HEROES

Wide Area Network products company CASCADE COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCC)") else Response.Write("(Nasdaq: CSCC)") end if %> gained $5 to $66 7/8 today as investors lifted the shares after yesterday's 6+ point fall, which was a reaction to a press release from competitor CISCO <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %>. Apparently, investors were disappointed that WORLDCOM <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WCOM)") else Response.Write("(Nasdaq: WCOM)") end if %> had re-ordered Cisco's StrataCom ATM switches as well as its BPX switches. Being that this was a repeat order and wasn't a turning-point strategic loss, Morgan Stanley stepped into the fray and upped its rating on Cascade to "strong buy" from "outperform." Cascade's announcement on Monday that WILLIAMS COMPANIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WMB)") else Response.Write("(NYSE: WMB)") end if %> had placed a fairly sizable order for the same type of equipment for its worldwide fiber networks barely budged the stock.

MICRON TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MU)") else Response.Write("(NYSE: MU)") end if %> gained $2 1/8 to $36 after announcing that it expects 1997 bit growth (a measure of units, not dollars) to exceed 80%. The company also said that it expects revenues in the coming quarter to slightly exceed the $700 million reported in the fourth quarter of 1996. 1996's bit growth was higher than 80%, though, as Micron pegged that growth rate at 95%. In absolute dollars, Micron's sales have been skewed toward its personal computer and contract manufacturing operations at its MICRON ELECTRONICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MUEI)") else Response.Write("(Nasdaq: MUEI)") end if %> subsidiary. Last quarter, semiconductor sales represented less than half its company-wide sales number. Considering the forecast of increased revenues and respectable bit growth, investors are expecting that Micron will be able to drive down costs and turn around its margin contraction.

ALEXANDER & ALEXANDER SERVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AAL)") else Response.Write("(NYSE: AAL)") end if %> powered ahead $3 to $17 1/8 as insurance holding company AON CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOC)") else Response.Write("(NYSE: AOC)") end if %> announced that that the two companies have agreed to a cash tender merger for $17.50 for each A&A share. AON is the world's second-largest insurance brokerage -- the combined company would become the world's largest, moving past MARSH & MCLENNAN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MMC)") else Response.Write("(NYSE: MMC)") end if %>. The large amount of debt involved in the merger has prompted Standard & Poors to place Aon on "credit watch with negative implications." If S&P were a brokerage, that would be a downgrade to "hold," and means that the insurance ratings company isn't sure that this merger is a great idea. Lowering the company's rating would help fulfill the prophecy, as that raises debt service costs.

QUICK TAKES: ESS TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ESST)") else Response.Write("(Nasdaq: ESST)") end if %> picked up $1 5/8 to $25 1/8 on announcing that SONY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SNE)") else Response.Write("(NYSE: SNE)") end if %> will use the company's MPEG decoder technology in its video products... Nutritional supplements company NUTRITION FOR LIFE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NFLI)") else Response.Write("(Nasdaq: NFLI)") end if %> rose $2 1/2 to $14 1/2 after reporting a 49% increase in fourth quarter sales and earnings per share (EPS) of $0.10... CENTRAL SPRINKLER <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CNSP)") else Response.Write("(Nasdaq: CNSP)") end if %> ran up $2 3/4 to $22 1/2 after the fire suppression systems maker reported a 17% increase in fourth quarter sales... Chip-maker CYRIX <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CYRX)") else Response.Write("(Nasdaq: CYRX)") end if %> recovered for a $2 1/2 gain to $22 after slumping yesterday on news that its co-founder and CEO had resigned... RASTER GRAPHICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RGFX)") else Response.Write("(Nasdaq: RGFX)") end if %> gained $1 1/4 to $12 1/4 after the company introduced a wide-format printing system for making UV and water resistant posters and banners... Chinese company JILIN CHEMICAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JCC)") else Response.Write("(NYSE: JCC)") end if %> moved up $1 1/8 to $17 as trading in the company's shares in Shanghai and Hong Kong had left behind the U.S.-listed shares... PHP HEALTHCARE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PPH)") else Response.Write("(NYSE: PPH)") end if %> rose $2 3/8 to $29 3/8 following yesterday's report of a 90% increase in per-share earnings in the second quarter... Master Limited Partnership U.S. RESTAURANT PROPERTIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: USV)") else Response.Write("(NYSE: USV)") end if %> gained $1 1/4 to $25 3/4 after announcing that it will convert itself into a Real Estate Investment Trust, thus preserving its tax status and corporate structure as an dividend-generating entity... ION LASER TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: ILT)") else Response.Write("(AMEX: ILT)") end if %> jumped $1 7/8 to $12 7/8 after the company signed a contract to sell 36 of its teeth-whitening systems.

