Tuesday, March 26, 1996
MARKET CLOSE
INDEX:
I. Market News: Mixed Day For Tech Stocks
II. Heroes: Consolidated Stores, OrNda, Ostex, Gartner
III. Goats: Genzyme, Eagle Point, Genus, Progress
IV. Investment Perspective: Technophrenia 1: Micron
V. Another Foolish Thing
MARKET CLOSE
DJIA: 5670.60 +26.74 (+0.47%)
S&P 500: 652.97 +2.93 (+0.45%)
NASDAQ: 1088.32 +1.23 (+0.11%)
Negative remarks from analysts sent some networking stocks tumbling down today. Check our Special Section in the Evening News screen for further details. Also of interest there is MF Merlin's Economic News area, which covers today's Federal Open Market Committee meeting, the Conference Board's March report on consumer confidence, and the Mitsubishi Bank/Schroder Wertheim chain store sales report for the week ending March 23. Today's Investment Perspective is the second in MF Templar's ten-part series on investing and the technology world -- Technophrenia! Read why one of the most recognized "technology" companies isn't a technology company at all.
Fools in Denver, get ready to rumble! The brothers Gardner will be signing books at The Tattered Cover bookstore Wednesday night, from 7:30 to 9:00 pm!
Consolidated Stores <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CNS)") else Response.Write("(NYSE: CNS)") end if %> raked in gains for investors today, rising $5 3/8 to $31 5/8 after the company completed its purchase of KayBee Toys from Melville <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MES)") else Response.Write("(NYSE: MES)") end if %>. The KayBee Toys purchase represents a change from Consolidated's close-out approach as the toy chain is not known as a discounter. It appears widely believed that Consolidated's able management will be able to make the best of the situation. This purchase gives them an edge when it comes to buying close-out from toy retailers. The $315 million they are paying will buy them one thousand stores, four distribution centers, $200 million in inventory and one billion dollars in annual revenues (last year). Analysts now believe Consolidated will earn somewhere between $1.90 to $2.00 per share (EPS) compared to $1.32 last year.
OrNda Healthcorp <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ORN)") else Response.Write("(NYSE: ORN)") end if %> smashed estimates for the third quarter in a row today, boosting the stock price $2 1/8 to $28 7/8 as a result. OrNda is one of the three largest urban hospital chains, competing with Columbia/HCA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: COL)") else Response.Write("(NYSE: COL)") end if %> and Tenet Healthcare <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: THS)") else Response.Write("(NYSE: THS)") end if %>. OrNda came out of bankruptcy two years ago and has been trading at a lower multiple versus its earnings and revenue growth than its two peers. If OrNda continues to consistently post revenue and earnings growth in excess of Columbia and Tenet, this disparity should continue to correct, moving the share price up higher. OrNda estimates should move to $1.79 EPS this year and $2.10 EPS for next year, meaning the company is growing at 16.2% but trading at about 13.5 times those earnings.
Ostex International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: OSTX)") else Response.Write("(NASDAQ: OSTX)") end if %> surged $1 3/8 to $17 3/8 today after a large scale study demonstrated that its Osteomark test was the most specific test available for bone loss. Osteomark had the highest correlation with results from DEXA, the standard X-ray technique for measuring bone loss due to osteoporosis. This study was done by Patrick Garnero and published in the Journal of Bone and Mineral Research. Osteomark is a non-invasive urine test that measures bone loss and could be used as an indication for osteoporosis, a disease that causes brittle bones most commonly found in post-menopausal women.
Gartner Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GART)") else Response.Write("(NASDAQ: GART)") end if %> rose $4 3/4 to $61 3/4 after it announced an agreement with Netscape Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NSCP)") else Response.Write("(NASDAQ: NSCP)") end if %> to develop an online presence. Gartner will be bringing its @vantage service online. @vantage is an online product that provides information technology managers with advice. The @vantage site will be a "secure, direct source of premium-value research and analysis." Gartner plans to offer a "pay as you go service" with a look and feel similar to America Online.
