Monday, February 26, 1996
MARKET CLOSE

INDEX:

I. Market News: Down Day at the Market
II. Heroes: Sterile Concepts, IKOS Systems, Avant!, Summit Technology, VISX, LaserSight, ARV Assisted Living, VeriFone, Basin Exploration, ViaSoft
III. Goats: Biocontrol Technology, Silicon Graphics, Hutchinson Technology, Crop Growers Corp., Morrison Knudsen, Cellstar, Health Management, Andersons
IV. Investment Perspective: Internet Roller-Coaster
V. Another Foolish Thing: Industry Research---Info Bonanza!

MARKET CLOSE

DJIA: 5565.10 -65.39 (-1.16%)
S&P 500: 650.46 -8.62 (-1.31%)
NASDAQ: 1113.04 -4.75 (-0.42%)

MARKET NEWS

The markets had a tough day today, with the Dow giving back half of its gains from last week amid trading curbs. The NASDAQ was less troubled, though, as many tech stocks continued rising amid some positive earnings reports and news of new mergers and strategies. ADC Telecommunications beat estimates by a penny today, and you can read all about it in an ADC Special Section in the Fool main screen listbox. Another Special Section focuses on Baby Superstore, and on the huge drop in that stock at the end of the day.

Internet stocks took a tumble after Barron's presented a bearish look at the industry. Read about this in much more detail in MF Templar's Investment Perspective feature below.

HEROES

Maxxim Medical <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:MAM)") else Response.Write("(NYSE:MAM)") end if %> announced today that it wanted to grab up all of the outstanding shares of Sterile Concepts <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:SYS)") else Response.Write("(NYSE:SYS)") end if %> for $18 per share. Sterile Concepts shares rose $3 3/4 to $16 3/4 on news of the $118 million offer, including the assumption of $29 million in debt. Although Maxxim has yet to receive any "useful" response to their offer, they are prepared to make it cash or cash and stock, depending on Sterile's preference. Sterile Concepts makes procedure trays for hospitals, outpatient surgery centers and doctors offices. One of Maxxim's four divisions focuses on this market and the combined entity would have a product for just about every need, according to Maxxim. Maxxim stated that the combined company would have over $500 million in annual revenues, and its shares dropped $3/8 to $18 7/8 today.

Semiconductor electronic design automation (EDA) shares were on the rise today, with IKOS Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:IKOS)") else Response.Write("(NASDAQ:IKOS)") end if %> leading the pack, its shares up $1 7/8 to $15 1/8. IKOS announced today that it would smash its current earnings estimates for the second quarter of $0.19-$0.20 per share and that order rates were "strong." Avant! <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:AVNT)") else Response.Write("(NASDAQ:AVNT)") end if %> moved ahead $1 1/16 to $23 15/16 for the second day after a presentation at the Wessels Arnold & Henderson conference. Although no news was announced, this might signify that the Street is getting comfortable with Avant! again after a highly publicized patent battle with arch-rival Cadence Design <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CDN)") else Response.Write("(NASDAQ:CDN)") end if %> erupted a few months ago. You might want to check out the January 22-23 editions of the Evening News for further details on all of the companies in this software niche market.

Morgan Stanley analyst Eric Hecht upgraded Summit Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:BEAM)") else Response.Write("(NASDAQ:BEAM)") end if %> to a strong buy from a hold today, causing the shares to rally $4, closing at $31 1/8. Hecht stated that Summit's roll-out of machines to perform photorefractive keratectomy "is going okay"---a strong recommendation if we have ever heard one. Photorefractive keratectomy is a controversial procedure that uses lasers to correct nearsightedness. VISX <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:VISX)") else Response.Write("(NASDAQ:VISX)") end if %> rose $1/8 to $33 3/4 and LaserSight <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:LASE)") else Response.Write("(NASDAQ:LASE)") end if %> was up $5/16 to $13 in sympathy with the news. Both companies compete with Summit in the keratectomy market. Interested investors might want to check out the message boards for each of these companies here on the Motley Fool. They are quite lively and informative, although you should probably bring along a flack jacket if you strongly favor one company over the others.

