The markets had a wild day today, plunging early on strong jobs report and then recovering as the day progressed. MF Merlin's Economic News today discusses the cause of the excitement -- the Bureau of Labor Statistics's May report on the nation's employment situation. You'll find the Economic News, as well as all our Special Sections, FoolWires, and earnings reports, on either the Evening News or Stock Research screens. In tonight's Fool on the Hill, MF Templar muses on value. Enjoy!
It's Friday, so that means we must have a new Fool's Gold weekend magazine for you, right? Well, actually, we have last week's Fool's Gold, which was preempted. Thus, debuting in this week's Foolish stock-picking springboard is a Sector Snapshot focusing on companies which are spinning off parts of their businesses, a feature on possibly-undervalued printer company Kentek, and more. Also included is the Weekend Research Center, looking at this week's noteworthy companies. Fool's Gold will be accessible from our main screen this weekend. Enjoy!
UROMED <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: URMD)") else Response.Write("(NASDAQ: URMD)") end if %> investors were treated to a pleasant surprise today, when the Food & Drug Administration (FDA) announced that it had made a mistake and switched Uromed's Reliance product onto a faster track for marketing approval. Reliance is an intraurethral device which treats female stress urinary incontinence. Uromed's Chairman and Chief Executive Officer (CEO) John G. Simon's comment that, "We could expect final approval for marketing no later than the third quarter of this year" helped advance shares $1/2 to $13 3/8.
Like its high-flying fellow telemarketing company APAC TeleServices <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: APAC)") else Response.Write("(NASDAQ: APAC)") end if %>, SITEL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SITL)") else Response.Write("(NASDAQ: SITL)") end if %> has grown quickly. Today Sitel announced that it is acquiring several firms, and its shares were bid up $5 to $30 as a result. In exchange for 1.4 million shares of its stock, Sitel is acquiring NATIONAL ACTION FINANCIAL SERVICES, an Atlanta-based firm specializing in financial telephone-based services, and $24 million in cash is getting the company TELEACTION SA, a Spanish teleservicing concern. Sitel has previously agreed to merge with Mitre Inc., a London telemarketing company. So don't be surprised if one day you're disturbed at dinnertime by a phone call from a stranger speaking Spanish with an English accent, pitching financial services to you.
Stocks recommended by Carlton Lutts's Cabot Market Letter were battered yesterday amid worries about SEC investigations into Cabot. Today many recovered strongly, led by printing technology company PRESSTEK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PRST)") else Response.Write("(NASDAQ: PRST)") end if %>, up $17 1/2 to $95 and carbon fiber concern ZOLTEK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ZOLT)") else Response.Write("(NASDAQ: ZOLT)") end if %>, up $7 7/8 to $73 7/8. Storage technology firm IOMEGA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IOMG)") else Response.Write("(NASDAQ: IOMG)") end if %>, hit $40 during the day, but closed at $37 7/8, unchanged. AMERICA ONLINE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AMER)") else Response.Write("(NASDAQ: AMER)") end if %> was another Cabot rebounder today, rising $2 1/2 to $48 7/8, and also boosted by an upgrade by Alex. Brown from "buy" to "strong buy".
QUICK TAKES: MIDISOFT CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MIDI)") else Response.Write("(NASDAQ: MIDI)") end if %> announced an agreement to provide and Internet e-mail service for AT&T, sending shares up $7/8 to $8... REPUBLIC ENVIRONMENTAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: RESI)") else Response.Write("(NASDAQ: RESI)") end if %> shares jumped $2 1/2 to $24 1/2 when the waste treatment company declared a 2-for-1 stock split... TOWER AIR <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: TOWR)") else Response.Write("(NASDAQ: TOWR)") end if %> shares took off $5/16 to $6 1/4 after the company announced that its May "load factor" (percentage of seats filled), rose from 70.6% to 71.9%, and that block hours flown increased by 22%... ELECTRONIC ARTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ERTS)") else Response.Write("(NASDAQ: ERTS)") end if %> jumped $2 7/8 to $30 1/4 after releasing a new combat simulation game, AH-64D Longbow... AEP INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AEPI)") else Response.Write("(NASDAQ: AEPI)") end if %> shares shot up $3 to $32 1/4 today, with the only explanations offered being possible short covering or SOES bandits -- automated small order systems which take advantage of rising prices not yet updated... HIRSH INT'L <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: HRSH)") else Response.Write("(NASDAQ: HRSH)") end if %> shares rose $2 3/8 to $20 1/2 on sizable embroidery profits... FOXMEYER HEALTH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FOX)") else Response.Write("(NYSE: FOX)") end if %> shares rose $1 1/4 to $16 1/4 after obtaining new five-year credit agreements.
