The Evening News - Tuesday, December 03, 1996

HEROES

HUTCHINSON TECHNOLOGY CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: HTCH)") else Response.Write("(NASDAQ: HTCH)") end if %> jumped $19 1/2 to $72 1/4 as the company pre-announced expected Q1 earnings per share of $1.50 to $1.90, which will far exceed estimates of $0.71 per share. During the past few quarters, the leading maker of head suspension assemblies for disk drives has not reported earnings that would indicate that it has been participating in the strong surge in the fortunes of other industry players such as SEAGATE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SEG)") else Response.Write("(NYSE: SEG)") end if %>. However, Hutchinson has said all along that it has not lost market share. The fact that the company will experience sequential quarterly revenue growth of 13%, compared to the seasonal norm of sequential decline, speaks to the unusual nature of this year's sales patterns.

Healthcare database company HCIA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: HCIA)") else Response.Write("(NASDAQ: HCIA)") end if %> gained $2 1/8 to $30 1/4 after brokerage Alex. Brown added the company to its "Focus List" a day after HCIA closed its acquisition of Equifax Healthcare Analytical Services, formerly a unit of EQUIFAX <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EFX)") else Response.Write("(NYSE: EFX)") end if %>. Equifax Analytical brings a number of managed care customers to HCIA , as well as software tools that will help the company improve its software offerings. Through nine months of this year, HCIA earned $0.49 per share. Adding that to Q4 estimates of $0.17 per share, the company is trading at 45 times earnings and is looking at an 88% earnings per share growth rate in the coming year. Those estimates have also been revised downward recently due to the trouble in this industry group in the last quarter.

QUICK TAKES: Hutchinson Technology's strength moved the shares of other disk drive industry component suppliers, including KOMAG <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: KMAG)") else Response.Write("(NASDAQ: KMAG)") end if %>, up $3 to $35 3/4; HMT TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: HMTT)") else Response.Write("(NASDAQ: HMTT)") end if %>, up $7/8 to $18 5/8; STORMEDIA INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: STMD)") else Response.Write("(NASDAQ: STMD)") end if %>, up $7/8 to $ 14 3/4; READ-RITE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: RDRT)") else Response.Write("(NASDAQ: RDRT)") end if %>, up $2 1/2 to $25 5/8; and INNOVEX <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: INVX)") else Response.Write("(NASDAQ: INVX)") end if %>, up $3 1/4 to $41 1/2... Computer workstation and chip-maker SILICON GRAPHICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SGI)") else Response.Write("(NYSE: SGI)") end if %> jumped $3 3/8 to $23 5/8 after Goldman Sachs added the shares to its "recommended list" as holiday shoppers snap up the new gaming platforms that use the company's chips... NOVA CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NIS)") else Response.Write("(NYSE: NIS)") end if %> rose $3 1/4 to $22 1/2 after Alex. Brown made positive comments on the credit card transaction processor... VICAL INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: VICL)") else Response.Write("(NASDAQ: VICL)") end if %> moved ahead $1 7/16 to $19 1/4 as the biotech company announced that it was issued a patent for its method of delivering "naked DNA" gene therapy... Climate control parts distributor WATSCO <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: WSO)") else Response.Write("(AMEX: WSO)") end if %> gained $1 7/8 to $28 1/2 as the company announced that it has agreed to acquire two mid-west distributors that will add $60 million in sales... DIGENE CORPORATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: DIGE)") else Response.Write("(NASDAQ: DIGE)") end if %> rose $1 to $12 1/2 after the company released studies yesterday showing the effectiveness of its cancer screening method... Circuit board manufacturer ADFLEX SOLUTIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AFLX)") else Response.Write("(NASDAQ: AFLX)") end if %> jumped 1 3/8 to $13 on the strength of yesterday's rating upgrade to "buy" from Robertson Stephens... CONSOLIDATED FREIGHTWAYS, or now, CNF TRANSPORTATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CNF)") else Response.Write("(NYSE: CNF)") end if %> rose $1 1/2 to $22 1/8 after spinning off its trucking line to shareholders. That company will now take the Consolidated Freightways name and trade on the Nasdaq under the symbol "CFWY"... ADVANCED DIGITAL INFO CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ADIC)") else Response.Write("(NASDAQ: ADIC)") end if %> moved up $2 1/8 to $14 1/2 after the tape storage company reported fourth quarter earnings of $0.18 per share, well ahead of estimates of $0.13... Laser surgery company SUMMIT TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BEAM)") else Response.Write("(NASDAQ: BEAM)") end if %> drove ahead $2 1/2 to $8 3/4 after receiving word from the FDA that it may expand farsightedness clinical trials for its Apex Plus laser...CENTOCOR INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CNTO)") else Response.Write("(NASDAQ: CNTO)") end if %> rose $5 3/8 to $34 3/8 after analysts at Morgan Stanley and Salomon Brothers said good things about current products and products in the pipeline... Software developer OPEN MARKET <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: OMKT)") else Response.Write("(NASDAQ: OMKT)") end if %> gained $2 1/2 to $16 3/4 after the company said it has signed a strategic internet commerce software pact with HEWLETT-PACKARD <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HWP)") else Response.Write("(NYSE: HWP)") end if %>... SCOPUS TECHNOLOGY INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SCOP)") else Response.Write("(NASDAQ: SCOP)") end if %> erupted for a $7 gain to close at $45 1/4 as the company announced support for INFORMIX <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IFMX)") else Response.Write("(NASDAQ: IFMX)") end if %> server products and tools... Market players say there's a short squeeze on in help-desk stocks, as these companies moved up yesterday and today, with REMEDY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: RMDY)") else Response.Write("(NASDAQ: RMDY)") end if %> climbing $3 1/8 to $52 3/8 and CLARIFY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CLFY)") else Response.Write("(NASDAQ: CLFY)") end if %> gaining $2 5/8 to $54 1/8... Construction capital equipment firm GENCOR INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: GX)") else Response.Write("(AMEX: GX)") end if %> jumped $1 7/8 to $15 7/8 after the company said that its acquisition of the Process Machinery Group of INGERSOLL RAND <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IR)") else Response.Write("(NYSE: IR)") end if %> is on track to close before the end of the month... ABLE TELECOM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ABTE)") else Response.Write("(NASDAQ: ABTE)") end if %> rose $1 1/4 to $8 7/8 after the telecom and cable infrastructure builder acquired Dial Communications, which is expected to add $12 million in revenues.