QUICK CUTS: TRITON OIL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OIL)") else Response.Write("(NYSE: OIL)") end if %> rose $7 to $58 1/2 after Lehman Brothers started the stock as a "buy" after news about a huge Colombia oil field was announced. . . CINCINNATI BELL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CSN)") else Response.Write("(NYSE: CSN)") end if %> jumped $3 1/2 to $42 7/8 after announcing exclusive long-term billing and customer-care service agreements with two Personal Communications Service (PCS) providers. . . CONTROL DATA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CDAT)") else Response.Write("(NASDAQ: CDAT)") end if %>, down $4 to $18 1/2 got whacked by Lehman Brothers, which cut its estimates for the current quarter from $0.23 EPS to $0.17 EPS today. . . RETIX WIRELESS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: RETX)") else Response.Write("(NASDAQ: RETX)") end if %> was up $15/16 to $5 1/8 after signing a large contract to provide wireless communications infrastructure to Ericsson <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ERICY)") else Response.Write("(NASDAQ: ERICY)") end if %>. . . CAMBRIDGE NEUROSCIENCE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CNSI)") else Response.Write("(NASDAQ: CNSI)") end if %> continued to rise, up $1 5/8 to $12 7/8, after news of its presentation to the American Academy of Neurology about Cerestat continued to circulate.
Genzyme <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GENZ)") else Response.Write("(NASDAQ: GENZ)") end if %> tanked $5 to $52 1/4 today after losing a bundle in late trading yesterday when the company got a pretty lukewarm approval for its Seprafilm product from the Food and Drug Administration. Genzyme Tissue Repair <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GENZL)") else Response.Write("(NASDAQ: GENZL)") end if %> slipped $2 7/8 to $14 1/8 and Genzyme Transgenics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GENZZ)") else Response.Write("(NASDAQ: GENZZ)") end if %> plummeted $5 to $19 1/4 as well, although both companies are not necessarily directly tied to Seprafilm. Seprafilm was only approved for use in the two surgeries that were studied, over the objections of one panel member who recommended that it be approved for broader use. These label limitations and the overall tone of skepticism might hurt Seprafilm when it hits the market. Genzyme Investor Relations representative Steve Push has been active in the Fool's folder and this is where interested investors might want to head next.
Eagle Point Software <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: EGPT)") else Response.Write("(NASDAQ: EGPT)") end if %> continued to tumble, losing $1 3/4 to $9 1/2, after reporting yesterday that it would only make $0.05 to $0.10 EPS in the current quarter. Developing geographical survey software applications has become a rough business with the weather and the government shutdown, it claims. Piper Jaffray cut its 1996 view to $0.42 EPS from $0.52 EPS and its 1997 estimates to $0.55 EPS from $0.75 EPS, implying that the company will barely grow at all over that two year period. Piper Jaffray cut the stock from "strong buy" to "buy".
Olde has thrown in the towel when it comes to Genus, Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GGNS)") else Response.Write("(NASDAQ: GGNS)") end if %>, downgrading the stock to "neutral" and putting it at a new 52-week low. Genus plunged $1 3/8 to $5 7/8 today in fairly heavy volume after the discount broker cut its earnings estimates for 1996 to $0.30 EPS from $0.54 EPS. Olde's "recommendations" are almost always for Nasdaq National Market stocks in which it makes a market, calling into question the impartial nature of this "free" service. Most analysts had already lowered their ratings on the stock, making Olde's advice fairly late to market.
Progress Software <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PRGS)") else Response.Write("(NASDAQ: PRGS)") end if %> got hosed for $5 1/16 to $14 15/16 today after the company told analysts that revenues would fall 5% to 10% below what it made last quarter. Customers have apparently been slow to adopt the newest version of its database software, partially due to the fact that it involves a new graphical user interface (GUI). One company's pain, however, is another company's panacea -- Sybase <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SYBS)") else Response.Write("(NASDAQ: SYBS)") end if %> surged $1 7/8 to $24 5/8 while Informix <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IFMX)") else Response.Write("(NASDAQ: IFMX)") end if %> was up $1 1/4 to $28 7/8 on the news that Progress's Valued Added Resellers (VARs) simply could not compete with VARs from other database software companies.
