HEROES
After reporting progress with its quarterly financials this morning, NYNEX CABLECOMMS GROUP PLC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NYNCY)") else Response.Write("(NASDAQ: NYNCY)") end if %> started moving, eventually finishing up $2 7/8 at $19. However, it wasn't boring old cash flows or subscriber numbers that got things going. Rather, it was a multi-dimensional deal to combine the cable and telecommunications assets of the NYNEX <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NYN)") else Response.Write("(NYSE: NYN)") end if %> unit with assets of VIDEOTRON HOLDINGS PLC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: VRONY)") else Response.Write("(NASDAQ: VRONY)") end if %>. 56% of Videotron will be bought by BELL CABLEMEDIA PLC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BCMPY)") else Response.Write("(NASDAQ: BCMPY)") end if %> for $613 million. Tying together the above two communications systems, CABLE & WIRELESS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CWP)") else Response.Write("(NYSE: CWP)") end if %> agreed to throw its operations into the mix, to form a dominant UK telco and cable company called C&W Communications. London analysts are setting the total value of the proposed company at 5 billion pounds sterling, or $3.14 billion. Cable and Wireless would own 52.6% of the new company. NYNEX Cablecom popped up $2 7/8 to $19; Videotron rose $1 5/8 to $19; Bell Cablemedia advanced $1 to $15 5/8; and Cable & Wireless finished up $1 3/8 to close at $22 1/8.
TEXAS INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TXI)") else Response.Write("(NYSE: TXI)") end if %> climbed $2 1/8 to $58 1/2 as investors welcomed yesterday's news of earnings success at MARTIN MARIETTA MATERIALS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MLM)") else Response.Write("(NYSE: MLM)") end if %>. Given that these companies have been organizing anti-takeover provisions recently, and that TXI recently announced a buyback, some investors might be getting the idea that these companies are undervalued. Other companies such as HANDY & HARMAN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HNH)") else Response.Write("(NYSE: HNH)") end if %>, which finished up $1 1/4 at $18 5/8, are buying back shares to show what their managements think of market valuation. Handy & Harman today launched a "Dutch Auction," to buy at $20 apiece, over 10% of its company's shares from investors. If these managements did believed they could deploy the cash more effectively elsewhere, they'd probably do something else with it (unless they're egomaniacs). Other investors might say that the third quarter was just unusually strong in steel, transportation, and heavy construction, all of which are exaggerating the earnings power of companies like these. In the quest for shareholder value, heavy industries doing buybacks must believe it's cheaper to buy businesses (their own) than to build them right now.
QUICK TAKES: Communications equipment company XIRCOM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: XIRC)") else Response.Write("(NASDAQ: XIRC)") end if %> popped $3 to close at $21 1/8 as the company's focus on its core PC-card business payed off in a 53% increase in yearly sales, and even better sales performance in the fourth quarter. Excluding charges, Q4 earnings per share beat estimates... ROCKSHOX <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: RSHX)") else Response.Write("(NASDAQ: RSHX)") end if %> jumped $1 5/8 to $15 1/8 after investors pulled a "tabletop" over the newly-public company's earnings results... Staffing firm ROMAC INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ROMC)") else Response.Write("(NASDAQ: ROMC)") end if %> finished up $2 3/8 at $24 1/4 on a 75% increase in quarterly earnings.
GOATS
This morning, we wrote about HMT TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: HMTT)") else Response.Write("(NASDAQ: HMTT)") end if %>, which lost $4 7/16 to close at $15 1/8 today. HMT makes media, the material on which data is written, for the disk drive industry. While it appeared as though the company beat estimates with the $0.38 EPS it reported, it actually slid below the low range of those estimates with a pre-tax EPS performance of $0.32. The company recorded a one-time tax benefit of six cents per share. Upon discovering that it can pay less taxes in the future, it will adjust downward its effective tax rate 800 basis points (1 basis point = 1/100 percentage point). Notwithstanding a sales increase of 40%, operating income increase of 53.5%, and a 21.4% increase in operating income per share, an increase in share count dropped per-share earnings 8.6% in the quarter. As the company was spun off from Hitachi Metals last year and then brought public earlier this year, the equity portion of the balance sheet has been as active as the company's production lines.
PERCLOSE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PERC)") else Response.Write("(NASDAQ: PERC)") end if %> dropped $5 1/4 to $17 3/4 today as investors gasped "oh la vache!" when they saw the company's profit & loss statement. The French government has decided not to reimburse hospitals there that use Perclose's medical devices. While the amount in absolute dollars was small, the effect on the revenues line was pretty large, as Perclose derives 40% of its revenues from French sales. Companies of this type, however, aren't really assessed on operating numbers -- investors buy them for their engineering properties. Two things to remember, though: "Technology" doesn't sell itself. Management and salespeople sell technology. Secondly, when a company's sales depend upon the whims of governmental decree, make sure there are extra-compelling reasons to invest. In this case, it wasn't the efficacy of the devices that cut off the flow of money from the government, according to the company. The decision appears to be arbitrary. ARTERIAL VASCUKAR ENGINEERING <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AVEI)") else Response.Write("(NASDAQ: AVEI)") end if %> fell $5 1/4, or 24.14%, to $16 1/2 on the news, as it makes complementary products and does 80% of its business in Europe.
