Thursday, March 21, 1996
MARKET CLOSE
INDEX:
I. Market News: Blah Day---More Chip Scares
II. Heroes: Nashua, Breed Tech, Health Mgmt, Zoltek
III. Goats: Southern Pac., AMCOL, Networking Comp.
IV. Investment Perspective: A Look at Cabletron
V. Another Foolish Thing
MARKET CLOSE
DJIA: 5626.88 -28.54 (-0.50%)
S&P 500: 649.19 -0.79 (-0.12%)
NASDAQ: 1099.79 -2.03 (-0.18%)
It was a mixed day for technology stocks, and a generally down day for the market. Check out our Special Sections today, focusing on negative announcements from semiconductor companies Altera and Alliance, and on the earnings announcement from Broderbund, the biggest name in edutainment software. You'll find them in our Evening News area. MF Templar is participating in the Broderbund conference call at 6pm, and will have his report ready for us around 7pm.
Fools in the greater Denver area, rejoice! Fool founders David and Tom Gardner are heading West to sign copies of "The Motley Fool Investment Guide". They'll be at The Tattered Cover on Wednesday, March 27th from 7:30 to 9 pm. And for those who enjoyed MF Templar's ten-part Digital World (now available in an expanded paper edition) hold on to your hats---Technophrenia is coming!
Nashua Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NSH)") else Response.Write("(NYSE: NSH)") end if %> surged $1 1/4 to $12 1/8 today after the company announced it was spinning off its Cerion Technology unit in an initial public offering in mid-May. Cerion will come public somewhere between $12 to $14 a share and Nashua will own between 37% to 45.2% of the company afterwards. Cerion manufactures precision-machined aluminum disk substrates which are used in hard drives. Nashua makes special office products like thermal papers, pressure sensitive labels and jet printer supplies. Nashua plans to use its proceeds from the offering to reduce debt.
After reporting that the General Motors <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GM)") else Response.Write("(NYSE: GM)") end if %> strike would hurt results if it continued any longer, Breed Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BDT)") else Response.Write("(NYSE: BDT)") end if %> received a boon when news came out that the strike had ended, sending shares up $2 to $18 5/8. Prudential Securities analyst Phil Fricke seems particularly brilliant, having initiated coverage of Breed with a buy rating this morning, racking up 12% gains for his firm's clients. Breed Technologies makes airbag components used in General Motors cars and trucks. The company had been pushed down to near its 52-week low while the strike lumbered on. General Motors, by contrast, was only up $1/8 to $53 5/8 on news that the troublesome work stoppage was over.
Health Management <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: HMIS)") else Response.Write("(NASDAQ: HMIS)") end if %> shot up $1 7/8 to $4 3/4 after the company announced that it will not suffer losses after it restates results from its last three quarters. A few months back the company had discovered some accounting irregularities that they are still not prepared to discuss that devastated the stock in a few bloody sessions. Health Management is certain that after restatement they will show a profit for those three quarters---investors had previously feared that they would come out with losses for each of the quarters. The company provides comprehensive outpatient drug therapies.
Zoltek <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ZOLT)") else Response.Write("(NASDAQ: ZOLT)") end if %> continued to rise $4 to $35 1/4 after the Cabot Market Letter recommended the shares. Cabot, which is probably most famous for its bullishness about Presstek <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PRST)") else Response.Write("(NASDAQ: PRST)") end if %>, announced that it was adding the stock to its fake-money portfolio via its dial-in telephone hotline. Pauli & Co., after getting a look at the first 20 days of earnings contribution from Zoltek's new Hungarian plant, Magyar Viscosa Rt, made positive comments about the company on Friday, driving the stock up this week.
QUICK TAKES: FRANKLIN QUEST <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FNQ)") else Response.Write("(NYSE: FNQ)") end if %> rose $1 5/8 to $24 after reporting second quarter earnings a penny ahead of expectations. . . BOMBAY CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BBA)") else Response.Write("(NYSE: BBA)") end if %> popped up $1 1/2 to $8 3/4 after Morgan Stanley upgraded the furniture retailer to buy. . . US Robotics's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: USRX)") else Response.Write("(NASDAQ: USRX)") end if %> decision to standardize SMITH MICRO SOFTWARE'S <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SMSI)") else Response.Write("(NASDAQ: SMSI)") end if %> software across all of its modem divisions was enough to spark a $1 1/4 to $9 3/4 rally in the shares. . . SMART MODULAR TECH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SMOD)") else Response.Write("(NASDAQ: SMOD)") end if %> was up $2 to $16 3/8 after being promoted on the New America page of Investor's Business Daily. . . STAC INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: STAC)") else Response.Write("(NASDAQ: STAC)") end if %> jumped $1 1/8 to $10 1/8 after Smith Barney analyst Jonathan Cohen made positive comments about the company.
Southern Pacific <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RSP)") else Response.Write("(NYSE: RSP)") end if %> got whacked for $3/4 to $24 3/8 after news got out that the National Industrial Transportation League may announce its opposition to the proposed merger between that railroad and Union Pacific <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UNP)") else Response.Write("(NYSE: UNP)") end if %>. The League is concerned that the merger of these two railroads would give the combined company incredible power in the western two-thirds of the country. The Street was surprised by this resistance and the railroads are on record saying they will brook no conditions from the League.
AMCOL Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ACOL)") else Response.Write("(NASDAQ: ACOL)") end if %> sank $4 to $12 5/8 after the company reported that it saw its first quarter "50-70 percent below consensus." Can't accuse them of being vague, now can you? AMCOL, the kitty litter stock that CNBC commentators were having a field day with all afternoon, blamed the profit drop on higher costs associated with increasing capacity at a number of plants. They also pointed a finger at January's weather, saying it delayed their ability to get environmental products delivered. AMCOL makes other specialty chemicals but does the majority of its business producing absorbent polymers to soak up cat pee.
