HEROES

Computer wholesaler TECH DATA CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: TECD)") else Response.Write("(NASDAQ: TECD)") end if %> rose $3 1/8 to $32 1/2 after turning in an estimate-shattering 111% increase in third quarter earnings per share (EPS) of $0.38. The company also said that its next quarter will see continued strength and that sales could come in above $1.3 billion, with EPS of $0.38 to $0.40, which would be flat sequentially, but up 58% to 66% from last year's fourth quarter. The company carries a price-earnings ratio of 26 times fiscal 1997 earnings estimates (FY 1997 ends in Jan.), which some investors say is too high for a distributor that generates margins as small it does. Others point out that a mere one percent increase in net margin (percentage of a dollar of sales brought to the bottom line) would expand profits 74% even if sales didn't increase.

GEOTEK COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GOTK)") else Response.Write("(NASDAQ: GOTK)") end if %> popped $1 1/2 to $8 1/2 after the wireless telephony company announced that IBM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %> will market and service Geotek's voice and data services. The companies signed a deal last year for IBM to set up networks for Geotek. With the disinflation of wireless services and the addition of newer kinds of services, Geotek is getting a large boost in being represented by one of the premiere sales and service organizations in the world. SMR, or Specialized Mobile Radio, is not well-known to consumers or businesses, but its ability to act as a "cellular" phone system, pager, two-way radio, and packet data system make it pretty darn handy for business users.

CRA MANAGED CARE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CRAA)") else Response.Write("(NASDAQ: CRAA)") end if %> jumped $6 1/4 to $48 3/4 after the healthcare services company said it has withdrawn plans for a secondary offering of two million shares. It's not much of a coincidence that the value of the currently outstanding shares jumped 15%, as the offering would have expanded the fully-diluted sharecount (which includes options and other convertible securities) by about 22%. Three-quarters of the funds would have gone to shareholders and not the company, so it's not as if the CRA is starving for the capital. Boards of Directors will sometimes elect to do a secondary offering so that selling pressure from options exercises won't depress the market price of the stock. Sometimes that selling mechanism doesn't work, though, but at least the cancellation of the offering had the intended effect on the company's share price.

QUICK TAKES: Diversified restaurant operator CKE RESTAURANTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CKR)") else Response.Write("(NYSE: CKR)") end if %> rose $2 5/8 to $34 1/2 after the company reported a 44% increase in Q3 sales and a 75% increase in EPS... BOISE CASCADE OFFICE PRODUCTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BOP)") else Response.Write("(NYSE: BOP)") end if %> gained $1 7/8 to $21 1/8 after the company announced that it has entered into a secure corporate internet purchasing consortium headed by NETSCAPE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NSCP)") else Response.Write("(NASDAQ: NSCP)") end if %> and Mastercard International... HEALTHSOURCE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HS)") else Response.Write("(NYSE: HS)") end if %> rose $1 3/8 to $13 1/4 after the HMO was mentioned in a Wall Street Journal column that listed some of 1996's biggest stock market losers... CONTINENTAL AIRLINES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAI.A and .B)") else Response.Write("(NYSE: CAI.A and .B)") end if %> gained $2 to $30 1/2 as the company is in exploratory talks regarding a possible combination or merger with DELTA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DAL)") else Response.Write("(NYSE: DAL)") end if %>. MF Wings will have more on this story later today in our Airlines industry area... Software company BANYAN SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BNYN)") else Response.Write("(NASDAQ: BNYN)") end if %> gained $2 to close at $6 after announcing a deal with the AMERICA ONLINE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AOL)") else Response.Write("(NASDAQ: AOL)") end if %> - TRIBUNE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TRB)") else Response.Write("(NYSE: TRB)") end if %> joint-venture Digital City... FARALLON COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: FRLN)") else Response.Write("(NASDAQ: FRLN)") end if %> bounced back $2 1/2 to $ 12 after falling this week on the announcement of a new router for small offices/home offices... Eastern department store chain BON-TON STORES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BONT)") else Response.Write("(NASDAQ: BONT)") end if %> jumped $1 1/8 to $7 3/8 after reporting a 17.6% increase in November same-store-sales... ALLIANCE PHARMACEUTICAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ALLP)") else Response.Write("(NASDAQ: ALLP)") end if %> moved up $2 to $13 7/8 on word that it will receive a $15 million milestone payment for blood substitute work done with partner JOHNSON & JOHNSON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JNJ)") else Response.Write("(NYSE: JNJ)") end if %>.

