Thursday, February 29, 1996
MARKET CLOSE

INDEX:

I. Market News: Chip Stocks Drag Down NASDAQ
II. Heroes: AnnTaylor, Retirement Care Associates, Revlon, Coleman, New World Communications, Marvel Entertainment, Netcom, UUNet, PSINet, America Online, H&R Block, Ion Laser Technology, Diana, Integrated Packaging, MacFrugal's, I Stat
III. Goats: LSI Logic, Proxima, Orion Network Systems, Systemed, Citrix, Uranium Resources, Spectrum Signal Processing
IV. Investment Perspective: The Chips Are Down, But. . .
V. Another Foolish Thing: Secrets of the Stock Folders

MARKET CLOSE

DJIA: 5485.62 -20.59 (-0.37%)
S&P 500: 640.43 -4.32 (-0.67%)
NASDAQ: 1100.05 -7.50 (-0.68%)

MARKET NEWS

Any leaping the markets did today was tempered by returns to earth. The Dow was especially volatile, shooting up and down, and ending the day lower. The NASDAQ might have ended up in positive territory had chip stocks not been falling once more, this time due to LSI Logic's pre-announcement that its earnings would be lower than anticipated.

For a closer look at economic numbers released today (jobless claims, Chicago purchasing managers), check out MF Merlin's Economic Indicator area in the lower left corner of the Evening News screen.

Several earnings surprises warranted some focused Foolish attention. Check out the Special Sections on The Gap and Intuit's impressive results and Mid-Atlantic Medical's less impressive results---in the main screen listbox. Also of note there are the Industry Research area, the book tour schedule of the Brothers Gardner (Atlanta on March 19!), and a link to Fribbles---witty, thought-provoking pieces on investing, sports, family, budgets, IRAs, literary watering holes in Key West. . . you get the idea.

HEROES

A bright outlook for February sales and a timely upgrade from Donaldson Lukfin & Jenrette (DLJ) sent shares of AnnTaylor <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:ANN)") else Response.Write("(NYSE:ANN)") end if %> up $2 3/8 to $17 1/4 today. Analyst Diana Eisman Cohen moved AnnTaylor to outperform from market perform, saying that the company had "turned the corner." Cohen put a $20 12-month price target on shares of the battered retailer, which bottomed out at $11 a few months ago after speculation that it might end up filing for bankruptcy. A bad bet on fashion in a terrible retail environment put the leveraged retailer of women's clothing on the ropes for most of 1995. Expense and inventory improvements as well as a rededication to its classic style have many eager to see the same store sales numbers, set to be released in a few days.

Only a month after its move to the New York Stock Exchange, Retirement Care Associates <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:RCA)") else Response.Write("(NYSE:RCA)") end if %> announced it would merge with NewCare Health Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:NWCA)") else Response.Write("(NASDAQ:NWCA)") end if %> two days ago. The stock was up $1 1/4 to $11 1/2 today, possibly in response to this news. Retirement Care gets its penny-stock partner for a mere 2.65 million shares. Retirement Care got smashed late last year when the company missed earnings estimates due to lower-than-expected Medicaid rate increases, among other reasons. The company's executives own a great deal of the stock and also own many of the nursing homes that the company manages, a conflict of interest that has made some in the Foolish newsroom a little queasy.

The success of today's Revlon <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:REV)") else Response.Write("(NYSE:REV)") end if %> initial public offering (IPO) rubbed off on another company owned by Ron Perelman---Coleman Company <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:CLN)") else Response.Write("(NYSE:CLN)") end if %>. Coleman, which dominates the outdoors-recreational industry, rose $3 1/4 to $43 3/4 even as Revlon climbed $3/8 to $27 5/8. Coleman announced the acquisition of 70% of French-based Camping Gaz, extending its worldwide franchise. Rumors are that Brunswick might be interested in buying Coleman, meaning that Perelman is building cash for another, bigger acquisition. New World Communications Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:NWCG)") else Response.Write("(NASDAQ:NWCG)") end if %>, another Perelman property, rose $1 1/4 to $18 3/4 as well off of Revlon's success. Only Marvel Entertainment <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:MRV)") else Response.Write("(NYSE:MRV)") end if %>, the last Perelman property, did not do that well today, only rising $1/4 to $11 1/2. Perelman owns majority stakes in all of these companies through his holding company, McAndrews & Forbes.

