HEROES

Hamilton, Ontario-based PHILIP ENVIRONMENTAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PEV)") else Response.Write("(NYSE: PEV)") end if %> rose another $1 to $12 5/8 after adding $7/8 yesterday when Deutsche Morgan Grenfell started coverage of the waste recovery firm with a "strong buy" rating. Two weeks ago, Philip reported strong earnings on much improved margins in the third quarter. Adjusting for U.S. accounting norms, operating margins (based on continuing operations) went from 11.4% in 1995 to 13.1% this year. Over the last three years, the company's shares have outpaced the Dow and have easily beaten the performance of U.S. stalwarts WMX <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WMX)") else Response.Write("(NYSE: WMX)") end if %> and WHEELABRATOR <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WTI)") else Response.Write("(NYSE: WTI)") end if %>, and even fellow Canadian company LAIDLAW <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LDW.B)") else Response.Write("(NYSE: LDW.B)") end if %>, which is less a pure-play but still North America's fourth-largest waste handler. Those who think that grimy industries and seemingly boring companies can't compete with the shazam of Silicon Valley should probably take the time to research such enterprises.

MICRO WAREHOUSE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MWHS)") else Response.Write("(NASDAQ: MWHS)") end if %> came back $2 1/4 to $25 today after the company unveiled its third quarter earnings report. The direct marketer of all things having to do with PCs earned $10.7 million, or $0.31 per share, on almost $500 million in sales. Comparable period numbers from last year weren't available since the company will restate earnings. There have been lawsuits filed against the company for its mistakes in accounting which involve the valuation of inventory. In moving that inventory through gross margin, the cost was understated, which means that all of this can flow back to the investor by looking at the cash flow statement. After all, if a supplier company doesn't provide price protection on inventory in the channel, the cash flow deficiency is going to show up in that all-important statement. It all looks to be very careless from the viewpoint of the investor who has little desire to invest in purely distribution-oriented enterprises that add little value.

QUICK TAKES: CYTYC CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CYTC)") else Response.Write("(NASDAQ: CYTC)") end if %> surged upward $4 7/16 to $23 7/16 after UNITED HEALTHCARE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UNH)") else Response.Write("(NYSE: UNH)") end if %> announced that its coverage will include payment for Cytyc's next-generation pap smear test... Recent IPO DONNA KARAN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DK)") else Response.Write("(NYSE: DK)") end if %> climbed out of the cellar, rising 1 1/2 to 16 1/8, as the company brought on a new administrative chief... VALSPAR CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VAL)") else Response.Write("(NYSE: VAL)") end if %> continues upward, adding $4 1/2 to $58 1/4 on the strength of this week's 18% increase in fourth quarter earnings per share (EPS)... Medical technology company NORTHFIELD LABORATORIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NFLD)") else Response.Write("(NASDAQ: NFLD)") end if %> jumped $2 7/8 to $13 3/8 as the company received notification that it can test its blood substitute at the 10-unit level, which means "go ahead, remove all the blood in the subject's body and put in your substitute"... GREENWICH AIR SERVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GASI.A)") else Response.Write("(NASDAQ: GASI.A)") end if %> moved up $2 1/2 to $20 as it said that its Aviall integration is proceeding ahead of schedule... Software developer WIND RIVER SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: WIND)") else Response.Write("(NASDAQ: WIND)") end if %> blasted ahead $6 1/8 to $47 3/4 after reporting a 90% increase in third quarter EPS of $0.19, beating estimates by four cents per share... TRIQUENT SEMICONDUCTOR <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: TQNT)") else Response.Write("(NASDAQ: TQNT)") end if %> processed a $1 3/8 gain to $22 1/2 on announcing an agreement with QUALCOMM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: QCOM)") else Response.Write("(NASDAQ: QCOM)") end if %> to develop chips necessary for CDMA telephony handsets... THE REGISTRY INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: REGI)") else Response.Write("(NASDAQ: REGI)") end if %> moved up $6 3/8 to $53 after the information technology consulting firm announced that is expanding through the acquisition of privately-held Application Resources, Inc... Pollution controls company COMMODORE APPLIED TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: CXI)") else Response.Write("(AMEX: CXI)") end if %> jumped $1 3/8 to $6 3/8 after reporting earnings, two acquisitions, and after investors took in the federal filing which shows Scudder funds owning 10.5% of the company... MOOG INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: MOG.A)") else Response.Write("(AMEX: MOG.A)") end if %> jumped $2 1/2 to $21 1/2 as the aerospace products firm recorded a 30% increase in fourth quarter EPS due to strength in missile launches and aircraft orders in 1996... Specialty retailer MICHAELS STORES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MIKE)") else Response.Write("(NASDAQ: MIKE)") end if %> gained $1 3/32 to $9 3/16 even though the company reported worse-than-expected earnings for the quarter and the year after the market closed.