GOATS

SAFEGUARD SCIENTIFICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SFE)") else Response.Write("(NYSE: SFE)") end if %> declined $1 5/8 to $32 3/4 after the company told Dow Jones that its Chief Financial Officer, Gerald Wilk, is "phasing down his activities" and that it was promoting Vice-President and Comptroller Michael Miles to the CFO post. No, this isn't a smarmy tale of a CFO being forced out (Wilk has been with the company since the early 70s), but investors do get a tad nervous when the chemistry at the top of such a successful organization changes. Safeguard has been described as "the Berkshire Hathaway of technology," due to the company using cash flow from its information systems and software businesses to do venture capital work by investing in other companies. This formula has worked extremely well, as Safeguard has achieved an annual return of about 31% per year for the last decade.

Software publisher GT INTERACTIVE SOFTWARE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GTIS)") else Response.Write("(NASDAQ: GTIS)") end if %> plunged $4 3/4 to $7 7/8 (a 52-week low) after the company said that fourth quarter revenues will come in between $115 and $125 million, up 10-20% from last year's pro-forma (restated) sales level. The company said that the problem is not specific to GT, but is the result of "...weakness on a scale that is widespread and unexpected..." in the specialty retail channel. That's sort of like blaming the dog for eating homework, since the company has made so many pricey acquisitions in the last year and quarter. GT should probably look at its rapid pace of high-priced acquisitions and wonder if it has concentrated too much on doing deals and not enough on its products.

Electronics contract manufacturer FLEXTRONICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: FLEXF)") else Response.Write("(NASDAQ: FLEXF)") end if %> was doused for $9 to $28 1/4 today after the company announced a massive restructuring that would make the third and fourth quarters "modestly profitable." The company will be adding aggressively to its sales organization and manufacturing capacity over the next six months to prepare for "substantial growth opportunities" over the next few years. Flextronics recently purchased ERICSSON'S <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ERICY)") else Response.Write("(NASDAQ: ERICY)") end if %> $350 million contract manufacturing division and added a number of high-profile new customers. Flextronics expects 35 to 40 percent bottom line growth after making these changes.

QUICK CUTS: FOREST LABS <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: FRX)") else Response.Write("(AMEX: FRX)") end if %> free-fell $9 3/8 to $29 3/8 after the firm said that it is taking actions to work off inventories of its steroid inhalant and that it will take losses in the third and fourth quarters... Seismic equipment maker INPUT/OUTPUT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IO)") else Response.Write("(NYSE: IO)") end if %> crashed $7 1/2 to $16 3/8, saying that it experienced an order delay and that Q2 earnings will come at $0.08-$0.12 per share, well below estimates... GREAT LAKES CHEMICAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GLK)") else Response.Write("(NYSE: GLK)") end if %> was lowered $3 3/8 to $52 after the company met with analysts in New York today... Networker EQUINOX SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: EQNX)") else Response.Write("(NASDAQ: EQNX)") end if %> dropped $2 3/4 to $8 3/4 after the company said Q4 sales will be flat and 1996 earnings will come in below estimates of $0.73 per share... SAWTEK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SAWS)") else Response.Write("(NASDAQ: SAWS)") end if %> dropped $4 1/4 to $31 3/4 as the wireless components maker was downgraded to "hold" from "buy" by Montgomery Securities.

An Investment Opinion by MF Yon
FOOL IN THE VALLEY (OF THE SUN)
Owner's Yield II, the sequel

(This investment perspective is a response to yesterday's Fool on the Hill. If you haven't read that yet, you'll probably want to so that you can better follow this.) "The fact is, until the 1990s, dividend yield was an excellent tool for forecasting future changes in the stock market." -MF Templar (Fool on the Hill, 12/3/96)

The implied meaning of my good friend Templar's statement here appears to be that "this time, it really is different." Well, in the immortal words of my three-year-old daughter: "Maybe so... or not."

Let us examine the argument closer. While it is true that equities tend to perform poorly when dividend yields are low and the market-to-book (the price-to-book ratio for the whole market) and price-to-earnings ratios are high, it is Foolish to remember that this describes only a tendency and not a physical law of nature. Yes, the S&P 500 dividend yield is at an all-time low, but it was not much higher than current levels throughout the late '50s and the '60s, culminating in a then all-time low in the early '70s. Reading back through the investment commentaries of the time reveals a similar decade-long period of hand-wringing about it being different that time, too. Anybody remember what happened back in the '70s?