Internet service providers started to recover today after a two-day rout initiated by AT&T's entry into their market. Netcom On-Line <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:NETC)") else Response.Write("(NASDAQ:NETC)") end if %> rose $2 7/8 to $23 1/4 after its CEO and Chairman appeared on CNBC's Squawk Box citing a $16.50 book value and $14 in cash per share. We're not quite sure how they are calculating book value, but the cash per share number looks spot on according to the S&P Stock Guide. UUNet Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:UUNT)") else Response.Write("(NASDAQ:UUNT)") end if %>, whose network is worth even more than Netcom's if you consider the relative number of expensive hubs and international Points of Presence (POPs), was $1 3/8 higher to $30 today. PSINet <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:PSIX)") else Response.Write("(NASDAQ:PSIX)") end if %> moved up $3/4 to $10 1/8, America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:AMER)") else Response.Write("(NASDAQ:AMER)") end if %> added $1 3/4 to $49 1/8 and H&R Block <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:HRB, owner of CompuServe)") else Response.Write("(NYSE:HRB, owner of CompuServe)") end if %> managed a $1/4 gain to close at $35 3/8.

Ion Laser Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:ILT)") else Response.Write("(NYSE:ILT)") end if %> continued to bask in the warmth of last week's FDA approval of its tooth-whitening argon laser. Less than a year ago, ILT shares cost less than a dollar, but today they continued their ascent, up $4 3/8 to $15 3/8---up nearly 40%! Apparently, investors suddenly have a lot of confidence in the public's imminent demand to spend one or two hours in a dentist's chair, having lasers and chemicals whiten their teeth. Ion Laser shareholders must be packing up their troubles in their old kit bags, in order to smile, smile, smile.

QUICK TAKES: DIANA CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:DNA)") else Response.Write("(NYSE:DNA)") end if %> continued up $2 to $21 1/2 today after announcing yesterday that it was shedding its food distribution subsidiary to focus on networking. . . INTEGRATED PACKAGING ASSEMBLY CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:IPAC)") else Response.Write("(NASDAQ:IPAC)") end if %> rose $1 1/4 to $9 3/4 the day after its oversubscribed initial public offering (IPO). . . AMWAY ASIA PACIFIC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:AAP)") else Response.Write("(NYSE:AAP)") end if %> rose $1 7/8 to $33 after it resumed sponsoring distributors in China. . . MAC FRUGAL'S <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:MFI)") else Response.Write("(NYSE:MFI)") end if %> moved up $1 1/2 to $15 3/8 after reporting a sales gain of 7% for February. . . SHARES OF I STAT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:STAT)") else Response.Write("(NASDAQ:STAT)") end if %> soared $5 3/8 to $38 on no news that we could find at press time.

GOATS

Data Broadcasting, which provides quotes for America Online, confused the heck out of a lot of readers when it reported that LSI Logic <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:LSI)") else Response.Write("(NYSE:LSI)") end if %> closed up $1/4 yesterday in spite of the fact that the company sold off after the New York close. What happened here? Where did we get the price we reported yesterday? Investors should know that the Pacific Exchange closed at 2:00 PM PST---or 5:00 PM EST, meaning that investors there get an extra half hour to trade. When a company like LSI releases news at 4:30 PM EST, investors out on the West Coast have a half-hour to react to the news. So yesterday, when LSI announced that their first quarter would be off 10%, the stock sold off substantially. Then, this morning, LSI lost another big chunk, closing at $27 5/8---after all was said and done, down $8 3/4 in two sessions. Make sense now?

Analysts have been busy at Smith Barney over the last few days, raising and lowering ratings on a bevy of stocks. All this after analyst Jonathan Cohen got the Internet stocks off on a downward spiral due to his weekend comments in Barron's. Today proved no exception, as Smith Barney analyst Peter Enderlin downgraded Proxima <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:PRXM)") else Response.Write("(NASDAQ:PRXM)") end if %> from buy to neutral. Enderlin cited increased competition in the electronic projector market as his reason, shaving 1997 earning estimates by $0.10 per share to $2.20, and driving the shares down $4 to $22 1/2.

Orion Network Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:ONSI)") else Response.Write("(NASDAQ:ONSI)") end if %> reported today that a 41%-owned affiliate had signed a three-year contract with Telecom Ireland International. As part of the agreement, Ireland will market Orion's satellite services to multinational companies in Ireland. This news only saw shares fall, though, down $1 7/8 to $11 1/4. Orion maintains this is a multi-million deal, which is evidently why investors got so excited about the company today.

QUICK CUTS: SYSTEMED INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SYSM)") else Response.Write("(NASDAQ:SYSM)") end if %> fell $7/8 to $4 3/8 after missing earnings estimates by 20%. . . CALLS TO CITRIX SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CTXS)") else Response.Write("(NASDAQ:CTXS)") end if %> after the stock fell $3 3/4 to $43 1/2 yielded no answers as the company did not know why the stock was down. . . URANIUM RESOURCES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:URIX)") else Response.Write("(NASDAQ:URIX)") end if %> was off $1 to $13 1/8 after reporting a loss for its fiscal fourth quarter. . . DISAPPOINTING EARNINGS put the kibosh on Spectrum Signal Processing <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SSPIF)") else Response.Write("(NASDAQ:SSPIF)") end if %>, down $1 1/4 to $10 3/4.

