Wednesday, January 10, 1996
MARKET CLOSE

INDEX:

I. Market News: Dow Plunges For Second Straight Day
II. Heroes: AZPN, TGET, LUNR, FNL, HRC, ADHC, MAM
III. Goats: TSY, XNET, GEST, MONE, CYTL, COT, BELM
IV. Investment Perspective: Time to Cash In Your Chips?
V. Calendar: Thursday's Economic Events

MARKET CLOSE

DJIA: 5032.94, -97.19 (-1.89%)
S&P 500: 598.48, -10.97 (-1.80%)
NASDAQ: 990.21, -8.60 (-0.86%)

MARKET NEWS

Continued anxiety about a balanced budget toasted the long bond today, which choked blue chip stocks. Even though a balanced budget does not really affect the stock market directly, it does have a secondary effect since it defines the level at which bonds trade---an asset constantly competing with stocks for investors' cash.

HEROES

Shares of Aspen Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:AZPN)") else Response.Write("(NASDAQ:AZPN)") end if %> soared today, up $6 3/16 to $38 1/16, after it announced a few acquisitions last night. The acquired? Dynamic Matrix Control Corporation and Setpoint Inc.---leading suppliers of on-line automation and information management software and services to the process manufacturing industries. Aspen, which develops company-aided chemical engineering (CACHE) software, diversifies into on-line process development with these acquisitions from its off-line software development---a nice fit judging by the Street's reaction. DMCC had $17 million in revenues last year and Aspen is buying 81% of it for $15.8 million in cash. Setpoint had $45 million in revenues last year and is being bought for no more than $26.3 million. The acquisitions nearly double Aspen's trailing revenues, suggesting upward EPS revisions of anywhere from $1.70 to $2.60 from the current $1.30 for next year, depending on the cost of integration. With $26 million in cash on the books, the company may require some financing to complete both deals.

Target Therapeutics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:TGET)") else Response.Write("(NASDAQ:TGET)") end if %>, which recently split 2-for-1, rose $9 5/8 to $47 7/8 today after it reported at a Hambrecht & Quist conference that it expects quarterly earnings of $0.23 a share. Analysts previously had estimates of $0.18. The company anticipates Japanese market acceptance of its GDC device as well. Target makes micro-catheters, guidewires and micro-coils used in minimally invasive procedures. Also represented at H&Q today was Lunar Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:LUNR)") else Response.Write("(NASDAQ:LUNR)") end if %>, up $4 1/2 to $30 3/4 after it said that it expected revenues to be up 62% in the second quarter and net income of at least $0.24 a share. Analysts were looking for $0.23. The company will also be spinning off its Bone Care Int'l unit to shareholders. Lunar develops products for the diagnosis, monitoring and treatment of osteoporosis.

A group of investors offered to buy a little over 4 millions shares of Fansteel <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:FNL)") else Response.Write("(NYSE:FNL)") end if %> from its chairman today for $10 a share, causing the stock to rally $1 1/8 to $8. The offer, which expires on January 12th, was made in order to transfer control of the company to the shareholder group, which would then actively seek to "maximize" shareholder value through acquisition, divestiture or restructuring of the company. Fansteel is a Chicago-based metal tools manufacturer. Its dividend yield is 5% and although the company is only estimated to increase its earnings by 7% in fiscal 1995, its net is supposed to increase 33% the year after, leveling off to its 11.5% five-year growth rate. At 19.5 times trailing earnings, it is difficult to value the shares because of the erratic growth.

Shares of HealthSouth <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:HRC)") else Response.Write("(NYSE:HRC)") end if %> shot up $2 1/4 to $29 5/8 after Advantage Health <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:ADHC)") else Response.Write("(NASDAQ:ADHC)") end if %> released its earnings today. HealthSouth, which offered to acquire Advantage Health for about $325 million back on December 18th, apparently got a better deal than the Street originally expected. Advantage Health reported earnings of $0.46 per share, compared to consensus estimates of $0.43, implying that the acquisition would be more additive to HealthSouth's 1996 earnings than previously believed. Advantage Health, for its part, was up $3/4 to $43 3/4 on the day.

Maxxim Medical <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:MAM)") else Response.Write("(NYSE:MAM)") end if %> also fought the downward pull today, rising $1 3/8 to $18 1/8 after reporting earnings of $0.36 a share---9% higher than consensus estimates. The company increased its net income 34% on a revenue increase of 39%. When looking at the results, be aware of a one-time charge relating to the restructuring of the company's Boundary and Sterile Design divisions. Maxxim Medical is a medical products manufacturer and supplier which manufactures and distributes a wide variety of products, ranging from disposables for cardiology, surgery and radiology to physical medicine products.

GOATS

Tech-Sym <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:TSY)") else Response.Write("(NYSE:TSY)") end if %> lost $3 1/4 today to close at $28 5/8 after it reported that its fourth quarter would not meet analyst expectations. The management is looking for somewhere between $0.42 and $0.52 a share and $67 million in revenues. The company made $0.51 last year and had no quarterly estimates, according to Zacks Investment Research. The company's Syntron unit had a significant delay in shipping orders that included a new module as a result of some start-up problems. The problem was reportedly resolved, but not quick enough to avoid shifting some deliveries into next quarter. For the entire year, the company is expecting $2.00 to $2.10, compared to consensus estimates of $2.20. Tech-Sym is a diversified electronics engineering and manufacturing company.