GOATS

HFS INCORPORATED <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HFS)") else Response.Write("(NYSE: HFS)") end if %> lost $4 3/4 to $57 5/8 as investors reacted to the weak October new home sales report. While the bond market was cheered by the down numbers, they didn't help the country's largest real estate brokerage company. HFS has been backing down from its 52-week high of $79 3/4 -- hit in mid-October -- due to its acquisitions of Resort Condominiums (shouldn't it be Condominia?) International and corporate services outsourcing company PHH CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PHH)") else Response.Write("(NYSE: PHH)") end if %>. Not only are investors having a tough time pegging the value of HFS going forward, but they also learned right before Thanksgiving that Avis Corp., on which HFS closed its acquisition in mid-October, might not be totally free of legal liability in a discrimination case filed last month.

Developmental pharmaceutical firm ALTEON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ALTN)") else Response.Write("(NASDAQ: ALTN)") end if %> lost $1 9/16 to $6 3/16 today after the company announced last night that it will make changes in Phase III clinical trials for one of its diabetes drugs. Some of the higher risk patients in these tests have experienced side effects such as flu-like symptoms and cardiovascular events, according to Dow Jones. Although the company also reported favorable results that have come out of the tests, some investors are nervous that the company doesn't have a partner in these drug trials and that its $1.5 million per-month cash burn rate is a heavy burden for the go-alone effort.

U.S. ROBOTICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: USRX)") else Response.Write("(NASDAQ: USRX)") end if %> was mashed for $7 1/4 to $73 3/4 after an analyst commented that next quarter earnings might be a little "light." U.S. Robotics is currently making a product transition from its 33.6-kbits per second modem to its "x2" technology, which allows users to download information at 56-kbits per second. However, the analyst suggested that consumers might wait until the new modems are out in January before buying one, even though one can simply get an upgrade to 56-kbits per second by downloading a cheap software upgrade. Robot has enjoyed a strong rise since DELL COMPUTER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: DELL)") else Response.Write("(NASDAQ: DELL)") end if %> announced it would use Robot's x2 modems in its line of desktop PCs, giving a thumb in the eye to the competing standard of ROCKWELL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ROK)") else Response.Write("(NYSE: ROK)") end if %> and ASCEND COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ASND)") else Response.Write("(NASDAQ: ASND)") end if %>.

