Thursday, January 4, 1996
MARKET CLOSE

INDEX:

I. Market News: What January Effect?
II. Heroes: China, Japan, The Gap, MGM Grand, Tuboscope Vetco
III. Goats: Mecklermedia, Tandy, Books, Trend-Lines, Microdyne, Sync
IV. Investment Perspective: Buying Opportunity, or Party's Over?
V. Calendar: Friday's Economic Events

MARKET CLOSE

DJIA: 5173.84, down 20.23 (-0.39%)
S&P 500: 617.71, down 3.61 (-0.58%)
NASDAQ: 1029.82, down 16.44 (-1.57%)

MARKET NEWS

1996 is looking more and more like someone stuck in the tape for 1995 and is playing it backwards. Retail stocks are surging while technology and financial stocks continue to crumple. Technology was flogged partially because of the rampaging rumors that Fidelity Magellan icon Jeff Vinik is set to step down and that Fidelity Management Research (FMR) is heavily selling technology stocks after yesterday's debacle. Why it makes sense to sell stocks just because someone else is selling is up for grabs.

The bond market took a hit when the I-word ("impeach") flashed across news screens; a group of conservative House Republicans want Treasury Secretary Robert Rubin canned for digging into government trust funds to avoid default on our debt obligations. (We suppose they would also like movie-star Mark Harman flogged for pulling two teens from the burning wreckage of their car as well?) A sagging bond market means sagging blue chips---particularly financial stocks like insurance companies, banks, brokerage houses and income-sensitive issues like utilities.

HEROES

Yeow! The foreign investment mania continues! The biggest percentage gainers on the New York Stock Exchange today were Chinese ADRs. Stocks like Ek Chor China Motorcycle <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:EKC)") else Response.Write("(NYSE:EKC)") end if %> up $1 3/4 to $15, Brilliance China Automotive Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:CBA)") else Response.Write("(NYSE:CBA)") end if %> rising $2 1/8 to $6 3/4, China Tire Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:TIR)") else Response.Write("(NYSE:TIR)") end if %> blossoming $1 1/4 to $13 1/8, Shanghai Petrochemical <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:SHI)") else Response.Write("(NYSE:SHI)") end if %> bubbling up $2 1/2 to $31 5/8 and China Yuchai Int'l <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:CYD)") else Response.Write("(NYSE:CYD)") end if %>, up $1 1/2 to $10 7/8. Of course, we are sure that every investor has dutifully pored over the financial statements with loving patience. Huh? You mean they are in Chinese? Even MF Yon in the Foreign Investments folder (KEYWORD:SECTOR) is wary of investing in Chinese companies directly, or even at all. Check his folder to see what he does find interesting.

China was not today's only hot spot, as Japanese ADRs also had solid days. Honda Motor Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:HMC)") else Response.Write("(NYSE:HMC)") end if %> drove ahead $3 5/8 to $46 1/4 while shares of mega-corp Sony <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:SNE)") else Response.Write("(NYSE:SNE)") end if %> blasted ahead $4 1/2 to $66 1/4. No specific news on either company, suggesting that many global funds that have been under-weighted in Asia due to dour 1995 economies are changing their allocations, using money that used to be in technology stocks. The Nikkei, Japan's equivalent of the Dow Jones Industrial Average, has been rising in recent weeks over increased optimism that the Japanese can clean up their fiscal mess and prop up their ailing banking industry. For more than this, you are going to have to check out MF Yon's folder (see above).

The Gap <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:GPS)") else Response.Write("(NYSE:GPS)") end if %> led retail stocks in a rebound today, surging $2 1/4 to $47 1/2 on sales numbers that the Street liked. Same-store sales were up 6% while total sales for the month surged 22%. Gruntal's recent cut of fourth-quarter estimates for the Gap to $0.90 a share from $0.96 on concerns that it was taking second and third markdowns in Gap and GapKids stores still hangs over the shares, though; same-store sales numbers ahead of its peers actually make this more of a likelihood. Dollar General <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:DG)") else Response.Write("(NYSE:DG)") end if %> joined The Gap on the upside, rising $1/2 to $22 on "record" December sales. Hills Department Stores <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:HDS)") else Response.Write("(NYSE:HDS)") end if %> was also up $1 1/4 to $11 today on same-store sales that fell more than 6%; evidently, the Street expected far worse for this discount retailer fresh out of bankruptcy. Dollar Tree <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:DLTR)") else Response.Write("(NASDAQ:DLTR)") end if %> rose $2 1/4 to $27 3/4 and Mother's Work <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MWRK)") else Response.Write("(NASDAQ:MWRK)") end if %> jumped $1 3/4 to $16 1/2 today for the same reason.