XcelleNet <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:XNET)") else Response.Write("(NASDAQ:XNET)") end if %> reported after the bell last night that its fourth quarter earnings would disappoint investors. The stock was whacked for $1 3/4 today, closing at $10 at day's end. The remote networking concern will report earnings of between $0.13 and $0.15 per share, compared to analysts' expectations of $0.16 to $0.18. The company said flat out that it overestimated demand for its RemoteWARE product, implying that its inventories will be up as well when it comes time to announce those earnings to the world. Revenues will only be $9.2 million compared to the $10.7 million that the company's plan called for.

Guest Supply <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:GEST)") else Response.Write("(NASDAQ:GEST)") end if %> also chimed in on the earnings-disappointment front, stating that it would report $0.13 a share compared to $0.11 in the year-ago period. The stock was down $4 1/8 to $19 1/8 because the Street had been looking for something more like $0.15. Sales will increase about 27% in the quarter to $41.6 million. The company assured investors that the "inefficiencies" which led to this disappointment have been corrected and that they are still comfortable with $0.90 for the year. Guest Supply makes toiletries and personal care products for the lodging industry.

Continued concerns about consumer delinquencies pulled the rug from under some lending stocks today. An example is The Money Store <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MONE)") else Response.Write("(NASDAQ:MONE)") end if %>, off $1 3/4 to close at $14 in heavy trading. Compounding the rising delinquencies problem is a fear that the Federal Reserve will not be able to cut rates further due to the budget imbroglio, slowing demand for refinancing as well as making it more difficult for customers to pay and companies to make money. General Acceptance <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:GACC)") else Response.Write("(NASDAQ:GACC)") end if %> lost $1 to close at $11 1/2 while Green Tree Financial <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:GNT)") else Response.Write("(NYSE:GNT)") end if %> slipped $1 3/4 to close at $23 1/4.

The rally in biotechnology stocks came to a brutal end today as many of these high-fliers got creamed in the broad-based sell-off. Cytel <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CYTL)") else Response.Write("(NASDAQ:CYTL)") end if %> lost $1 to close at $5 3/8, Cephalon <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CEPH)") else Response.Write("(NASDAQ:CEPH)") end if %> was down $3 1/4 to $31 1/4, Alteon <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:ALTN)") else Response.Write("(NASDAQ:ALTN)") end if %> slid $1 3/4 to $11 3/4, Maginin Pharmaceuticals <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MAGN)") else Response.Write("(NASDAQ:MAGN)") end if %> fell back $1 3/4 to $11 1/4 and Athena Neurosciences <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:ATHN)") else Response.Write("(NASDAQ:ATHN)") end if %> tumbled $1 3/8 to close at $10 3/4. The hot money that ignited this previously moribund sector in the last few weeks has apparently gone to greener pastures in the ever-churning world of sector-rotation.

More than a few shares of quasi-technology companies reported disappointing news today. Automotive and aerospace product manufacturer Coltec Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:COT)") else Response.Write("(NYSE:COT)") end if %> reported $0.31 per share compared to estimates of $0.34, losing $1 for its troubles to close at $11. Bell Microproducts <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:BELM)") else Response.Write("(NASDAQ:BELM)") end if %> disappointed investors as well, stating that it would take a $0.19-per-share charge in its fourth-quarter earnings in order to write-down "certain inventories," probably DRAM related. The distributor of high-technology products was off $1 to $6 7/8.

INVESTMENT PERSPECTIVE: Cashing in the Chips?

Two rounds of downside program trading curbs combined with an ongoing sell-off in technology stocks (profit concerns) and blue chips (the budget fiasco) made for a hectic day for investors. Although the direct impact of the budget on the stock market is questionable, this in conjunction with a complete lack of economic indicators for the last three weeks only serves to heighten an atmosphere of uncertainty that pervades the stock market.

Contributing to this uncertainty was Motorola's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:MOT)") else Response.Write("(NYSE:MOT)") end if %> earnings disappointment. You probably already know that Motorola only made $0.72 a share compared to $0.86 in the year-ago period. Whether Motorola was a winner or loser today depends on whether or not you measure it by the consolidated tape or the NYSE tape. According to the NYSE, Motorola was down $2 3/4 to $50 1/4 today. Last night in Instinet trading, however, the stock touched $44, suggesting it was up a solid $6 today.

Motorola blamed sluggish sales of its cellular phones for its earnings woes, stating that growth in this market---which Motorola dominates---is beginning to slow. Christopher Galvin, Motorola's president and CEO, said that the results look bad because of stockpiling of cellular phones last year. The company has been weathering an ongoing "inventory correction" in the cellular phone market all year. Hambrecht & Quist, Schroder Wertheim, UBS Securities, Gruntal & Co., Morgan Stanley and Cowen & Co. all cut Motorola to neutral/hold today because of its cellular problems.