Yes, the market-to-book is at an all-time high. But no, as Templar highlighted, the S&P 500 price-to-earnings ratio is not at an all-time high. Far from it. In fact, it was higher in the previously mentioned late-50s to early-70s period. The present P/E is about par with the pre-1987 crash. The present P/E is also well-below that of the 20s and 30s. So, while the current valuations are clearly at the higher end of the historical scale, let's not get carried away here. They appear to this Fool to be merely in line with other similarly-frothy periods. Periods during which such extended valuations were maintained for much longer than the so-called "conventional wisdom" believed was possible.

My good friend Templar makes a very good point when he says, "...investors might be better off looking at what I call "owner's yield." He then goes on to describe a method by which the current dividend yield is modified by the extent to which a company is engaged in share buy-backs. The point is that a low dividend yield is not inconsistent with a normal P/E if dividend policy has been modified. If companies are now channeling the "yield" to investors through share repurchases, the payout ratio will be lower, as will the dividend yield.

However, Templar's example was PHILIP MORRIS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MO)") else Response.Write("(NYSE: MO)") end if %>, a company that is hardly representative of the broad market in general. A better proxy was examined in a paper appearing in the May/June 1996 issue of Financial Analysts Journal. In an article titled "Stock Market Valuation Indicators: Is This Time Different?", authors Kevin Cole, Jean Helwege, and David Laster* examine the predictive power of indicators such as dividend yield and market-to-book and quantify the effects of share repurchases and retiree health liabilities on these two measures. They appropriately adjust dividend yields for share repurchases and find that, even after adjusting for more than $50 billion of share repurchases in 1995, the net adjusted dividend yield for the market was 3.0%.

While the "owner's yield" concept might be somewhat new to many, share repurchases as a percentage of dividends paid is not meaningfully different from past trends. During the 1984-1995 period, share repurchases ranged from a low of 26% in 1991 to a high of 70% in 1985. Within the context of this period, 1995 was about average for such repurchases at 56% of dividends paid. Additionally, the categorization of share repurchases as merely a substitute for dividends is most dubious, in the opinion of this Fool. If such were the case, one would expect the growth in dividend payments to have slowed as share repurchases accelerated during the early-80s. No such slowing was evident. One can only conclude that an adjustment such as "owner's yield", which gives full credit to repurchases as dividend substitutes and gives no consideration to additional share issuance, is overly generous.

Authors Cole, Helwege and Laster also appropriately modify market-to-book ratios for the post-1990 implementation of FAS 106, which requires firms to record liabilities for health benefits paid to their retired work forces in excess of premiums collected from active workers. With many firms downsizing recently, retiree work forces are unusually large relative to active employees, creating meaningful FAS 106 liabilities. Additionally, because these numbers do not account for the tax deductibility of retiree health expenses, such bookings of liabilities meaningfully overstates the charge to after-tax earnings. The bottom line from the authors is that the market-to-book ratio of the S&P index is more than 10% lower than the naive data would indicate. Still a record level, but not nearly as obscene.

Nonetheless, after making an adjustment for FAS 106, the market-to-book ratio of the S&P Industrials remains about 20% higher than the previous peak established in 1987. And after making the "owner's yield" adjustment championed by MF Templar (and taking it a step further to include netting repurchases by new issuance), the current dividend yield remains in the "danger" zone, slightly below 3%. Only the price-to-earnings ratio offers a modicum of comfort. And such comfort requires one to make the leap of faith that current earnings can be sustained over the long term and are not "peak" earnings resulting from the latter phases of a business cycle. Such is a leap I am unprepared to make, and it is the considered opinion of this Fool that foreign diversification and a more cautious approach to equities would be prudent at this juncture.

But that's just one Fool's opinion.

MF Yon
(Stephen P. Barnes, CFA, CFP)

*Kevin Cole is an assistant economist, and Jean Helwege and David Laster are economists in the Research and Market Analysis Group of the Federal Reserve Bank of New York.

FOOL FEATURES

Today's Lunchtime News offers up a Fool Plate Special that flies over the possible merger of Delta and Continental. The piece also cruises through the implications for the rest of the industry.

The epic Iomega Retrospective is still available for your reading pleasure. MF BudFox has chronicled the past two years in the Iomega saga, and it's a tale to rival the most dramatic of mini-series.

ANOTHER FOOLISH THING

Special Holiday Gift Packs!

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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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