INVESTMENT PERSPECTIVE: The Chips Are Down, But. . .

Difficulties for semiconductor manufacturers weighed on computer and semiconductor related shares for most of the day after LSI Logic <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:LSI)") else Response.Write("(NYSE:LSI)") end if %> reported last night that they would not make their fiscal first quarter and second quarter estimates. This comes on the heels of bad news from Microchip Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MCHP)") else Response.Write("(NASDAQ:MCHP)") end if %>, an integrated circuit manufacturer once believed immune to cyclical swings, and Micron Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:MU)") else Response.Write("(NYSE:MU)") end if %>, which decided to pull the plug on its controversial Lehi, Utah wafer fabrication plant (fab). All of this combined to make investors nervous again about semiconductor stocks, with extremely volatile results.

The companies most affected by these three pieces of news were the semiconductor equipment manufacturers---the companies that build the machines that make the chips that power the electronic stuff people love to use. The conventional wisdom is that shrinking profits for semiconductor manufacturers will cause capital expansion budgets to evaporate overnight, leaving the semiconductor equipment manufacturers high and dry. With unit prices of commodity chips falling as computer makers dump DRAM on the spot market to get it out of inventory, a new caution has entered the mindset of computer-related companies. In what is classically called an "inventory correction," these corporations have allowed their supply of components to drop down to bare bones, holding off purchases of components until they are absolutely necessary.

This inventory correction, however, has caught many semiconductor manufacturers off guard, given the slew of press releases calling for lower-than-expected earnings in recent weeks. A short-term glut of commodity components resulted from Packard Bell's tragic miscalculation on whether or not customers would want 75 megahertz, 16 meg DRAM machines rather than faster microprocessors with only 8 meg of DRAM. This crunched the DRAM spot market, caught Cirrus Logic in the face and caused Intel to convert $470 million of its accounts receivables in to a loan---which accounted for roughly 500,000 $1000 motherboards equipped with 75 megahertz Pentiums. Taiwanese fabs that did contract business for Intel and Intel suppliers have "pushed out" equipment orders, telling semiconductor equipment manufacturers that they will not need big ticket equipment until the third or fourth quarter.

With diverse manufacturers like Xilinx <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:XLNX)") else Response.Write("(NASDAQ:XLNX)") end if %>, LSI Logic and Micron Technology all weathering inventory corrections, will they slack off on capital investment? The Japanese are praying they will. During last year's high yen, global correction environment the Japanese slacked off on capital investment and got jumped by a variety of American, Korean and Taiwanese chip makers. As manufacturing semiconductors is a unit-driven business, and as he who makes the most chips for the lowest price takes the largest market share, investment in your facilities is absolutely vital if you want to stay in the game. It is what Carl Johnson and Ron Leckie of Infrastructure call "no limit" poker---if the American companies do not up the ante, then the Asian or European manufacturers will be happy to.

The LSI Logic news really dealt a blow to the semiconductor equipment stocks because they have five planned fabs---some of which industry wags speculate will never be built. On top of Micron's decision earlier in the week to stop construction on its $250 million fab, LSI Logic's troubles have the rumbling, crumbling, sky-is-falling crowd all in a tizzy again. Applied Materials <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:AMAT)") else Response.Write("(NASDAQ:AMAT)") end if %> was off $2 3/4 to $35 3/4 while smaller companies like Cohu <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:COHU)") else Response.Write("(NASDAQ:COHU)") end if %> managed to close slightly up despite being down a huge amount during the day. If you look closer at a lot of this news, the logic (pun intended) of a uniform slowdown starts to break down.

Micron's "investment" soured more because of a conflict between the board room and the executive suite and a silly focus on 4 meg DRAM rather than a market crash. With sales of 16 meg DRAM increasing 196% in 1995, it was only fitting that 4 meg Micron would get kiboshed at some point by falling prices. With the Japanese, Koreans, Taiwanese and some American producers of DRAM all lining up to expand their own capacity to built higher meg DRAM on bigger wafers, the universal skepticism towards the equipment crowd suddenly becomes a little less sensible. When you consider that DRAM is currently only 28% of global semiconductor sales and that falling DRAM prices are what are making cheap Internet terminals possible, one wonders what the demand side of the equation will look like in the coming months.

Inventory correction or full-blown implosion? Thinning capital spending budgets or aggressive expansion to build better chips on bigger wafers? The answer to these questions are to be found digging through the flurry of news and press releases from the past weeks and months, not looking toward the talking heads on CNBC for enlightenment. Do your homework, make your choices and stay Foolish.

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)