Initially, many market mavens extrapolated Motorola's results as a confirmation of weakness in the semiconductor market, which Motorola also participates in (only consuming about 18% of the chips it produces for its own products). However, a closer look at the results showed that earnings growth in Motorola's semiconductor segment was solid. It was not bad news at all for the chips, actually. In the conference call today, Motorola officials stated that they expect the semiconductor industry to grow 20% in 1996, quite a bit above Rick Whittington's doomsday prediction of flat to 10% growth (which he based on National Semiconductor's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:NSM)") else Response.Write("(NYSE:NSM)") end if %> ails). Motorola booked a 23% increase in its semiconductor revenues in the fourth quarter, generally in line with analyst expectations. Whittington, as readers may recall, based his dismal forecast for the semiconductor industry on the fact that National Semiconductor's December business is reportedly 25% off from a year ago.

The desperate search for some barometer to measure demand in technology stocks is only matched by the frenzied responses to perceived changes. Investors will have barely had time to digest Motorola's results when the book-to-bill ratio will preoccupy their thoughts tomorrow. The most-widely hailed measure of demand in technology stocks, the book-to-bill ratio came in at 1.09 for December, down from an adjusted 1.10 in November but within the 1.05 to 1.10 range of analyst expectations. The book-to-bill measure pits "bookings," or orders for semiconductor chips, against "billings," or deliveries. The widely used measure is also widely misunderstood, as it does not reflect the underlying growth in demand for chips, but rather the imbalance of supply and demand present in the market.

Bookings increased 41% above year-ago levels in December while billings trailed, rising somewhere in the 30-39% range. All in all, this is a much better situation than early this summer when bookings were exploding and billings were coming nowhere close. The case for the semiconductor manufacturers making the transition into growth stocks from cyclical stocks demands on supply coming in line with demand; it is the very imbalance in the book-to-bill ratio which investors got hysterical over last summer that real long term investors want to see erased.

Last year, the book-to-bill for December was 1.07, meaning that the demand picture is ahead of what it was at the beginning of the biggest rally in technology shares ever. The 1.09 for December is down from November's 1.10 (which itself was adjusted down from 1.14) and quite a bit below October's 1.18, but remains an underlying *good* thing, given the brisk growth in bookings.

Unfortunately, ill-educated investors have turned the book-to-bill ratio into something that it was never meant to be---some kind of indicator of demand in the technology sector. When you have a group of companies that stretch from massive pharmaceutical concerns to tiny networking companies, finding one number to judge them all by is a difficult task, to say the least. Investors should take from Motorola's semiconductor results and the book-to-bill ratio the message that the core market for chips continues to expand at a solid clip and most chip-related companies will report solid fourth-quarter earnings this month and next. Certainly specialty chip companies will fare better than commodity chip companies (like Micron Technology and National Semiconductor) given the proprietary nature of the products they make. Users of chips, which range from the personal computer manufacturers to the networking companies, gain higher margins from an equilibrium in the chip market as the cost for raw materials decreases, heightening the irony of PC-makers and networkers getting thrown down a black hole whenever some blip in chip prices appears. Software companies which are dominant in their niches and at least peripherally involved in "electronic commerce" (we refuse to use the word Internet anymore) probably have had a nice quarter as well.

The question investors have faced regarding technology companies is whether to cash in the chips---along with the software, the hardware, the networkers, etc. The air of uncertainty complicated by an absolutely stupid use of indicators has sent the Street into a tizzy. Worst-case dire projections of flat earnings (which would mean an instant replay of a record-breaking, cash-flow positive year) scare traders like nobody's business. The decision to cash in your chips or continue to hold depends on your ability to separate the cash-strong companies with solid business prospects that can maintain or expand margins from the quasi-technology, commodity plays which have been so popular for many investors over the last six to eight months (like producers of DRAM, SRAM, and, yes, Virginia, personal computers). By staying away from over-competitive and over-crowded markets (which describes the electronic retailers as well), you can *almost* be assured that holding will not be suicidal.

It is these very inefficiencies in the market that we poke fun of here at Fool HQ, inefficiencies that allow people to profit. If stocks went straight to their *fair values,* no one would ever make any money. Rather than getting frustrated and angry at this volatility, cull through the information for bargains and act upon them. My only regret as an investor in the last few months has been moving too fast to invest my cash and not waiting for the real bargain-basement moments to buy and hold that Buffett and Munger write about. Is this one of these moments? Break out the calculators, hit the stock boards and Company Research and check it out; it just might be.

**NOTE: WE GOT THROUGH A WHOLE ARTICLE ON TECHNOLOGY TODAY WITHOUT
ONCE MENTIONING SEMICONDUCTOR EQUIPMENT, A SUPREME ACT OF WILL.

CALENDAR: Thursday's Economic Events

---Weekly Unemployment Claims (8:30) tentative
---Weekly Money Supply Statistics (4:30)

Byline: Randy Befumo (MF Templar)