QUICK CUTS: Property and casualty re-insurer E.W. BLANCH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EWB)") else Response.Write("(NYSE: EWB)") end if %> fell $5 1/8 to $20 1/8 today after it reported that it would not make its first quarter estimates. . . SIMULA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SMU)") else Response.Write("(NYSE: SMU)") end if %> slumped $1 to $18 1/4 after yesterday's news about a major auto maker using its side-impact airbag technology, possibly on profit-taking. . . ALPINE LACE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: LACE)") else Response.Write("(NASDAQ: LACE)") end if %> fell $1/2 to $6 1/2 after a motion for a summary judgment in a patent suit again Kraft Foods was granted, meaning Alpine ain't getting no fat settlement or injunction. . . Color printer MAIL-WELL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MLWL)") else Response.Write("(NASDAQ: MLWL)") end if %> got socked for $1 3/4 to $8 1/8 after it reported that it would miss quarterly estimates by $0.10 to $0.15 EPS next time around. . . CONTROL DATA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CDAT)") else Response.Write("(NASDAQ: CDAT)") end if %> dropped $4 to $18 1/2 today after Lehman Brothers cut the stock's estimate for next quarter from $0.23 EPS to $0.17 EPS. . . News that VISTA 2000 <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: VIST)") else Response.Write("(NASDAQ: VIST)") end if %> will lose $5 million this year due to charges and year-end adjustments pushed the stock down $1 5/8 to $12 7/8.
INVESTMENT PERSPECTIVE:
Technophrenia 1: Micron: A Moral Fable
The urge to classify is our Aristotelian heritage. The perspicacity of mind that allowed Democritus and Leucippus to conceive of the "atom", a tiny, indivisible unit and that inspired scientifically-minded Greeks to classify flora and fauna differently has been the fount of science. Suddenly we could compare and contrast things that previously coexisted in an undifferentiated blob. The will to categorize enhanced the art of science and the application of science came to be known as technology. An alternative use of categories is the Wall Street "sector" -- the notion that at any one time there are a discreet number of industries into which all extant companies can be cataloged. Sure, there might be some that ride a cusp of two or more distinct divisions as found in the '70s-style conglomerates, but for the most part you can shove them all in one hole or another. And besides, we can just make "conglomerates" a category itself.
By classifying companies into "industries" we enable ourselves to make intelligent decisions between the myriad companies that compete for our investing dollars because we can determine "relative" value. ABC Corp. trades at 13 times trailing earnings and is expected to grow earnings per share (EPS) 20% next year, whereas its archrival XYZ Corp. trades at 22 times earnings and will only grow its EPS by 5%. This is a gross oversimplification as criteria like the balance sheet, the brand name, cost structure, research and development spending, overall competitive position, and the worldwide market share must also come into play, but the roots of intelligent investing are to be found here.
Industry categories emerge over time. It was not that long ago, for instance, that your local telephone company was just another utility to be set alongside the water and power companies. Then came deregulation in 1984 and further reform in 1996 and suddenly telecommunications has become a growth industry in its own right, with executives anticipating that the average customer bill will increase four-fold by the end of the decade. Historical context is everything when it comes to industry classification -- these notions are not set in stone but rather are ideas invented by people to allow them to make decisions in an increasingly-populated capital market.
Sometimes an idea that at one point had a basis in fact but is now anachronistic will still linger, its old priests unwilling to give up their power. One we discussed in the previous installment was the "stock market", an idea rooted in the early American experience with capital markets that has become increasingly bankrupt. This same historical fixedness encourages the investment community to see a "stock market" where increasingly there is only a "market of stocks", and reinforces the notion that such a thing as the "technology sector" exists -- even at a time when there is patently no such thing.
The comfort found in a totality like the "technology" sector is something our reductionist instincts are loathe to relinquish. The simple fact remains that the concept of a "technology" sector is an historical one and has no grounding in material reality. For instance, as mass consumer adoption of the personal computer (PC) intersects with increasingly complex televisions, the circuit boards used for both products starts to look the same. Yet personal computers remain "technology" stocks whereas television manufacturers are called "consumer electronics". And what to make of the component companies that manufacture by contract the circuit boards for both products -- technology, consumer electronics or something else all together?