GOATS

Shares of REVLON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: REV)") else Response.Write("(NYSE: REV)") end if %> lost some of their glamour today in dropping $3 1/2 to $30 1/8 as investor Ronald Perelman was spanked by The Wall Street Journal because of goings-on at MARVEL ENTERTAINMENT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MRV)") else Response.Write("(NYSE: MRV)") end if %>. Maybe someone dumped these shares of Revlon because they thought that Perelman's involvement is enough of a stain on the company to make it unattractive, but the numbers are there to look at: the equity value of this company is about five times annualized gross cash flow (EBITDA) priced off numbers for the third quarter. At the same time though, interest expense eats up the value of that cash flow. That's just interest expense, and not the repayment of debt and preferred dividends, which eat up what would be the company's free-cash-flow. While companies like Revlon, with stable brand names and great margins, might be attractive, there is a certain point where financial leverage makes even fancy cash flow ratios useless. Potential investors can probably find other better deals around, especially when they stop to consider how Marvel's owners have done. Great brand names don't guarantee great returns.

Semiconductor plant automation company BROOKS AUTOMATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BRKS)") else Response.Write("(NASDAQ: BRKS)") end if %> fell $2 3/8 to $12 after the company reported a 17% increase in fourth quarter EPS, but below the full-year trend of a 42% increase in EPS. Two weeks ago, PRI AUTOMATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PRIA)") else Response.Write("(NASDAQ: PRIA)") end if %> also made it into the magic circle known as the "Goat corral" when it came in with seemingly strong earnings. At that time, PRI reported that it would be pricing its products at levels to stay ahead of competitors during the business downturn. Though that is exactly what these companies are dealing with, the numbers belie that description as trends dictate that the semiconductor companies automate their fabrication facilities. Is this a good deal for investors? At this point, the word is that PRI is absolutely ferocious. If investors would like to dial into the conference call number below, they should keep their ears open for updates on issues such as pricing, capacity utilization, inventories, sales efforts, and R&D programs.

QUICK CUTS: NORFOLK SOUTHERN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NSC)") else Response.Write("(NYSE: NSC)") end if %> lost $1 to $88 after a Pennsylvania judge denied the company's motion to delay the planned merger of CONRAIL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CRR)") else Response.Write("(NYSE: CRR)") end if %> and CSX CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CSX)") else Response.Write("(NYSE: CSX)") end if %>. The competition for the hearts, minds, and pocketbooks of Conrail shareholders is far from over though... Cotton seed company DELTA & PINE LAND CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DLP)") else Response.Write("(NYSE: DLP)") end if %> lost $2 3/8 to $32 1/2 as the company announced yesterday that it will set up a joint venture in China... URBAN OUTFITTERS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: URBN)") else Response.Write("(NASDAQ: URBN)") end if %> lost $2 1/2 to finish at $14 after reporting a 13% increase in per-share earnings, which met First Call estimates. Same-store-sales declined in the quarter... NORLAND MEDICAL SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NRLD)") else Response.Write("(NASDAQ: NRLD)") end if %> dropped $1 3/4 to $6 1/2 as investors are finding out that Medicare reimbursements for bone densitometry procedures, for which Norland makes equipment, will drop... RAWLINGS SPORTING GOODS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: RAWL)") else Response.Write("(NASDAQ: RAWL)") end if %> slid $2 1/8 to $8 1/4 after reporting poor fourth quarter results... Specialty steel company CITATION CORPORATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CAST)") else Response.Write("(NASDAQ: CAST)") end if %> was dulled $1 1/8 to $10 1/2 on 59% lower fourth quarter EPS (before a charge for equipment disposal).