Strong December results for casinos, including rumors of record Christmas week attendance, pushed a lot of these shares up today. MGM Grand <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:MGG)") else Response.Write("(NYSE:MGG)") end if %> soared $2 to $25 1/2 while Harrah's Entertainment <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:HET)") else Response.Write("(NYSE:HET)") end if %> cashed in its chips for a $1 1/8 rise, closing at $26 1/2. The gaming stocks were weak in 1995 along with retail stocks as consumers tightened their belts and stopped playing. The explosion in state lotteries and off-track betting has also robbed a lot of these companies of short-term momentum. Is a turnaround in the offing for the gaming stocks?

Tuboscope Vetco Int'l <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:TUBO)") else Response.Write("(NASDAQ:TUBO)") end if %> barreled ahead $1 1/8 to close at $7 1/4 today, allowing investors to strike oil when it announced a definitive agreement to merge with Drexel Oilfield Services. Drexel, with $119 in trailing revenues, boosts Tuboscope's proportions as well as allowing it to receive $31 million in new equity from Drexel's largest shareholder, SCF Partners. MF Rigs has been heralding the values in oilfield services for a while. . . been listening? Check out his folder in the Industry Research area.

GOATS

Magazine publisher and Internet play Mecklermedia <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MECK)") else Response.Write("(NASDAQ:MECK)") end if %> fell another $2 1/4 to close at $12 1/2. During the height of Internet fever, shares of this company were trading hands in the low $20s. We were skeptical at the time and our only regret here at the Evening News bureau is that we did not put our money where our mouth was and short the stock. The hang-up? It is virtually impossible to get a financial packet from the company.

Tandy Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:TAN)") else Response.Write("(NYSE:TAN)") end if %>, best known for its Radio Shack stores, slumped $4 3/4 to $35 1/8 today when same-store sales numbers were released. The release prompted Tandy to admit that although its flagship Radio Shack stores have been picking up, Computer City and Incredible Universe have not been performing up to plans. The company said that earnings per share would be up around 7-10% for the next year, below the consensus $3.56 analysts had been citing. Stores that have focused on the first-time computer buyer have been under pressure lately from excess of competition.

Books-A-Million <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:BAMM)") else Response.Write("(NASDAQ:BAMM)") end if %> suffered $2 3/8 to close at $10 1/4 when its same-store sales numbers failed to meet expectations. Although it had a record year with a 32.4% total revenue increase, same-store sales wilted 1.2% over the same period. The last nine weeks were even worse, down 3.2%. This bad news was enough to bring all of the retail book superstores lower, with Barnes & Nobles <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:BKS)") else Response.Write("(NYSE:BKS)") end if %> falling $3 3/8 to $24 7/8 and Border's Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:BGP)") else Response.Write("(NYSE:BGP)") end if %> down $1/2 to $18. The irony here is that Books-A-Million is probably the "cheapest," as the company is actually earning money. Despite the high quality of the Border's superstores, the majority of the mis-named company actually consists of shopping mall-based WaldenBooks that probably did the same or worse than Books performed over the same period.

Trend-Lines <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:TRND)") else Response.Write("(NASDAQ:TRND)") end if %> came in way over par today, losing $5 5/8 to $4 3/8. The mail-order house, specializing in golf and woodworking tools (not as stupid as it sounds, given both are seasonal products) told the Street that the next fiscal quarter would be about half what analysts had been expecting. A tough retail environment combined with higher postal costs is what did this company in. When retail gets tough, it is often the hobby-related retail operations that get hit the worst.

Networking equipment maker Microdyne <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MCDY)") else Response.Write("(NASDAQ:MCDY)") end if %>, down $8 1/4 to $7, dragged the sector lower today when it issued a warning that its fiscal first quarter would be "significantly below" analysts' forecasts. Stocking shortages, uneven distribution levels and greater sales of low-margin products caused the shortfall. The company is estimating earnings below last year's $0.14 a share while analysts were up in the $0.30 to $0.31 range. Weakness in networking equipment and software is what contributed to the technology sector's pains today. Network Equipment <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:NWK)") else Response.Write("(NYSE:NWK)") end if %> was down $2 1/2 to $24 3/8, apparently in sympathy.