QUICK CUTS: AMERICA ONLINE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> pulled back $2 3/8 to $37 1/2 after rising from $26 two weeks ago in advance of its move to a $19.95 flat-fee...Software developer COGNOS INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: COGNF)") else Response.Write("(NASDAQ: COGNF)") end if %> lost $4 to $34 3/4 after UBS Securities cut its rating on the company to "hold" from "buy" based on valuation... MEDAPHIS CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MEDA)") else Response.Write("(NASDAQ: MEDA)") end if %> slipped $1 1/4 to $11 1/4 as investors assess conflicting information regarding rumors of a buyout of the healthcare information company... Optoelectronics company UNIPHASE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: UNPH)") else Response.Write("(NASDAQ: UNPH)") end if %> lost $5 3/4 to $52 1/2 after the company said that it will sell its Ultrapointe semiconductor wafer defect system to TENCOR INSTRUMENTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: TNCR)") else Response.Write("(NASDAQ: TNCR)") end if %>... VANSTAR CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VST)") else Response.Write("(NYSE: VST)") end if %> lost $1 5/8 to $26 3/8 as the computer networking integrator reported a 73% increase in second quarter EPS... Networker CABLETRON SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CS)") else Response.Write("(NYSE: CS)") end if %> lost $2 1/8 to $40 1/4 as investors digest news of yesterday's acquisition of ASys Group, a private software firm that develops products for fiber optic networks.

FOOL ON THE HILL
An Investment Opinion by MF Templar

Owner's Yield

Many market mavens pay inordinate attention to the average dividend yield of the S&P 500. The predictive value of dividend yield of the S&P 500 is something that almost all market participants have taken as gospel for the last 50 years. In Stock Market Logic, Norman Fosback offered the following chart as a "simple test of the dividend yield as a forecast of future stock prices."

DIVIDEND YIELDS & STOCK PRICES (1941-1975)

DJIA Yield     S&P 500 One  Probability of
               Year Later   Rising Prices
Under 3.0%     -10.1%             0%
3.0%-4.0%      + 2.0%            59%
4.0%-6.0%      +11.4%            72%
6.0%-7.0%      +15.0%            87%
Over 7.0%      +37.8%           100%

DJIA = Dow Jones Industrial Average

The fact is, until the 1990s, dividend yield was an excellent tool for forecasting future changes in the stock market. Whenever the yield of either the Dow Jones Industrial Average, the S&P 500 or the S&P Industrials (the 400 non-utility and finance companies on the S&P 500) would dip below 3.0 percent, there was definitely rough sailing ahead. However, in the past six years this historical relationship has essentially been thrown out the window by the market. In 1991 the yield on the S&P 500 went below 3.0 percent and has not looked back since. In fact, the only bad year for the market in aggregate (as measured by the Dow or S&P) since 1991 was 1994, when the index was flat.

The damage that this decade has done to the conventional wisdom about dividend yields being a worthwhile predictor of future stock prices has been immense. The probability of rising prices, a mere 0.0 percent in 1975, has risen significantly. Now, in any other profession, if an indicator had been wrong for five out of six years, it probably would have been tossed out. However, in the investment business, tradition and inertia are everything and little tidbits like logic and statistical relevance are relegated to dark corners with the other dunces. Although a few voices in the investment community have begun to question the conventional wisdom, the received wisdom has remained impregnable to any criticism. Thankfully, we are Fools and can gaze askance at Wisdom.

Why would such a tried and true indicator suddenly start wiffing every time it went up to bat? What fundamental, secular change has occurred that makes average dividend yields a much less accurate predictor of future prices? Many market seers clinging desparately to the notion that the dividend yield is predictive start frothing at the mouth and talking about speculative bubbles at this point. However, other factors like the average price/earnings ratio and the average cash-flow multiple do not bear them out. At which point, they concoct numbers to say earnings are really higher than they should be because of various macroeconomic effects unique to this decade. However, any fan of Occam's razor knows that when the explanations get convoluted, the likelihood of them being accurate decreases disproportionately. Or as Marcus Aurealis said, "Seek the simplest cause."

What widespread shift in corporate governance could account for the negation of dividend yield as a predictive factor? Dividends are the portion of earnings that companies pay out to shareholders. In the past decade, one major trend has been the rise of non-dividend paying companies to prominence among investors. Whether we are talking MICROSOFT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MSFT)") else Response.Write("(NASDAQ: MSFT)") end if %> or DELL COMPUTER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: DELL)") else Response.Write("(NASDAQ: DELL)") end if %>, a number of massive companies do not pay dividends as a rule. Well, then, how do these enterprises return cash value to shareholders? Through systematic and routine repurchases of outstanding shares, better known to the world as stock buybacks.