QUICK TAKES ... ARV ASSISTED LIVING <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:ARVI)") else Response.Write("(NASDAQ:ARVI)") end if %> surged $1 1/4 to $17 1/2 today after it got mentioned in a Wall Street Journal article that profiled a group of microcap nursing home stocks as "one of the last hot stock areas in the small-cap market.". . . VERIFONE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:VFI)") else Response.Write("(NYSE:VFI)") end if %> continued to add to its recent gains today, rising $1 7/8 to $44 7/8 after it announced an 800,000 share buyback program to cover stock issued under its employee stock option plan (ESOP). . . . BASIN EXPLORATION INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:BSNX)") else Response.Write("(NASDAQ:BSNX)") end if %> rose $1 1/4 to $5 today after it announced it was selling its D-J Basin assets to another company for $125 million; the company's board endorsed a shareholder right's plan to protect its now cash-rich balance sheet. . . . WE EXPECT a dunning note from MF Yon at any moment now, as ViaSoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:VIAS)") else Response.Write("(NASDAQ:VIAS)") end if %> rose $3 1/16 to $25 9/16 today; MF Yon covers ViaSoft in the Folly in Arizona folder.

GOATS

The Food & Drug Administration (FDA) shot down Biocontrol Tech <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:BICO)") else Response.Write("(NASDAQ:BICO)") end if %> today, sending the stock down $1 11/16 to $2 7/16---nearly a 41% drop. The FDA reviewers assigned to check out Biocontrol's Diasensor 1000 said that the device was potentially groundbreaking, but they had a number of concerns with the study. Biocontrol has only successfully tested eight patients in a clinical study and the study could have been done "retrospectively"---allowing for tampering with the data. Also, the study had no control group using invasive glucose monitoring devices to compare efficacy. The Diasensor is a non-invasive glucose monitoring device.

Silicon Graphics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:SGI)") else Response.Write("(NYSE:SGI)") end if %> lost $2 1/8 to $25 3/8 today after announcing it would buy up 75% of the outstanding shares of Cray Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:CYR)") else Response.Write("(NYSE:CYR)") end if %> for $30 in cash per share. Silicon intends to purchase the remainder of the company in a one-for-one stock swap later in the year. The manufacturer of sophisticated graphics workstations for the entertainment industry believes that Cray's supercomputers can assist its high-end efforts in creating virtual worlds. Analysts were down on the transaction, however, as it completely failed to address the problems that Silicon Graphics has had with eroding margins on its low-end products. Cray's lack of any reasonable history of earning profits also failed to inspire confidence in the deal. Some investors with long memories might recall shares of Cray selling for $120 in 1987, to give you a sense of how disappointing the stock and company has been over the past decade. Our own desktop video Fool, MF Ben, called the transaction "stupid," pending further analysis.

Hutchinson Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:HTCH)") else Response.Write("(NASDAQ:HTCH)") end if %> forecast profits of $0.60-$0.75 per share for its fiscal second quarter today. Unfortunately, estimates from analysts had been in the $1.11 range. . . meaning the company will substantially disappoint the Street. Hutchinson was off $7 1/4 to $41 1/2 in heavy trading today. The company forecast earnings of $5.00 per share for fiscal 1996 however, anticipating a stronger second half after its new Wisconsin plant is complete. Hutchinson makes disk drive suspensions and has been under pressure ever since one of its biggest customers, Conner Peripherals, merged with Seagate Technology. The company blamed its woes on high demand for products being transferred to its new plant, resulting in high overtime and production costs. Hutchinson has had consistent 30% unit volume growth---which makes one wonder why they could not have planned a little better on this move.

