Wednesday, February 28, 1996
MARKET CLOSE

INDEX:

I. Market News: Early Surge Ends in Late Day Plunge
II. Heroes: Boston Scientific, Crop Growers, Spectrum Holobyte, CellPro, Iomega, Diana Corp., Equitable Companies, Sand Technology, Human Genome, Mackie Designs, S3
III. Goats: Information Storage Devices, Petroleum Geo-Services, Genzyme Tissue Repair, LSI Logic, Integrated Device Technology, Vitesse Semiconductor, Semtech, Park-Ohio, Sync Research, Cohu
IV. Investment Perspective: AT&T's WorldNet vs. Internet Stocks
V. Another Foolish Thing: Ask the Headhunter!

MARKET CLOSE

DJIA: 5506.21 -43.00 (-0.77%)
S&P 500: 644.75 -2.49 (-0.39%)
NASDAQ: 1107.54 +1.37 (+0.12%)

MARKET NEWS

The market started rebounding strongly this morning, after several days of dramatic drops. However, by afternoon it had given back most of its gains, and just before the closing bell, the Dow plunged, triggering trading curbs. Some of this volatility may have been due to mixed economic news. For more on this, read MF Merlin's take on the day's economic indicators, which include numbers for existing home sales, the consumer price index, and international trade. You'll find MF Merlin's area in the lower left corner of the Evening News screen.

Internet stocks bucked any positive trends today and continued to fall, following AT&T's entry yesterday into the Internet access provider business. For more details and Foolish analysis of these topics, check out today's Investment Perspective below, as well as the Internet stock Special Section in the Fool main screen listbox. Also of note is a Special Section featuring Chiron's earnings report, complete with news releases, numbers, links to further data, and a Fool briefing on how to value biotech stocks. For those looking for some promising and unknown little companies, check out the Special Section reviewing the Cruttenden Roth Conference on emerging growth stocks.

HEROES

Boston Scientific's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:BSX)") else Response.Write("(NYSE:BSX)") end if %> fourth quarter earnings came in substantially above expectations today, causing the stock to soar $5 1/2 to $48 today. The $0.36 earnings per share (EPS) result was $0.02 higher than the First Call consensus estimates. Strong improvements in gross margins, operating margins and net margins all drove investors to bid up these shares. Excluded from all these results is a $204.4 million one-time charge related to the acquisitions of Meadox Medicals and Heart Technology during the year. Salomon Brothers analyst Eli Kammerman upgraded Boston Scientific to buy from hold, moving his 1997 earnings estimates to $2.10 per share from $1.90. Boston Scientific makes and markets medical devices.

Assurances that its business relationships were "secure" and news that a large shareholder had increased his stake allowed Crop Growers <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CGRO)") else Response.Write("(NASDAQ:CGRO)") end if %> to recover $1/2 to $9 3/4 today after getting beaten down on Monday. Questions still abound as to who initially leaked the story that two highly placed Crop Growers executives were the target of an election fraud investigation. The stock opened dramatically lower on Monday on absolutely no news until the company issued a hurried press release explaining the electoral imbroglio. Regardless, a group led by Kramer Spellman increased their stake in Crop Growers to 7.54%. Crop Growers markets and services crop insurance for farmers.

Spectrum Holobyte's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SBYT)") else Response.Write("(NASDAQ:SBYT)") end if %> new Chief Executive Officer Steve Race has apparently assuaged market fears with a new business plan, buoying shares of the beleaguered software developer by $1 7/16 to $8 3/8. Race stated that Spectrum was returning to its core simulation, strategy and action-adventure games. "We will not be making any more puzzle games," he said. "We will not be making any martial arts games." The release of a sequel to Civilization as well as the much-ballyhooed Top Gun II have many small investors hopeful for a turnaround. Chairman Gilman Louie recently said the company was open to any takeover bids after CUC International bought out Sierra On-line and Davidson & Associates. In spite of the fact that Spectrum has shaved $3.5 million in operating expenses in each quarter of 1996, the company still lost more than $14 million last quarter and needs to dramatically boost revenues to become profitable. Fool MF Templar commented, "This company doesn't need a hit---it needs to start producing hits regularly, something I am not sure it can do."