FOOL ON THE HILL
An Investment Opinion by MF Templar

Profits For Free

Wall Street consistently views any deviation from a previously articulated corporate plan as disaster. When TEMPLAR’S TREEHOUSES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: TREEH)") else Response.Write("(NASDAQ: TREEH)") end if %> is over the wires saying that it is going to go in an entirely new direction in the professional and recreational treehouse market, investors start to head for the door. Sometimes wholesale alteration from what had previously been planned can lead to superior outcomes. To put it simply, new ways of looking at things can open doors. Victory can sometimes be snatched out of the jaws of defeat. A spontaneously emerging order can arise out of some quirk of circumstance that produces results that are demonstrably superior to those the previous strategy would have yielded. The quick pronouncements of doom that we often hear arise out of the all-too-human inability to comprehend all the variables in a dynamic situation, not out of any sort of prescience.

When a company exits a well-defined strategy, even if the consensus opinion of that strategy was that it would end in disaster, many are quick to conclude that it is a total defeat. Making rash decisions based on imperfect information, they throw in the towel without taking time to fully understand the factors at play. Certainly all can agree at this point that APPLE COMPUTER’S <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AAPL)") else Response.Write("(NASDAQ: AAPL)") end if %> margin-inspired plan to take share in business and consumer markets while maintaining its premium pricing structure under the justification of "value" was intellectually bankrupt. However, when the inevitable came to pass and Apple became mired in a restructuring that was particularly ugly, the market was already giving up without taking the time to evaluate what new possibilities were now opened. Emotional reactions to failure and capital loss compounded by an inability to understand the new plan in a relatively short period of time led long-time shareholders to capitulate. No one was willing to buy the shares at anywhere near what had been the current quote, sending the price into a portfolio-deadening spiral.

Reality, as always, was a little messier than the market was willing to initially concede. Weaned on Neoclassical economics that predict market equilibriums and identical subjects in structurally simple situations, it is no surprise that the average Wall Streeter has problems dealing with change. Whereas a mind lacking in theoretical rigor might look to the possibilities, the MBA-sharpened senses of portfolio managers fasten on the truth as it has been determined by the consensus opinion. They are unable to quickly process all of the variables. In Apple's case, they were unable to see how a company geared towards making a computer for everyone could shift to targeting desktop publishing, graphics designers, Web servers and sophisticated personal computer users, completely ignoring the mass market that it had been preoccupied with for so long. Had circumstances been different and Apple all along gone for the sweet spot in the market, painting itself as a highly-profitable niche player from the beginning, the valuation based on the same set of "facts" could be very different. The "story" of Apple as a niche player would have been well-ingrained amongst the investing public. This mythos would have been the operative paradigm that informed portfolio management decisions, not the recently rejected dogmatism of gaining mass market share through demonstrable excellence, even at higher price points.

Examples of functional fixedness leaving investors unable to comprehend how order could emerge from reversals of fortune are legion. When Warren Buffett began to amass his stake in GENERAL DYNAMICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GD)") else Response.Write("(NYSE: GD)") end if %> in the late ‘80s, the conventional wisdom saw a crumbing Berlin Wall, a disintegrating Soviet Republic and peace literally breaking out all over the world. What place would a defense contractor have in the New World Order? Understanding that a smaller overall market for defense products did not equate the destruction of all players, Buffett began scooping up shares of a research-heavy, cash-strong contractor that was well positioned to benefit from the inevitable wave of consolidation. Instead of destroying defense companies, the fall of the Soviet Union actually forced a systematic program of consolidation that left fewer players in charge of larger market shares, injecting more rational pricing and improved relationships with the Department of Defense into the mix. The average defense contractor today is better capitalized with a lower cost-basis than ever before -- all due to an event less than a decade ago that was universally viewed as a "disaster" for the industry.

