large funds decide they want to take profits. Dorfman's tout just three days before a major bout of selling reeks just a bit of front-running, a disreputable brokerage industry practice of making positive public comments about a company while you are selling. "Released" from his position at Money Magazine today for failing to reveal his sources, Dorfman has been allegedly linked to front-running for Donald Kessler. This has not been proven as Dorfman refused to reveal his sources. The Evening News is planning an extended analysis in a future edition of Dorfman picks with reference to possible front-running that will focus on Steven Madden <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SHOO)") else Response.Write("(NASDAQ:SHOO)") end if %> and some Madden warrants set to expire at the end of this month.

Is their any stopping MF Boring? A guy who makes his investments based on how fast you fall asleep when reading the description of the business in the annual report has been doing fantastic over the last couple of months---all documented and accountable in his message board in the Let's Talk Investment Approaches Area. The story today? His one short pick, Fastenal <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:FAST)") else Response.Write("(NASDAQ:FAST)") end if %>, crumpled today, down $4 to $38 after Robert Baird analyst Judith Scott cut her fourth-quarter revenue estimate. Her reason? A slower-than-expected retail season, something MF Boring mentioned more than a few weeks ago in relation to the company's outrageous valuation. Way to go, Boring!

INVESTING PERSPECTIVE: Analysts Make Sweeping Downgrades

Semiconductor equipment shares got hosed today in a frenzied selling session sparked by negative comments from the Street. This caught investors almost completely by surprise given the strong day almost every one of these companies had yesterday in a New Year's post-tax-loss-sales buying blitz. Virtually every company that has ever made a piece of semiconductor equipment with a front-end, back-end or test application got smashed today---including companies like Hewlett Packard <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:HWP)") else Response.Write("(NYSE:HWP)") end if %> and Schlumberger <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:SLB)") else Response.Write("(NYSE:SLB)") end if %> that devote only a small part of their massively diversified businesses to making semiconductor test equipment. (All right, so Schlumberger got downgraded by Prudential for other reasons and Hewlett Packard got caught up in the tech slaughter---but it makes for a great copy.)

What is going on here? Who were the culprits behind today's arresting moves? Gunnar Miller at PaineWebber and Erik Jansen at Alex Brown head the list of suspects. Their individual pans stack up like this: Gunnar Miller at PaineWebber Inc. (the rough one)

From Buy to Neutral:

Applied Materials <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:AMAT)") else Response.Write("(NASDAQ:AMAT)") end if %>; down $3 7/8 to $37 1/2
Lam Research <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:LRCX)") else Response.Write("(NASDAQ:LRCX)") end if %>; savaged for $3 1/4 to $42

From Buy to Attractive:

KLA Instruments <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:KLAC)") else Response.Write("(NASDAQ:KLAC)") end if %>; slipping $1 7/8 to end at $24 5/8

From Attractive to Neutral:

Brooks Automation <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:BRKS)") else Response.Write("(NASDAQ:BRKS)") end if %>; off $2 3/16 to $11 13/16
Novellus Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:NVLS)") else Response.Write("(NASDAQ:NVLS)") end if %>; dragged down $3 5/8 to $48 1/2

Erik Jansen at Alex Brown (gentle by comparison)

From Buy to Neutral --> Applied Materials

From Strong Buy to Buy --> Lam Research