A Food & Drug Administration (FDA) advisory panel recommended today that CellPro Inc.'s <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CPRO)") else Response.Write("(NASDAQ:CPRO)") end if %> stem cell system should receive approval, causing the stock to rally $4 1/16 to $18 1/2. The FDA almost always follows the recommendation of review panels, making the approval for the CEPRATE SC system almost a sure thing. CEPRATE SC completed Phase III clinical trials in May of 1993. The system would be used in autologous bone marrow transplants---procedures where bone marrow is taken from one place and put in another place in the same patient.

Iomega Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:IOMG)") else Response.Write("(NASDAQ:IOMG)") end if %> was driven up $1 1/2 to $18 3/8 on news that it was going to put through a $40 million in convertible subordinated note due in 2001. Iomega needs the cash, as it revealed in a filing with the SEC that it will run out of money in June. The convertible notes, which can be turned into stock at a set price in the future, carry a lower interest rate than conventional debt and represent a nice alternative to additional credit lines. Herb Greenberg (KEYWORD:BIZINSIDER) commented on the stock today in his daily column, speculating that Montgomery Securities and Hambrecht & Quist disagreed over the future of this company because only H&Q signed up to underwrite the convertible offering. Sources on the Fool speculate that a leak at Montgomery is actually the reason. Iomega manufactures the Ditto, Zip and Jaz storage products and is widely followed on the Motley Fool.

QUICK TAKES. . . DIANA CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:DNA)") else Response.Write("(NYSE:DNA)") end if %> confirmed for investors that it was strictly a networking company today by announcing it was selling its Atlanta Provision subsidiary, rising $2 3/4 to $19 1/2 on the news. . . MERRILL LYNCH made the Equitable Companies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:EQ)") else Response.Write("(NYSE:EQ)") end if %> a Focus One Stock of the week, moving the stock up $1 5/8 to $25 3/4. . . SAND TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SNDCF)") else Response.Write("(NASDAQ:SNDCF)") end if %> continued to rise today, up $1 3/8 to $9 3/8, after debuting its Nucleus Server at a press conference yesterday. . . HUMAN GENOME <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:HGSI)") else Response.Write("(NASDAQ:HGSI)") end if %> said it knew of no reason why its stock was up $3 1/2 to $40 1/2. . . MACKIE DESIGNS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MKIE)") else Response.Write("(NASDAQ:MKIE)") end if %> surged $1 1/16 to $9 9/16 when the CEO bought 60,000 shares on the open market. . . HAMBRECHT & QUIST reiterated its strong buy on S3 <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SIII)") else Response.Write("(NASDAQ:SIII)") end if %> today, moving that stock $1 1/8 to $15 7/8.

GOATS

Information Storage Devices <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:ISDI)") else Response.Write("(NASDAQ:ISDI)") end if %> got whacked for $2 1/4 to $8 today after it preannounced losses for the first and second quarters of fiscal 1996. A six-month delay in production due to technical problems at its foundry, along with a possible write-down for excess inventory, are the problems. The company is also no longer confident it will achieve its forecasted selling prices, which will adversely affect margins. Information Storage Devices designs semiconductors used in voice recording and playback applications.

Rodman & Renshaw cut its estimates on Petroleum Geo-Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:PGSAY)") else Response.Write("(NASDAQ:PGSAY)") end if %> while maintaining its buy rating on the stock. Investors looked at the former and sold the stock, causing it to fall $1 7/8 to $22 3/4. The analyst lowered his 1996 first quarter estimate to $0.05 EPS from $0.20 and revised his projection for the full year to $1.70 EPS from $1.90. Fiscal 1997 got trimmed $0.30 to $2.00 EPS. The analyst, Kurt Hallead, stated in a published report that, "seasonal factors were affecting vessel utilizations." The company is in the volatile oil field equipment and services business.