GOATS

MAXIS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MXIS)") else Response.Write("(Nasdaq: MXIS)") end if %> fell $1 1/2 to $13 1/2 after the SimCity software company announced that it has published a "fix" for its SimCopter game on its website. A mischievous programmer had added some elements to the game that weren't supposed to be there. From the company's press release: "The update removes unauthorized programming found by the company after the game shipped which replaced an animated marching band at the game's final scene with stick-figure-like men in swim trunks accompanied by kissing sounds. Contrary to some earlier reports, there were never any scantily-clad women in the game." These features appear when playing the old version of the game on any Friday the 13th, August 22 and September 30.

Computer aided design (CAD) company EAGLE POINT SOFTWARE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EGPT)") else Response.Write("(Nasdaq: EGPT)") end if %> lost $1 11/16 to $3 15/16 as investors fear the consequences of the merger between AUTODESK <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ADSK)") else Response.Write("(Nasdaq: ADSK)") end if %> and SOFTDESK <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SDSK)") else Response.Write("(Nasdaq: SDSK)") end if %>. In that deal, Autodesk will issue 0.44 shares of its stock for each Softdesk share. Softdesk is the number-one developer of software using Autodesk's various design systems. Eagle Point is a developer of engineering and design applications for Autodesk's AutoCAD system as well, so the combination does bode poorly for its prospects. Analysts were quick to downgrade Eagle Point and give the nod of approval in the form of "buy" ratings to Autodesk today.

QUICK CUTS: Chemical giant UNION CARBIDE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UK)") else Response.Write("(NYSE: UK)") end if %> declined $2 5/8 to $42 1/4, saying fourth quarter EPS will come in below third quarter results... TELCO SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TELC)") else Response.Write("(Nasdaq: TELC)") end if %> lost $1 3/4 to $19 1/8 after the communications product maker said orders fell from last quarter... Furnishing and fabrics maker SPRINGS INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SMI)") else Response.Write("(NYSE: SMI)") end if %> lost $3 1/8 to $43 5/8 as CS First Boston cut its rating to "buy" from "strong buy" after the company said Q4 results will be weak due to restructuring actions... NEUROGEN CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NRGN)") else Response.Write("(Nasdaq: NRGN)") end if %> lost $2 7/8 to $18 5/8 despite extending a drug development contract with PFIZER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PFE)") else Response.Write("(NYSE: PFE)") end if %>... BARRICK GOLD <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ABX)") else Response.Write("(NYSE: ABX)") end if %> lost $2 of luster to finish at $28 3/8 as the company and investors sort out the embarrassing BRE-X <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BXMNF)") else Response.Write("(Nasdaq: BXMNF)") end if %> deal... Education products company SCHOLASTIC <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SCHL)") else Response.Write("(Nasdaq: SCHL)") end if %> tumbled $5 5/8 to $67 1/8 after reporting earnings of $2.21 per share, a penny shy of estimates... ROCK-TENN CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RKTN)") else Response.Write("(Nasdaq: RKTN)") end if %> was rocked for a $4 1/2 loss to $18 1/2 after the paperboard company said November results have been weak and poor pricing will cause first quarter earnings to fall below last year's $0.35 per share... Energy company TEXAS MERIDIAN RESOURCES <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: TMR)") else Response.Write("(AMEX: TMR)") end if %> lost $1 1/8 to $16 5/8 after LOUISIANA LAND & EXPLORATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LLX)") else Response.Write("(NYSE: LLX)") end if %> handed over an as-yet dry well that both have been working on... SODAK GAMING <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SODK)") else Response.Write("(Nasdaq: SODK)") end if %> lost $3 to $16 as investors' hopes of a Mexican gambling license waned.

CORRECTION

Today's Lunchtime News incorrectly described VERITAS DGC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VTS)") else Response.Write("(NYSE: VTS)") end if %> as a developer of data storage software. Veritas specializes in seismic data services for the energy industry.

FOOL ON THE HILL
An Investment Opinion by MF Templar

Discount

Ultimately, where does the value in a share of stock come from? This perplexing question can befuddle even the most seasoned of investors -- particularly those too exposed to the day to day irrationalities of the market. The inability of most philosophically inclined investors to accept the validity of specious sciences like technical analysis springs from the desire to answer this question. Day to day share movements become irrelevant when one is preoccupied with finding out from where value comes.

A share of stock represents a small piece of the control of a company -- this we have explored many times. With each share comes a vote in the annual meeting to appoint members of the board of directors and make changes in the company’s by-laws. With the exception of those misbegotten enterprises that issue multiple classes of stock in an effort to cheat investors out of the one-share, one-vote system that has become the democratic standard in the stock market, investors are free to vote their shares however their conscience decides.

How does one quantify the value of the this vote? The price of control is of course logically related to the amount of cash that the enterprise can generate. Anyone knows that you should pay more for a lemonade stand grossing $100 a day than one grossing $50 a day. Attaching the value of a single vote to the portion of the cash flow that same single vote can claim as its own makes all the sense in the world. Thus we explain in a few short sentences the logical system of fundamental valuation that has come to dominate the market over the past century. Huzzah.