Networking Computer Devices <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NCDI)") else Response.Write("(NASDAQ: NCDI)") end if %> will revise its fourth quarter earnings, sparking a $1 1/8 sell-off today that left the stock at $4 1/8 when it was all done. They will be forced to reduce revenues at their software unit by $2 to $2.5 million, pushing earnings down from a gain of $0.07 per share to a loss of $0.01-$0.03 per share. Several distributors returned a large quantity of product during the first quarter, causing the company to review the original purchases and accompanying documentation. Apparently, there is some doubt that these "orders" were legitimate, and consequently the company will take them out of their results.
QUICK CUTS: DIGITAL EQUIPMENT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DEC)") else Response.Write("(NYSE: DEC)") end if %> continued to slide $2 3/4 to $53 1/4 today after reporting yesterday that it would miss third quarter earnings. . . Medical-laser manufacturer TRIMEDYNE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: TMED)") else Response.Write("(NASDAQ: TMED)") end if %> ended its two-day surge today, falling back $2 1/8 to $8 3/4 after starting the week at $2 and change. . . STRAWBRIDGE & CLOTHIER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: STRWA)") else Response.Write("(NASDAQ: STRWA)") end if %> lost $3 1/4 to $21 1/2 after UBS Securities analyst Todd Slater cut the stock from buy to hold. . . CASCADE COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CSCC)") else Response.Write("(NASDAQ: CSCC)") end if %>, down $2 1/8 to $87, got hit by profit-taking over general concern that networking sales were slowing.
INVESTMENT PERSPECTIVE:
A Look at Cabletron
Cabletron Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CS)") else Response.Write("(NYSE: CS)") end if %> shed $5 1/4 to $69 3/4 today after it reported fourth quarter earnings a penny ahead of expectations. News that competitor Cisco Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CSCO)") else Response.Write("(NASDAQ: CSCO)") end if %> would cut orders to Altera Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ALTR)") else Response.Write("(NASDAQ: ALTR)") end if %> launched speculation that the networking industry was experiencing a slowdown in demand. Cisco did not escape unscathed either, falling $1 1/4 to $44 3/4 on normal volume. Almost every company involved in networking was off today as investors vacated the stocks.
This pullback in shares of networking companies comes after a pretty nice run-up since mid-January. For instance, investors could have had Cisco in the low $30s in mid-January and since then it has been off to the races, hitting a high of around $50. The business-to-business networking segment has been the hottest area among what most people call the "technology stocks" as more and more companies link individual computers in local area networks (LANs) and wide area networks (WANs) and use hypertext transfer protocol to form intra-nets and link to the Internet.
After today's action, many of these stocks are as cheap as they have been in weeks. It all started when Altera told the Street that its orders from Cisco would be below previous expectations in their fiscal second quarter, which they only recently started. The reason Cisco gave was the need to trim their inventories as they had built up higher-than-usual supplies because some components became hard to get last year. Although Altera said nothing about whether its revenues or earnings would be lower than expected for the quarter, the Street took this as a dire confirmation that the weakness in DRAM and SRAM (as witnessed by Alliance Semiconductor today) had spread to the specialty chip makers and the networkers.
Looking at the group with an eye toward growth rates, the apparent lofty multiples that investors are paying for trailing earnings fade a bit. For instance, even though 3Com is trading at 30 times trailing earnings, it is only trading at 19 times 1997 estimates and is estimated to grow at an average annual rate of 28.6% over the next five years. The trick to high growth stocks like these which have historically executed their operating strategy well is not always to wait for a disaster but sometimes to bite the bullet and purchase today, understanding that they are being priced for what is fair in six to twelve months, not based off of what is fair in two to three years.
Of the five large networking companies---Cisco, Bay Networks <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAY)") else Response.Write("(NYSE: BAY)") end if %>, Madge Networks <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MADGF)") else Response.Write("(NASDAQ: MADGF)") end if %>, Cabletron and 3Com---it is Cabletron after today's beating that now looks the cheapest. The massive pull-back in Cabletron actually seems almost unfair, given that the company broke the $1 billion revenue mark for its current fiscal year while maintaining its solid margins and making a pretty cheap acquisition in Standard Microsystems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SMSI)") else Response.Write("(NASDAQ: SMSI)") end if %> networking business. Having just completed their fiscal year, there is no consensus yet for two years out, but my guesstimate is that it is going to be in the $4.50 to $5.00 range, suggesting that Cabletron is only trading at 15 times forward earnings in spite of the fact that it has grown 31% in each of the last two years and has shown no sign of slowing down.
Check out the Special Section in the Evening News's new listbox in order to get the FoolWires and press releases about Alliance Semiconductor, Altera Corp., Cabletron Systems and Cisco Systems that the Fool News staff wrote this afternoon.
ANOTHER FOOLISH THING: The Weekly Fool on Paper
For those among you who prefer paper and staples to chips and bytes, The Weekly Fool is now available in a paper format. Ideal for Fools on the run, The Weekly Fool is a compilation of the week's happenings. If you don't have time to scour every corner of Fooldom, yet you want to stay in the loop---sign up! This paper version is also an ideal gift for your friends or relatives who have Foolish inclinations but no Foolish technology. Share this unique newsletter with them, and help them learn about sound investing principles and strategies as well as potential stock picks. To subscribe, for more information, or for a sample copy, contact MF Numbers ([email protected] or 800-717-0701).
Byline: Randy Befumo (MF Templar)