Genzyme Tissue Repair <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:GENZL)") else Response.Write("(NASDAQ:GENZL)") end if %> sank again today, losing $2 to $18 7/8 on rumors and innuendo. The story goes that a procedure it developed has never been proven effective and that the company will have to raise $40-50 million this year in order to continue operations. Smith Barney published a report on the subject today that we have not gotten a chance to look at, but the word is that it confirms this rumor. Parent Genzyme Corp. General Division <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:GENZ)") else Response.Write("(NASDAQ:GENZ)") end if %>, a diversified biotechnology concern with a complicated corporate structure, also fell, down $2 1/2 to $72.

LSI Logic <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:LSI)") else Response.Write("(NYSE:LSI)") end if %> cracked up near the day's close, falling back $4 3/8 to $31 1/8, after it updated its first quarter outlook. The semiconductor manufacturer expects revenues and estimates for the first quarter to be below current estimates. The company anticipates earnings in the $0.32-$0.35 per share range, about 10% below the current consensus estimates. The shortfall in revenues comes from pushouts of personal computer-related orders originally intended for delivery in the first quarter. The company believes that it is nearing the end of the inventory correction, spurred on by falling prices in the commodity chip market. No manufacturer wanted commodity chips in their inventories with prices coming down, as it might have resulted in large one-time charges against inventory if they could not sell the components.

QUICK CUTS. . . SMITH BARNEY downgraded Integrated Device Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:IDTI)") else Response.Write("(NASDAQ:IDTI)") end if %> to neutral from buy, shaving $1 1/8 off the stock to close at $12 5/8. . . VITESSE SEMICONDUCTOR <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:VTSS)") else Response.Write("(NASDAQ:VTSS)") end if %> fell $2 3/4 to $21 on no news---just the growing skepticism for all semiconductor manufacturers. . . ANALOG-CIRCUIT MAKER Semtech <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SMTC)") else Response.Write("(NASDAQ:SMTC)") end if %> continued its fall after reporting record earnings last week, down $1 1/2 to $18 1/2, as traders abandoned this erstwhile favorite. . . PARK-OHIO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:PKOH)") else Response.Write("(NASDAQ:PKOH)") end if %> pulled back $1 5/8 to $15 1/2 after having a blistering day yesterday due to blockbuster earnings. . . SYNC RESEARCH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SYNX)") else Response.Write("(NASDAQ:SYNX)") end if %> continued to fall, down $4 1/4 to $32, possibly on concerns that Cisco Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CSCO)") else Response.Write("(NASDAQ:CSCO)") end if %> will blow the company's switches out of the water. . . COHU INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:COHU)") else Response.Write("(NASDAQ:COHU)") end if %> continued lower today, down $2 3/4 to $31---investors must have just realized that one of this company's largest customers is Micron Technology.

INVESTMENT PERSPECTIVE: AT&T's WorldNet vs. Internet Stocks

Concerns about AT&T's entry into the Internet service market sent almost every digital stock sharply lower this morning. Many of the stocks clawed their way back up towards the day's close, buoyed by investors taking advantage of perceived bargains. The two-day slide began yesterday morning when AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %> announced its proprietary WorldNet Internet service, right on the heels of a Sprint <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FON)") else Response.Write("(NYSE: FON)") end if %> announcement that it would provide Internet and Intranet services to business customers. Headlines in the major dailies like "AT&T Move May Trigger Internet War" (USA Today) probably account for most of the hysteria.