The second hottest public offering of 1995 has become a little too hot to handle. Sync Research <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SYNX)") else Response.Write("(NASDAQ:SYNX)") end if %> first traded at $44 in late December after being priced at $20 and has been as high as $56 in the last few weeks. Today a bunch of shareholders took profits in this mainframe equipment maker's shares, pushing it down $7 to $35 1/4. No specific news was released, but the general haze in the technology stocks probably hasn't helped. Cooper & Chyan Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CCTI)") else Response.Write("(NASDAQ:CCTI)") end if %>, down $2 3/8 to $12 1/8, is another recent IPO that hit the skids today.

INVESTING PERSPECTIVE: De-Bugging Software Stocks

Normally we run the same-store sales numbers in the Investment Perspective on the day they're released. But today's flogging on the Nasdaq drives us back to cover "technology" stocks. In particular, we are drawn to a group of stocks we haven't looked at for a while---software stocks. (For aficionados of the same-store sales numbers, don't fret. We will run them on Monday, market willing.)

I tend to avoid covering software stocks for two reasons: I don't know them as well as I know other groups and I do not find them as interesting as semiconductor equipment and what I call "Internet infrastructure" stocks like Cisco Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CSCO)") else Response.Write("(NASDAQ:CSCO)") end if %>. The only exception to this has been the database software companies like Oracle Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:ORCL)") else Response.Write("(NASDAQ:ORCL)") end if %> and Informix <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:IFMX)") else Response.Write("(NASDAQ:IFMX)") end if %> that seem just as vital to the building of online content providers as hubs, routers, switches and gigarouters.

The last few days, though, I have seen something that I didn't see even in the darkest days for technology in late 1995---widespread selling in the software stocks. These companies sporting extra-fat gross margins and productivity-enhancing products have always been billed by the Street as "magic money machines." You could put "buy" ratings on software companies trading at 40 or 50 times earnings simply because they could deliver sustained margin expansion and profit growth. 1995 in particular saw the high-profile acquisitions of Lotus Development by IBM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:IBM)") else Response.Write("(NYSE:IBM)") end if %> and LEGENT Software by the ever-hungry Computer Associates <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:CA)") else Response.Write("(NYSE:CA)") end if %>, suggesting that even the laggards in the industry could be gobbled up by larger players looking to broaden their product line.

Yesterday saw a certifiable rout in these issues and today we had another implosion as a flurry of profit warnings hit the Street. Firefox Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:FFOX)") else Response.Write("(NASDAQ:FFOX)") end if %> got hosed yesterday for $11 7/8, losing more than 50% to end at $10 3/4. Firefox had been a hot seller because it sells networking software, kind of a magical-mystical combination of two hot sectors. The problem for Firefox was not a nagging lawsuit a la Avant! <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:AVNT)") else Response.Write("(NASDAQ:AVNT)") end if %> but the old stand-by, slower revenues. Insignia Solutions <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:INSGY)") else Response.Write("(NASDAQ:INSGY)") end if %> also lost more than 50% yesterday, down $7 5/16 to $5 15/16, joined by Concentra Software <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CTRA)") else Response.Write("(NASDAQ:CTRA)") end if %>. Failure yesterday, however, didn't save Firefox today, down another $2 to $8 3/4.

Today's drags included FTP Software <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:FTPS)") else Response.Write("(NASDAQ:FTPS)") end if %>, plunging $13 3/8 to $11 7/8 after an earnings warning. FTP Software was one of the primary developers of the TCP-IP protocol which allows networks and PCs of various sizes to access the Internet at speeds of 56K---four times the speed of the average modem. FTP Software's public statement was that the government shutdown combined with a previously announced "investment" in its New Ventures Business unit was the cause. Blaming the government shutdown was actually something all of yesterday's failures did, strangely enough, simply because any company that has as a major part of its growth plan selling to the federal government probably needs to revisit that assumption in its operations model, given the current alignment of power on the Hill.

Another maker of connectivity software was NetManage <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:NETM)") else Response.Write("(NASDAQ:NETM)") end if %>, which lost $5 3/8 to $15 3/8 today after Elliot Prince at Smith Barney slashed his fourth-quarter estimate to $0.19 a share from $0.23. His main worry was that customers were taking longer to make orders, which definitely fits in with what FTP Software and FireFox Communications have been saying. Some have wondered whether free connectivity products such as those found in Windows '95 might be eating into these companies' prospects. Desktop Data <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:DTOP)") else Response.Write("(NASDAQ:DTOP)") end if %>, another connectivity provider, fell $4 1/2 to $20 on no news that we could find, presumably in sympathy with the group.