Crop Growers Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CGRO)") else Response.Write("(NASDAQ:CGRO)") end if %> wilted $4 to $8 1/2 after the company reported it was under investigation for alleged violations of federal election laws. The problem involves some contributions made to Henry Espy's 1993 Congressional primary campaign. Henry Espy is the brother of former Secretary of Agriculture Mike Espy, who himself was forced to resign for accepting corporate largesse. The chairman/CEO and executive vice president of Crop Growers are also personally under investigation. One wonders, though, how steep the fines might be in this incident and how much damage they would really do to the company. Perhaps not too much.

QUICK TAKE. . . MORRISON KNUDSEN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:MRN)") else Response.Write("(NYSE:MRN)") end if %> was chopped in half today, losing $1 1/4 to $1 1/4 after rumors that debt holders would get 95% of the equity in the company all but guaranteed the stock was worthless. . . CELLSTAR CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CLST)") else Response.Write("(NASDAQ:CLST)") end if %> plummeted $3 9/16 to $18 7/16 after restating its fourth quarter earnings due to a $1.2 million inventory adjustment; as a result, CellStar made $0.33 per share instead of the $0.39 it reported. . . . HEALTH MANAGEMENT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:HMIS)") else Response.Write("(NASDAQ:HMIS)") end if %> plunged $1 1/8 to $6 after Smith Barney cut it from buy to neutral. . . . ANDERSONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:ANDE)") else Response.Write("(NASDAQ:ANDE)") end if %> continued to fall, down $2 to $10 1/2, after it was switched to the NASDAQ National Market---an allergic reaction?

INVESTMENT PERSPECTIVE: Internet Roller-Coaster

It often surprises me how dramatically momentum, or Big Mo' as its aficionados like to call it, can change in a heartbeat. Remember only a few months ago when it was cool to be buying Internet-related companies? When they were shooting up day-after-day, only a few intrepid souls had the courage to question the conventional wisdom there. Suddenly a sea-change has occurred and it is now cool to bash them. The irony is that some of this bashing might eventually start to unlock some value in these shares for investors who missed the first surge up, just like how the recent collapse in semiconductor-related companies allowed some investors to get into those shares at bargain basement prices.

In the latest issue of Barron's, better known to many as Bear-on's, Smith Barney analyst Jonathan Cohen wanes on Internet-related companies, suggesting that the valuations have left the realm of reality. Picking on Netcom On-line Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:NETC)") else Response.Write("(NASDAQ:NETC)") end if %>, PSINet <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:PSIX)") else Response.Write("(NASDAQ:PSIX)") end if %>, UUNet Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:UUNT)") else Response.Write("(NASDAQ:UUNT)") end if %>, Netscape Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:NSCP)") else Response.Write("(NASDAQ:NSCP)") end if %>, and Spyglass <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SPYG)") else Response.Write("(NASDAQ:SPYG)") end if %>, Cohen beats the same overvaluation drum that many an analyst has been pounding for a while. Never comfortable having a mainstream opinion, I scoured my databases to find a reason to disagree with Cohen.

Cohen highlights two segments of the "pure" Internet---connectivity and software. Connectivity is a tough one to defend. The basic problem here is that the market for access has become a commodity market---none of the 300-plus Internet service providers (ISPs) are really adding any value to their connections, preferring to bide their time and wait to get bought out for their customer lists. The problem is, however, that their customers are probably only worth a few hundred a pop, making pure service concerns like Netcom On-line Communications look exceedingly pricey at $27 3/4, down $1 1/2 today.

UUNet and PSINet are different beasts that Netcom, as both are busily building the networks that they provide service over, with UUNet receiving capital investment from Microsoft in the cities where Microsoft wants to expand its Network's reach. As Microsoft made the decision to make MSN a Web-based service, UUNet can comfortably provide its own Internet access service in the same regions that Microsoft pays to have built up. What is the replacement value for UUNet's network? The company's market cap is currently $1 billion, with about $150 million in working capital. Would AT&T want to snap up UUNet's high speed network for $850 million today? UUNet has 150 POPs ("points of presence"---the dial-up numbers that you connect to), as well as deals with MSN, Global Village and a few other value-added Internet service providers. Not that I think there is tremendous value here, either. . . but there is a positive argument. UUNet was down $2 to $35 1/4 today on the news.