The same blind reaction to change and inability to perceive a new spontaneously emerging system of order came with the recent reaction to MCDONNELL DOUGLAS’S <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MD)") else Response.Write("(NYSE: MD)") end if %> inability to win the Joint Strike Fighter (JSF) contract. The largest fighter contract in the history of man, it had been built up as a "must win" by the aggressive chief executive of McDonnell, Harry Stonecipher. When the McDonnell-British Aerospace-Northrop Grumman consortium lost the bidding war, shares of McDonnell were socked before any thorough analysis of the actual economic impact could have been completed, an analysis that might have reached a contrarian conclusion.

The dynamics of the aerospace business are those of increasing returns. The first plane costs $20 billion because of high research costs and the copies cost increasingly less per iteration. This means that after you have eaten the costs associated with development, each successive aircraft represents more pure profit. McDonnell has focused its commercial aviation ambitions on just this goal, aiming to remain a profitable niche player in the domestic airline business. McDonnell chose to eschew the exorbitant costs associated with developing a version of the MD-20 that can seat more than 300 people or fly further than current specifications allow. Wall Street viewed this as wise. Ironically, now that the company has been forced to adopt the same battle plan in its military fighter business, rather than spending billions over the next few years developing a prototype for a new generation of fighter planes, Wall Street is worried. Think about it. McDonnell will now be forced to milk its existing F-18 and C-17 designs instead of accruing billions in research and development costs.

The loss of the contract means McDonnell ends up with higher profits, margins and cash-flow over the next two to three years. Forward estimates for McDonnell that put it at 12 times earnings could not have included proceeds from the contract -- nor would any preliminary estimates for the year after. Yet in the absence of any analysis of the new possibilities open in this situation, Wall Street acts on a gut reaction. The same is true for Apple, as no true analysis of its ability to be a niche player can have been completed yet -- the company has not even finished restructuring. Warren Buffett has made his fortune on finding inefficiencies in Wall Street’s ability to discount future profits in the current stock price, focusing on dynamic situations that represent a break from the previous orthodoxy. It is clear that individual investors are best able to effectively follow this same strategy, safe from the quarter-to-quarter performance mentality that rules professional investors.

FOOLISH FEATURES

The Lunchtime News boots up a look at the PC jitters of the Wise. It relates the intermediate-term prospects for the PC market, and also outlines some of the factors that make short-term players jump.

Earnings Central is a great place to keep track of stocks you know, and find out about new stocks that you might want to consider. Recently added: calls from Ann Taylor, Staples, and Toys 'R' Us.

CONFERENCE CALLS

HEWLETT PACKARD <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HWP)") else Response.Write("(NYSE: HWP)") end if %>
(303) 446-5399 (code: 2004539) -- replay (after 8:30 p.m. EST through 8p.m. EST on 11/25)

DAYTON HUDSON CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DH)") else Response.Write("(NYSE: DH)") end if %>
(800) 633-8284 (reservation # 2053944) -- replay (avail. from 12:30-5:00 p.m. EST only)

FRONTIER CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FRO)") else Response.Write("(NYSE: FRO)") end if %>
(800) 633-8284 (reservation # 2189563) -- replay

11/20/96
BROOKS AUTOMATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BRKS)") else Response.Write("(NYSE: BRKS)") end if %>
(402) 220-5199 -- replay

11/21/96
SUNGLASS HUT<% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: RAYS)") else Response.Write("(NASDAQ: RAYS)") end if %>
1-800-475-6701 (code 320742) -- replay (from 11AM on 11/21 thru midnight 11/27)

11/21/96
APPLIED MATERIALS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AMAT)") else Response.Write("(NASDAQ: AMAT)") end if %>
after 5:30 p.m. EST
1-800-642-1687 (code: 108790) -- replay

ANOTHER FOOLISH THING

Painless Stock Valuations

Learn to value stocks painlessly! In the Industry Decathlon primer, MF Bogey takes readers by the hand and walks them through five stock valuation methods and ten financial ratios. While demystifying the Balance Sheet, Statement of Cash Flows, and Income Statement, Bogey demonstrates how to compare a bunch of companies in your industry of choice and find the most promising one. This is very useful stuff, folks! Check it out in FoolMart.

Randy Befumo (MF Templar), a Fool
Fool On the Hill

Dale Wettlaufer (MF Raleigh), Call me Golden Wheels
Heroes & Goats

Brian Bauer (MF Hoops), one more Fool
Editing

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