The debacles were not just limited to the connectivity crowd, though. MapInfo <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MAPS)") else Response.Write("(NASDAQ:MAPS)") end if %>, once a hot stock due to the inclusion of a primitive version of its mapping application in Windows '95, got smashed today, losing $5 1/2 to $13 3/4. This is the second disappointment in a row for MapInfo, and it sees earnings at break-even opposed to $0.15 a share last year. Even growth spots like out-sourcing and client/server software are wilting---witness Systems & Computer Technology's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SCTC)") else Response.Write("(NASDAQ:SCTC)") end if %> $2 3/8 belly-flop to $14 3/4 on a down forecast. Revenues are slipping due to utilities and higher education institutions not relicensing their products. Even edu-tainment providers like Maxis <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MXIS)") else Response.Write("(NASDAQ:MXIS)") end if %>, maker of the Sim family of products, felt the heat today, falling $6 to $31. And old disappointments like Avant!, which lost serious money over a lawsuit by Cadence Design alleging patent infringement, slid today, down $2 7/8 to $18 3/8.

Larger software houses, although not cut in half like their smaller counterparts, did not have a good day either. Computer Associates <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:CA)") else Response.Write("(NYSE:CA)") end if %>, Oracle Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:ORCL)") else Response.Write("(NASDAQ:ORCL)") end if %> and Sybase <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SYBS)") else Response.Write("(NASDAQ:SYBS)") end if %> were all down marginally. Cadence Design <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:CDN)") else Response.Write("(NYSE:CDN)") end if %>, Softkey Int'l <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SKEY)") else Response.Write("(NASDAQ:SKEY)") end if %>, Broderbund <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:BROD)") else Response.Write("(NASDAQ:BROD)") end if %>, Informix <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:IFMX)") else Response.Write("(NASDAQ:IFMX)") end if %> and Intuit <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:INTU)") else Response.Write("(NASDAQ:INTU)") end if %> were off substantially more. One of the few software stocks that managed a gain today is actually one that has been out of favor of late---Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MSFT)") else Response.Write("(NASDAQ:MSFT)") end if %>, which has been sliding ever since the hyped intro of Windows '95 put the stock at $110. At $87 3/8 today, up $1/2, it has basically turned around and never looked back since that moment.

After the bell, Adobe <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:ADBE)") else Response.Write("(NASDAQ:ADBE)") end if %> posted earnings $0.17 per share lower than expectations, suggesting that tomorrow will be no better for the software companies. Contrary to popular opinion, these stocks in a few days have lost a luster that had kept them gleaming for years. Even in software, there is no sure thing. Even in software, valuations and fundamentals matter over the long term. Story stocks like Internet connectivity plays which get bid up to outrageous multiples can cause major bruises in one's portfolio.

Putting all of this information together, what kind of conclusions can be drawn? The first thing that comes to mind is a comment by Peter Lynch in a speech to the National Press Club in October of 1994: The fact that institutions dominate the market today is a positive for small investors. These institutions push stocks to unusual lows and unusual highs. For the investor who can sit back and have his or her own opinion and who follows the industry, this is a benefit, not an obstacle.

What is dragging down many of these great companies, companies with incredible margins, no long-term debt and solid growth prospects? Their own success? Rumors of Fidelity selling technology stocks? Some rather aggressive multiples that kept cooler heads out of the stocks? Probably all three of these things and more. The significance of a day like today is not even that it represents a great buying opportunity. (It might, but the market is just as likely to go lower as it is to go higher in the short term, meaning there will always be a cheaper moment.)

Rather, the significance is that it painfully demonstrates that the market moves as Lynch described, toward extreme highs and extreme lows as a by-product of the large institutions which play in it. The savvy investor is not someone who buys 50 or a 100 shares today in hope of a $1 or $2 gain in a week, but rather a studied investor who has been watching these companies for years and can as a result say, "These stocks are cheap, and I plan to hold for a while, so I guess now is that time I have been waiting a long time for." Without going into attempts at valuation and the like, the best thing an investor can take from today is the knowledge that the market is inefficient over the short term and always a wild ride. With this knowledge comes the wisdom that patience is rewarded both in finding opportunities as well as in holding on for a longer pull. This works for software stocks as well as steel stocks.

CALENDAR: Friday's Economic Events

---Weekly Initial Unemployment Claims (8:30)
---December Columbia Univ. Leading Inflation Index (10:30)
---November Housing Completions (10:00)

***All government reports are contingent on the Washington silliness currently taking place courtesy of our elected officials.

Byline: Randy Befumo (MF Templar)