Speaking of technology and missed opportunities, DIGITAL EQUIPMENT CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DEC)") else Response.Write("(NYSE: DEC)") end if %> was sacked for a $5 3/8 loss today to close at $29. The Waltham, Mass. maker of software and hardware and service giant continues to head in the wrong direction after promising moves in 1995 through early 1996. This once-member of the Nifty-Fifty (a group of buy-anytime-sell-never stocks of the late 60s and early 70s) saw revenues in the first quarter drop 11% and income drop to a loss of $0.48 per share from a positive $0.26 per share in 1996. In the company's conference call last quarter, Chair Bob Palmer said, "In Europe, Digital is planning to expand direct sales focus, recruit new channel partners, and further reduce expenses." This came after restructuring efforts a couple years ago slashed the company's direct sales force. Analysts tore their 1997 estimates to ribbons today, fretting that another round of restructuring (the company took a sizable charge last quarter) will not do the trick. Though the company has great products and ideas, some fear that the cost structure is still too large and that Digital has "gone to the dark side," turning itself into a Win-tel supermarket.
QUICK CUTS: ADFLEX SOLUTIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AFLX)") else Response.Write("(NASDAQ: AFLX)") end if %> crumpled $3 1/8 to $9 3/8 after announcing operating losses and a pretty darned big charge to the company, including shutting off some manufacturing in the UK. The company is still trying to recover from the loss of business when QUANTUM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: QNTM)") else Response.Write("(NASDAQ: QNTM)") end if %> went to Japan for its manufacturing needs... Healthcare software/information management company MEDAPHIS<% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MEDA)") else Response.Write("(NASDAQ: MEDA)") end if %> tacked on another $6 3/8 loss to finish at $10 3/8, adding another chapter to its annus horribilus. After reporting a loss today (which includes a charge) which is about 12 times last year's loss, the company said it will re-state past earnings, ballooning the real loss for 1995 to about 150% greater than investors previously thought.
FOOL ON THE HILL
An Investment Opinion by MF Templar
Small Company Stocks
(PART ONE OF THREE)
INTRODUCTION
The investment community has the average investor agog over "small-cap" stocks. If the preponderance of mutual funds alleging to purchase just these puppies is any yardstick, buying small-cap stocks for big-time growth is one of the more prevalent pearls of financial wisdom out there. Many individual investors just taking control of their savings on a quest to build wealth often become completely preoccupied with the idea. In order to capture the next Microsoft or Intel before it happens, they buy small-cap names, loading up their portfolio with all sorts of obscure stocks selling for less than a dollar on Canadian exchanges. These investors, unfortunately, are normally sorely disappointed and end up putting their money right back into the underperforming mutual funds they removed the money from out of frustration.
Despite the fact that everyone is talking about small-cap stocks, very few people actually add anything resembling information to the discussion. The financial community remains content that its marketing job of getting investors to buy small-cap mutual funds has been done, but all kinds of questions floating around are left unanswered. What is a small cap or a small-company stock? What is the difference between the two? When does it make sense for an individual investor to consider buying such a vehicle? How does an investor look for good small-company stocks? What kind of broad characteristics should an investor look for in order to reduce the extreme risk attendant with purchasing little-known names which frequently have short histories as publicly-traded entities? All these questions and more will be addressed here in Small Company Stocks.
SMALL CAPITALIZATION OR SMALL COMPANY?