Don't get me wrong---AT&T's entry could hurt consumer-oriented services like Netcom and GNN (a subsidiary of America Online). WorldNet is an aggressively-priced offering from AT&T that represents its first foray into the digital world since it wrote down a $40 million investment last year. All new customers for this service will receive five hours free per month for the first year. AT&T's long distance customers get unlimited Internet access for only $19.95 per month, while non-AT&T customers can pick from two plans---$4.95 for the first three hours and $2.50 thereafter, or $24.95 for unlimited access.

How do these prices compare with the market? GNN is offering 20 hours a month for $14.95; PSINet has two plans, $9 for nine hours or $29 for 29 hours, plus $1.50 per additional hour; Netcom gives the customer 40 "primetime" hours for $19.95 plus $2 for every additional hour; and UUNet lets you have 25 hours for $30, charging $2 for each hour above that. InternetMCI is the priciest offering, costing $9.95 per month for five hours plus $2.50 for each additional hour. It seems pretty clear that AT&T's entry into the market will cause many of the companies to switch to flat fees for unlimited usage and to give up a lot of their rather pricey software and installation fees. However, AT&T is not undercutting the pricing for moderate users of the Internet all that much after the first year. AT&T has avoided the high premiums that MCI placed on its own service, thankfully.

At last count, there were over 3,000 companies that provided Internet access to commercial customers. MCI, in fact, has been involved in the Internet access market for over a year with limited success. A lot of commentators have apparently forgotten this, as there has actually been speculation on CNBC as to "when MCI would get into this market." When you combine MCI's forgettable Internet move with AT&T's failed Interchange service and its other written-down acquisition, it makes the success of AT&T's new offering somewhat doubtful, despite the fact that it will be marketing its product to its 80 million residential and 10 million business customers. MCI's strength was its dogged marketing, something that did not add any value to InternetMCI.

WorldNet's launch has thrown fear into shareholders of Internet service providers for the second day in a row. Netcom On-Line Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NETC)") else Response.Write("(NASDAQ: NETC)") end if %> closed down $2 3/8 to $20 3/8, UUNet Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: UUNT)") else Response.Write("(NASDAQ: UUNT)") end if %> lost $3 3/8 to $28 5/8 and PSINet <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PSIX)") else Response.Write("(NASDAQ: PSIX)") end if %> was off $1 3/4 to $9 3/8. PSINet set a new 52-week low and is now selling below its initial public offering (IPO) price. UUNet is faring slightly better, still far above its IPO price of $14 but getting close to where it first traded at $24.

Online service providers who offer Internet access as only part of their business were not doing much better. America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AMER)") else Response.Write("(NASDAQ: AMER)") end if %> was bludgeoned for $1 3/4 points, down to $47 3/8 after a torrid rise to $56 from its mid-January low of $33. America Online's recently launched GNN has become the number-two provider in its second month of operation and is perceived to have the most to lose from AT&T's new offering. CompuServe <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HRB, H&R Block)") else Response.Write("(NYSE: HRB, H&R Block)") end if %>, which had benefited last week from news that it would be spun-off from tax-preparation giant H&R Block, slipped in heavy trading to $35. Both online services are also down because of concern that cheap Internet access will cause them to drastically lower their own premium rates.

Even front-end software developers got hosed. Netscape <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NSCP)") else Response.Write("(NASDAQ: NSCP)") end if %> slumped $2 1/4 to $51 1/2 while Spyglass <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SPYG)") else Response.Write("(NASDAQ: SPYG)") end if %> was off again, down $1 1/4 to $23 1/2. Why these companies are being dumped on the AT&T news is anyone's guess---the potential expansion of the Internet to AT&T's 80 million customers should get people excited about the companies which sell the software that makes this happen. For example, it is Netscape's browser that AT&T will be using in WorldNet.