The apparent consensus that recognizes "technology" as a unique sector is akin to the shared set of beliefs that made blood-letting with leeches an accepted form of medical treatment until the 19th century. That it remains part of Wall Street's parlance like the appendix in the human digestive system implies the same dangers -- normally it is quite innocuous, but when inflamed it can be downright deadly. The simple fact is that the majority of companies that trade on the exchanges are "technology" companies of one type or another. Whether it is Johnson & Johnson building a better bandage, Wal-Mart keeping operating costs down by using wireless inventory units to keep careful track of supplies, or Allstate using extensive computer databases to pinpoint niche markets that are underserved, technology is an integral part of the business plan of all three of these companies -- despite the fine distinction that can be made between so-called technology producers and end-users. In fact, if you were to snap your fingers and remove anything remotely technological from the world's largest companies, we would suddenly not have a heck of a lot of stuff.
In a world where typewriters and television sets are no longer cutting edge, it is hard to believe that people have steadfastly clung to the same label even as the contents in the box kept changing. Recognizing what is called "technology" as a distinct set of industries can only enhance portfolio returns -- the unspoken goal of good investing. Industry classifications are intellectual conceits -- constructs that should be jettisoned when reality intrudes. Stubbornly clinging to them without reflection can lead to portfolio disaster, as many who invested in the stock of Micron Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MU)") else Response.Write("(NYSE: MU)") end if %> in the summer of 1995 discovered to their horror.
The story with Micron was fairly straightforward. They manufactured 4 meg DRAMs, or dynamic random access memory, a key component in personal computers as well as a host of other electronic products. With the impending release of Windows95 set to drive the upgrade market silly and the next generation of Pentium-equipped machines carrying an average of 16 meg of DRAM, buying a little Micron appeared to be a no-brainer for most professionals. Micron became part of their batch of "technology" holdings, joining the likes of Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MSFT)") else Response.Write("(NASDAQ: MSFT)") end if %>, Intel <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: INTC)") else Response.Write("(NASDAQ: INTC)") end if %> and Oracle <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ORCL)") else Response.Write("(NASDAQ: ORCL)") end if %>.
Those involved in the semiconductor industry, however, knew that the story was not nearly as simple as it appeared. 4 meg DRAMs were among the easiest chips in the world to mass produce, requiring very little in the way of fabrication plant (fab) investment to pump them out in mass quantities. Many of the large Asian semiconductor producers cut their teeth on 4 meg DRAM in order to get their production facilities rolling, upgrading to more sophisticated chips as time went on. Pin-compatible DRAM became entirely a commodity product, requiring little in the way of sophisticated equipment or specialized knowledge to make. How is it that in so many people's minds, this company became equivalent to Microsoft or Intel? It was the hobgoblin of the Street's mind, the "technology" sector that callously jammed any peg related to computers in the same hole even if it took a jackhammer to fit it in.
Micron remains a "technology" company with very little in the way of true technology about it. The company has been forced to jettison 4 meg DRAMs and rush up to 16 meg DRAMs after many of the leaders in the industry like NEC and Samsung are already producing 16 meg DRAM in mass quantities, getting ready to leap to 64 meg and 256 meg products. They have no patents, copyrights, special facilities, brilliant engineers or founding fathers of the Digital Age cubbyholed in their Boise, Idaho headquarters. There is nothing more sophisticated going on at Micron, in essence, than is going on at the companies that make the plastic keys for computer keyboards or the metal boards that house PC internals.
The mess that Micron caused in many a portfolio would have been avoided if investors had not been lured into believing it was a "technology" company. Rather, if they had understood from the outset that it was a highly-leveraged player in the DRAM market with a small percentage of its revenues derived from SRAM (another dying breed), investors would have been able to balance their portfolios more effectively. Although it might be premature to write Micron's obituary, it is even more premature to trust in its success. If investors had recognized that commodity and specialty semiconductors are different industries, a lot of bloodshed could have been avoided.
Tomorrow---Technophrenia 2: The Oppression of Large Categories
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Byline: Randy Befumo (MF Templar)