Does the size of the market capitalization correlate well with the size of the company? The way people talk about small-cap investing, you would think that it would. However, it does not. In order to to begin to answer this question, first we have to define what capitalization is. Capitalization, short for market capitalization, refers to the current dollar value of all of the outstanding shares. Thus, if a company has 100 million shares outstanding and is currently priced at $20 a share, it has a market capitalization of $2 billion. (See Example below.) You can find a much more detailed discussion of market capitalization in the article called Revenue-Based Valuations in the Fool's How to Value Stocks area. EXAMPLE:
Shares Outstanding * Current Price = Market Capitalization
100 million * $20 = $2,000 million = $2 billion
Small-capitalization stocks are companies whose current market capitalization is small relative to other companies that trade publicly. An alternative way to measure the size of the company is to look at the revenues it has generated over the last year. A company that has generated less than $10 million dollars in sales over the past twelve months is definitely small. How small is small for small-capitalization or small-company stocks? Although there is no set definition used in the financial world, you will find that most people use the following definitions, which come straight out of the Motley Fool Investment Guide and the Eighth Step to Investing Foolishly (Consider small-cap growth stocks). Large-cap/company: Over $1.5 billion
Mid-cap/company: $200 million to $1.5 billion
Small-cap/company: $50 million to $200 million
Micro-cap/company: Less than $50 million
Although these are good ground rules, it is important to realize that the overall capitalization of all stocks on the market is growing by a decent amount on an annual basis, meaning that what is small capitalization now might not be small capitalization in the future. Some (like myself), might argue that Tom and David's definition of the various sizes is skewed a little low and you might be better off for investment purposes looking at it like this: Large-cap/company: Over $5.0 billion
Mid-cap/company: $500 million to $5.0 billion
Small-cap/company: $100 million to $500 million
Micro-cap/company: Below $100 million
Why use one approach in looking for small companies over another? Unlike trailing revenues, market capitalization is greatly affected by how popular a company currently is. Despite the fact that YAHOO!<% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: YHOO)") else Response.Write("(NASDAQ: YHOO)") end if %> has generated $6.37 million in revenues over the past four quarters, obviously qualifying as a small company, the Internet search engine currently has 27.07 million shares outstanding at a price of $21 1/4 per share, giving it a market capitalization of $575 million, making it a mid-cap stock. Yahoo! is a great example of how not all small capitalization stocks are small companies and not all small companies are small capitalization stocks.
In the end, it all depends on what you are looking for. When you are looking for a small "growth" stock, don't look for small capitalization stocks -- look for small company stocks. Capitalization is an arbitrary measure of company size -- look at revenues and view capitalization as a valuation measure, not an objective measure of scale. This is not to say that there are times when you might want to look for small-cap stocks. Looking for medium and large companies priced with small capitalizations is a superior strategy for value investors, but it is a discipline separate from finding small "growth" companies. For our purposes in this series, we are "drilling down" to discover how to find small growth companies. We'll leave a discussion of how to find medium and large companies priced at fire-sale rates for another day.
TOMORROW: WHAT ARE THE RISKS AND REWARDS OF INVESTING IN SMALL COMPANIES?
FOOL FEATURES
Today's Lunchtime News looks at Urban Outfitter's woes -- it seems that their new Anthropologie stores are too successful, creating inventory management problems.
Microsoft reported earnings of $0.95/share yesterday (vs. Q1 '96 EPS of $0.78), beating street estimates by a nickel. Nevertheless, the company is selling off today.
Companies keep reporting earnings, and we Fools have phones glued to our ears. We're typing up synopses of the calls as fast as our fingers are able, and you can find the results of that labor in Earnings Central, a great place to find companies with bright outlooks.
Finally, we'll be covering Cadence Design Systems earnings tonight, with a consensus estimate of $0.33 EPS.
CONFERENCE CALLS
MICROSOFT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MSFT)") else Response.Write("(NASDAQ: MSFT)") end if %>
after 6:30 p.m. EDT
1-800-234-4804 (code: 1017) -- replay
10/22/96 (Tuesday)
OLYMPIC FINANCIAL
11:30 a.m. EDT
1-800-553-2506 (code: 141043)
10/22/96 (Tuesday)
TENNECO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TEN)") else Response.Write("(NYSE: TEN)") end if %>
1-800-857-5700 -- live call at 10:00 am EDT
Call by 9:55 am, do not use speaker phone or cellular phone.
You'll hear music until the conference begins.
FIRST DATA CORPORATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FDC)") else Response.Write("(NYSE: FDC)") end if %>
after 9:30 a.m. EDT
1-800-925-0560 -- replay
EQUITY MARKETING <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EMAK)") else Response.Write("(Nasdaq: EMAK)") end if %>
after 12:30 p.m. EDT through 10/29 @ 8:00 p.m. EDT
1-800-625-5288 (passcode: 146724)
LEVEL ONE COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LEVL)") else Response.Write("(Nasdaq: LEVL)") end if %>
after 5:15 p.m. EDT through 10/29 @ 8:00 p.m. EDT
1-800-625-5288 (passcode: 146020)
HOME SHOPPING NETWORK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HSN)") else Response.Write("(NYSE: HSN)") end if %>
after 10:30 a.m. EDT
1-800-765-1879 (passcode: 2525) -- replay
MEDICIS PHARMACEUTICAL (MDRX)
after 6:15 p.m. EDT
1-800-633-8284 (reservation # 2091446) -- replay
VENTRITEX <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: VNTX)") else Response.Write("(NASDAQ: VNTX)") end if %>
after 6:30 p.m. EDT
1-800-938-1105 -- replay
PRIME HOSPITALITY CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PDQ)") else Response.Write("(NYSE: PDQ)") end if %>
after 10:00 a.m. EDT
1-800-642-1687 (access code: 71226)
Dale Wettlaufer (MF Raleigh),
a Fool
Heroes & Goats