O, the Humana-ty! Managed-care provider HUMANA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HUM)") else Response.Write("(NYSE: HUM)") end if %> was humming a sad tune today, amid some not-so-positive news that sent shares spiraling downward $4 1/8 to $19. For one, the company warned that its second quarter earnings would come in around $0.18-$0.22, well below the $0.33 expected by analysts. Humana blamed this on the fact that people were using an unusually high number of medical services, and that in certain markets, such as Washington, D.C., the company is losing a lot of money. Not impressed, Merrill Lynch lowered its near-term rating from "accumulate" to "neutral", and its long-term rating from "buy" to "accumulate". Dillon Read also downgraded Humana.
Investors watched in dismay as shares of pharmaceutical concern ANESTA CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NSTA)") else Response.Write("(NASDAQ: NSTA)") end if %> plunged $4 to $13 1/4 after the company announced an offering of 3 million shares priced at $15. Suffering the same fate was DEL GLOBAL TECH <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: DEL)") else Response.Write("(AMEX: DEL)") end if %>, a medical imaging and electronics company, offering 2 million new shares and falling $1/2 to $11 3/4. At issue here is dilution. If a company is worth $100 million and has ten million shares outstanding, investors can value each of their shares at $10. But if the company issues another 10 million shares, suddenly a share is only worth $5. Anesta currently has about 7.2 million shares, while Del has about 5.3 million. Next week Del moves to the Nasdaq, trading under the symbol DGTC.
QUICK CUTS: STRATOSPHERE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: TOWV)") else Response.Write("(NASDAQ: TOWV)") end if %>, builder of one of Las Vegas's newest casino and hotel (complete with revolving restaurant and roller coaster, of course), slumped $7/8 to $7 1/8 after reporting that revenues for the first five weeks were below expectations... ASYST TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ASYT)") else Response.Write("(NASDAQ: ASYT)") end if %> dropped $1 3/4 to $22 1/2 after posting a loss of $0.54 for its fourth quarter, when analysts only expected a loss of $0.49... Management development software developer ATRIA SOFTWARE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ATSW)") else Response.Write("(NASDAQ: ATSW)") end if %>, merging with PURE SOFTWARE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PRSW)") else Response.Write("(NASDAQ: PRSW)") end if %>, dropped $3 1/2 to $60 1/2.
An Investment Opinion
by Randy Befumo (MF Templar)
FOOL ON THE HILL
Meditations on Value
On one side, there are the institutions. Daunting behemoths couched in shadows and flush with cash, constantly scanning the market through electronic eyes, attempting to take advantage of obvious market inefficiencies. Sleek and ruthless, these masters of the universe make the most obvious mis-pricing of securities simply temporary phenomena, bidding old favorites back up to prior levels within days of the consensus opinion shifting. Screen after screen attempts to cull from the available public information all sorts of bargain-basement securities -- low price/earnings, low price/sales, low price/book. Limited to the universe of 2,000 or so public companies big enough to withstand their liquidity, they are constantly pursuing value through complicated transactions and swaps. They literally employ hundreds of people and give them a task not unlike that of Sisyphus -- of finding value in the market.
The institutions are pension funds, insurance pools, large mutual funds, large asset managers. They attend many of the same conferences, go to many of the same conventions, speak pretty much the same language. Despite attempts to differentiate their products and services, outsiders are almost constantly struck by the uniformity of the approach and the positions. The fact that until recently IBM was a top holding of Fidelity's Magellan, Contrafund and Low-Priced Stock funds all at the same time gives you a sense of the real conformity that exists. Beneath the institutions are the smaller institutions -- most mutual funds, small asset managers, local or regional brokerages, and small research firms that run some retirement money. These are the guys who are left to pick at the roughly 80% of publicly-held stock not in the hands of the large institutions.