Whether the hippest of software companies or the bluest of blue chip retailers, boards of directors and managements have been advising stock repurchases for most of the decade. You can hardly go a day without some large company announcing that it is buying back billions of dollars worth of shares. Some companies, like CAMPBELL SOUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPB)") else Response.Write("(NYSE: CPB)") end if %>, have even taken on debt to advance their stock buybacks. Companies like REEBOK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RBK)") else Response.Write("(NYSE: RBK)") end if %> and JENNY CRAIG <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JC)") else Response.Write("(NYSE: JC)") end if %> have made the term "Dutch auction" a household word with their high-profile repurchases of a huge amount of shares at prices the investors bid on. This money comes straight out of the coffers of corporate America and benefits shareholders by increasing the value of their shares by making them more precious. And it has the added benefit of not being taxed for a second time, unlike dividend income.

Why have stock buybacks become de rigeur since 1991? A look at a Duetsche Morgan Grenfell report by James E. Moltz gives a clue. Moltz discovered if you took the free cash flow of the S&P Industrials after paying for dividends and capital expenditures, it turned positive for the first sustained period in history in mid-1991. In fact, free cash flow has continued to rise since that point at an almost non-stop rate. Due to the growing prominence of high margin software and services companies on the S&P Industrials and the use of information technology by all companies to operate more efficiently, a state where free-cash flow is the norm and not an exception has spontaneously sprung into being. All this extra cash left after capital expenditures has been plowed back into the market in the form of stock buybacks, not dividends.

Instead of dividend yield, investors might be better off looking at what I call "owner's yield." When you have a company like PHILIP MORRIS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MO)") else Response.Write("(NYSE: MO)") end if %> that is systematically buying back $4 billion of stock a year, it makes sense to count this as part of your yield. In fact, as buybacks have to be approved by boards, you can make a judgment whether or not the management of any company will complete the buyback and count it as yield, particularly if you are dealing with a company that routinely does this (like Microsoft, Dell Computer, INTEL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: INTC)") else Response.Write("(NASDAQ: INTC)") end if %> and more). To calculate owner's yield, just add the dividends to be paid to the stock buyback and divide by the market capitalization. In the case of Philip Morris, you have:

Aggregate Dividends = $4.80 per share*818 million shares  
                    = $3.93 billion

Total Owner Return = Dividends + Buybacks 
                   = $3.93 billion + $4.0 billion 
                   = $7.93 billion

Owner's Yield = Owner Return/Market Capitalization 
              = $7.93 billion/(818 million shares*$103 3/8)
              = 9.3%

Although the dividend yield of Philip Morris is only 4.6 percent, the owner's yield is nearly twice as much. If this is true across the market, then it would explain the divergence between historical dividend yields and the current sustained market advance in the face of a low overall dividend yield without concocting complicated explanations to explain the anomaly. It is my belief that if we adjusted historic dividend yield information to account for stock buybacks, the apparent divergence would in fact disappear.

FOOL FEATURES

In the tradition of "Winds of War," "North and South" and "Lonesome Dove," the Fool presents an epic look at Iomega over the past two years. The Iomega Retrospective examines the life and times of the stock, from the early days of the board, through the heady days of May, to the end of November. Miniseries are often broken up into four or five parts -- but we were feeling a little nutty here at the Fool -- all five segments of this saga are included in this one mondo collection. This gripping miniseries is now showing in out Fool Wire area on both AOL and on the Web, at .

Today's Lunchtime News serves up a Fool Plate Special from MF Raleigh on Hutchinson Technology, a maker of head suspension assemblies for disk drives. The company preannounced good earnings today, an announcement which helped propel the broader storage tech sector higher.

ANOTHER FOOLISH THING

Special Holiday Gift Packs!

You can't give many better gifts to your loved ones than a nudge in the direction of financial independence. With only a few shopping days left until the Great Murksneeveling, if you haven't loaded up on gifts for your loved ones for Plankity-Plankity Day, you may be in trouble. That is, unless you hop over to FoolMart, where our holiday gnomes have assembled some special deals for you. They've put together carefully-bundled packages for college students, parents & grandparents, friends & neighbors, and Fool fanatics -- all offering you a special, limited-time discount over our regular prices. You can even mix and match and create your own bundle!

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

Dale Wettlaufer (MF Raleigh), another Fool
Heroes & Goats

Brian Bauer (MF Hoops), one more Fool
Editing

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