Even stranger were the losses in the Internet infrastructure companies. Sync Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SYNX)") else Response.Write("(NASDAQ:SYNX)") end if %>, which makes switches and competes with Cisco System <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CSCO)") else Response.Write("(NASDAQ:CSCO)") end if %>, slumped $4 1/4 to $32. Cisco, for its own part, closed down $1 to $47 3/4 and tends to trade in sympathy with the online stock. Bay Networks <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:BNET)") else Response.Write("(NASDAQ:BNET)") end if %> lost $1 3/4 to $44, Cascade Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CSCC)") else Response.Write("(NASDAQ:CSCC)") end if %> cascaded $1 7/8 to $69 1/4 and 3Com <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:COMS)") else Response.Write("(NASDAQ:COMS)") end if %> was off $1 1/4 to $47 1/4, showing broad-based weakness in networking companies. The only thing I can think of to explain this is the capital spending argument, also used against semiconductor equipment stocks---lower prices will cause companies to stop expanding, meaning lower profits for equipment makers. Personally, I don't think this holds for the semiconductor equipment crowd and I definitely don't think this holds for the Internet infrastructure stocks. Providing Internet access will play out like the railroads---companies will build "track" until they collapse, either dominating the market or disappearing due to takeovers. The only "infrastructure" stock up substantially was ADC Telecom <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:ADCT)") else Response.Write("(NASDAQ:ADCT)") end if %>, which actually competes with AT&T for laying large communications/networking backbones, rising $2 3/4 to $40.

Was anyone benefiting from AT&T's news? BBN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BBN)") else Response.Write("(NYSE: BBN)") end if %>, better know to many as Bolt, Beranek & Newman, was up $2 3/8 to $34 1/4 today. AT&T has a stake in BBN, which it contracts to build its network access infrastructure. Investors have apparently forgotten about BBNPlanet, BBN's consumer Internet access business. Hopefully, for shareholders, they will not remember it anytime soon, as it is just as vulnerable as UUNet and PSINet to competition from AT&T on this front. But not all of AT&T's partners in this new venture did as well, though---Verity <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:VRTY)") else Response.Write("(NASDAQ:VRTY)") end if %>, which will be giving AT&T the text search engine for its Netscape-based service, was down $4 to $47 1/2. No one at Verity could comment on why the stock was down.

It has gotten bad enough out there that Peter Rogers of Bear Stearns & Co., lowered his ratings on Netcom and UUNet to neutral from attractive. A contact at Bear Stearns said the downgrades were based on the competition from AT&T. Investors will recall back in November when Rogers initiated coverage of Netcom with an attractive rating in the $60s, helping to drive the stock up to the $90 range. Why he did not foresee the potential competition of AT&T when MCI was *already* in the market is anyone's guess.

Although I am no fan of the Internet service providers, some of the valuations are getting ridiculous. Contrary to popular opinion, these stocks are not complete fluff. There are real networks here that have real value, particularly to a company like AT&T or Sprint that might be looking to radically increase capacity if they are going to initiate price wars for Internet services. With the average POP (Point of Presence) costing $50,000 in equipment, the average hub costing $500,000 and international POPs and hubs costing more, a conservative valuation for PSINet's network would be $70 million and UUNet's would be worth $110 million---maybe even more in buyouts. (My logic for these numbers is spelled out in an article called "POP Go The ISPs" that I wrote yesterday as part of a Special Section on the Internet service providers). Suffice to say, there is some value here at some point and I think that savvy investors will start seeking it out.

ANOTHER FOOLISH THING: Ask the Headhunter!

What?? A Headhunter in Fooldom? That's right. Meet Nick Corcodilos, who runs the "Ask the Headhunter/Job-Hunting" area in the Fool's School. Successful Fools need to know how to find and land the best job---or how to hire the best workers---thereby ensuring a Foolish disposition as well as a steady stream of funds to invest. Nick has also penned the invaluable "New Interview Instruction Book" (discussed in the March issue of Working Woman magazine), available to Fools at FoolMart. E-Mail Nick and ask him your questions---he has already answered hundreds since last April. You can get to Nick via the Fool's School on the Fool main screen.

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)