Although some mutual funds do manage to cross over into megalith territory, the simple fact is that they only hold about 15% of publicly-traded companies at any one time. The fact that they account for some 85% of volume on the New York Stock Exchange gives you a sense of how fast they are moving, though, trying to keep up with the big money, trying to psych it out and guess where it's going. When the leadership of the Magellan fund changed recently, many a research team was pouring over Robert Stansky's holdings in Fidelity's Growth Company to try to figure out what he might buy when he sells Magellan's large bond position. In fact, it would not be an exaggeration to suggest that hundreds of very smart people with very big computers have pondered this particular question, dissecting it from every possible direction.
On the other side, there are the individual investors. Tiny, bee-like, they dart in and out of stocks without budging the price an inch. Liquidity is never an issue, as it is the rare individual investor who is cursed with too much of it. With a research staff of one, they cull through anything they can literally get their hands on in an attempt to figure out where they should put their money. Things like a house, like college for children, like a comfortable retirement pre-occupy their minds. They normally do not have massive computer systems funneling gigabytes of historical market information into their homes. They do not have real-time quotes and lack the ability to call up well-known analysts and chat with them on the phone. They also do not have to report quarterly to their shareholders -- and are not forced to pounce on every hot industry or try to predict when the next bear market is happening, either.
Where can these individual investors make money, though? They seem to have a number of cards stacked against them. This is a question Fools have pondered for decades while the Wise have embarked upon a campaign of mystification and deception that has convinced people that playing stocks is a mug's game, akin to the poker table or a Vegas slot machine. An entire financial and brokerage industry has been built, requiring the individual investor to be completely dependent on Wall Street for advice, information and to complete their financial transaction -- no matter whether it was bond, stock or fund. This establishment, with a vested interest in making people feel helpless, made them feel investing was akin to magic, dazzling them with tales of fancy charts that portend the future and real-time quotes that somehow enable one to better understand the companies behind the tickers.
Where to find value is a question asked at Fool HQ constantly. My own particular take on the answer is that the individual investor needs to concentrate on a few areas in order to find companies that the market has dramatically mispriced. The most "fertile field of growth", to use growth-stock investor T. Rowe Price's phrase, would appear to be medium and small companies that the large institutions cannot get into without taking the company over. I am not talking "micro-caps" here, or whatever the current politically-correct term for Vancouver penny stocks is. I am talking about companies with under $200 million or so in revenues and/or market cap. Finding these companies with real earnings and cash-flow before the institutions do is a game of patience, but one that the individual investor can play with little penalty.
Another area of value are the times when the market so desperately misunderstands a company that the value you can add to it in your analysis makes all the difference. This happens most often when you either work in an industry and know a lot of about the companies in it or when you can place a better value on a consumer brand than can many institutional investors who are detached from reality. Is there some particular product or service you know a lot about? Send for the financials or look at them via the Internet. Apply the same rigor that any researcher would and you can come away with some notion of value.
The final "fertile field" in my mind is that of simply having a different time horizon. For instance, it is a well-known fact among institutional investors that COCA COLA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KO)") else Response.Write("(NYSE: KO)") end if %> at 39 times trailing earnings is pretty overvalued. In fact, anyone who buys it and sees it correct back to the low-end of its five year P/E range, 21 times earnings, would lose 47% of their investment stake. For the sake of argument, let's pretend this happens tomorrow, and Coca-Cola goes to $25 7/8 from its current perch at $46 7/8. You have invested $10,000 that quickly becomes $5,300. However, this money was for your retirement in ten years. And over those next 10 years, Coca-Cola manages to grow its earnings at a 15% rate. This would be 404.6% growth compounded, or $4.97 EPS. This means that even if the multiple hung tight at 21, you would eventually make up your 47% loss and actually do even better, turning your $10,000 investment into $22,295 even after that gut-wrenching fall -- without any multiple expansion or dividends. With the 2.0% dividend included (figured after the fall to $25 and change), you would have seen an average annual 10.3% return over 10 years, not shabby by many measure.
In summary, Fools need not fear being on the other side of the trade from an institution if they maximize their informational advantage and also maintain a completely different time horizon for their investments. I think it pays to reflect on this during high-volatility market days that can sometimes scare even the most stout-hearted individual investor.