PSINet, losing $13/16 to close at $11 15/16, is almost a value play by comparison, with 243 POPs as of February 15th, $50 million in working capital and a market cap of $452 million. I really think that outright bearish proclamations about this group only start to hold water the minute people start putting numbers on the replacement values of these networks, inevitable buyout targets for any of the telephone, cable or media giants that want to get involved with providing Internet access in a hurry.

Netscape <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:NSCP)") else Response.Write("(NASDAQ:NSCP)") end if %> slumped $5 1/4 to $55 3/4 while Spyglass <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SPYG)") else Response.Write("(NASDAQ:SPYG)") end if %> lost $4 1/4 to $25 3/4. Both companies provide front-end software for browsing the Internet. Netscape's canny strategy, however, tends to be unappreciated by many commentators on the Internet stocks. As the company continues to tweak its proprietary browser with add-ons that only its Netscape servers can support, the company moves toward turning the entire Internet into one giant proprietary system. A gambit, certainly, but one that if it pays off could result in the largest online service known to man. Netscape anticipates its sustenance will come from high margin server sales as well as annuity-like licensing revenues from its secure transaction protocol. Sure, the company is valued right now at $4 billion, a mere 25-times its current revenue run-rate. [A run-rate takes the latest quarter's result and multiplies it by four to get an annualized total.] But contrast this for a moment with Microsoft's $59.6 billion market cap and consider the potential power of Collabra groupware and control of server as well as secure transaction standards. High-risk, yes. Completely without a shred of merit? No. The one-stock Internet play in your portfolio? Sure, if you are suicidal.

Spyglass is a less well-known and less understood front-end software company. Unlike Netscape, Spyglass has a tiny $250 million market capitalization. . . befitting its $12 million in trailing revenues, certainly. But consider that the company has been profitable since 1994 and is expected to make $0.37 per share in 1997, up from $0.25 in 1996, an improvement of 48%. Considering that Microsoft, Quarterdeck, CompuServe and Oracle number among the licensees of Spyglass's Enhanced Mosaic browser, one could almost make a case that the company is cheap, if you think that it can grow earnings at a 50% rate over the next five years. Of all of these companies, Spyglass would be the one I would not necessarily dismiss out of hand before doing the hard work of figuring out how much they can make licensing the Mosaic browser---something hundreds of companies will use on "Intranets" as well as the consumer Internet market.

Don't get me wrong now -- I am unsure of the value most of these companies offer at today's prices and believe that a lot more risk needs to be built into some of the share prices. However, to have 5-10% drops in all of the stocks because Barron's saw fit to quote research Cohen did and made public a few weeks back points simply to the inefficiency of the market and how much facile analysis often counts. At some point, these shares will have value. It is up to the intelligent investor willing to do the hard work of modeling out the companies' potential revenues, margins and earnings to find this point though, while the herd tramples roughshod over the group, unconcerned with value.

ANOTHER FOOLISH THING: Industry Research---Info Bonanza!

For those not yet aware of it, Fooldom now offers an Industry Research area, featuring no fewer than sixteen industries. These areas offer model portfolios, ideas for stocks you might investigate, company valuations, tutorials on the nuances of different industries and how to study and understand them. Go to keyword "Sector" (or access the area from the Fool main screen listbox) and find MF Bayou's tutorial on networking cables, MF Edible's Rainforest Cafe update, MF Logman's report on Blount International, MF Uptrend's Healthcare contests, and GidgetCat's new lessons on immune diseases and AIDS treatment strategies. And there's much, much more!

YET ANOTHER FOOLISH THING: Fools on the Radio!

That's right! David and Tom Gardner are bringing their Foolish outlook to the airwaves this weekend. Tune in to the Monitor Radio's Weekend Edition---stations and times are listed in the Radio page.

Byline: Randy Befumo (MF Templar)