Even those who agree on the big picture can clash violently over the specifics. Witness the vehement struggle of 16th century Protestants and Catholics in the bitter Wars of Religion. The world of fundamental value makes it home to vulture investors seeking distressed securities at bargain prices, growth-at-a-reasonable-price (GARP) investors looking to nail down a growing company trading at a discount to its "fair" market value, and the quantitatively-oriented breed of quasi-technicians called momentum investors by the media. Even more frustrating, some integrated approaches can borrow from these distinct schools and hundreds of intellectual splinter movements, encompassing principles that at various points can actually contradict one another. Witness the investing style broadly called Foolish.

At the core, save for the quantitative faction, the notion that a single share of stock attains value from future cash-generation power remains constant. The market prices a single share of stock today at a discount to how much cash the company represented by that share will generate in the future, indexed to the number of shares outstanding. The fewer the shares, the more valuable each individual share becomes as it concomitantly represents a larger portion of the future cash. The concept of "discounting" the future cash-generation ability in present dollar terms is where the science of investing transforms itself into an art.

If we think that TEMPLAR’S TREEHOUSES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TREEH)") else Response.Write("(Nasdaq: TREEH)") end if %> will earn $1.00 per share in a year, having grown 10% a year for the past five years and growing 8% a year in perpetuity with a 2.3% dividend yield, what should the fair price be? Some might proffer overly simplistic systems that equate fair multiples (price-to-earnings ratios) to percentage growth expectations, but reality is always a little messier. What if ol’ TempTree has $100 million in cash? $200 million in debt? Generates $2.00 a share in cash-flow due to the high depreciation costs associated with the factories? Regularly buys back $50 million in stock every year, like clockwork? Has dominant market share? Holds the status as the low cost producer? Operates in an industry that does not fluctuate with interest rates or the overall economic picture?

Each of these factors and a hundred others affects the degree to which we discount future cash-generating ability. The concept of discounting explains why we invest in a world where COCA-COLA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KO)") else Response.Write("(NYSE: KO)") end if %> can trade at 33 times earnings growing at 15% and DELL COMPUTER <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %> could trade for a good part of the year at 11 times earnings growth at greater than 100%. Investors are much more sanguine about the ultimate future cash flows of Coke. Strong brand, dominant market share, low cost producer, top-flight management, regular share repurchases, high free-cash flow, long track record of generating expected growth with very little volatility, and selling a product that does not appear hostage to overall consumer confidence. Whereas you might discount the heck out of Dell’s year-ahead earnings, you could logically feel confident in projections of Coke’s earnings a decade from now -- a realization that would deeply influence what you believe a fair price to pay would be.

How much should a dollar of future cash-generating ability be discounted? How many angels can dance on the head of a pin? And how much wood can that darn woodchuck chuck? These questions haunt philosophers of value, those brave investing souls. The principle variant here is the perceived risk to the ability to generate those future profits. All of the questions asked above dance around the question of risk like Grateful Dead fans orbiting the stage. It is here that the philosophers of value part company, developing idiosyncratic systems that take into account overall conditions in their formative investing years. Seeing that the parallel ideas of discounting and risk unite these threads allows contemporary investors to chart their own individual course, fully aware of what is at stake in the debate.

CONFERENCE CALLS

12/12/96 (Thursday)
VERITAS DGC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VTS)") else Response.Write("(NYSE: VTS)") end if %>
10:00 AM EST
(800) 997-6755 -- live

12/12/96 (Thursday)
WIRELESS ONE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WIRL)") else Response.Write("(Nasdaq: WIRL)") end if %>
4:30 p.m. EST
(800) 226-7400 (code: 6786#) -- live
1-800-226-6200 (code # 335740) -- replay

12/12/96 (Thursday)
ORACLE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ORCL)") else Response.Write("(Nasdaq: ORCL)") end if %>
(800) 633-8284 (code: 2223286) -- replay

ANOTHER FOOLISH THING

The Dow Dividend Spreadsheet

Fooldom is all about interactivity and do-it-yourself investing, right? (Answer: Right.) What fits in better with such a tradition than the Dow Dividend Spreadsheet? Developed by our own industrious MF Templar, this is a living, breathing spreadsheet -- one you can manipulate and tinker with. It offers returns and dividends for all 30 stocks in the Dow Jones Industrial Average for 35 years (1961 through 1995), as well as returns for all eight Dow Dividend Strategies -- year by year. This allows you to test out any hypothesis in your search for the ultimate investing approach. Construct what-if scenarios and test them. What if you only bought the 17th-highest-priced stock each year for 35 years? What if you bought all but the lowest-yielding stocks? What if...

The spreadsheet is available in FoolMart and will be delivered to your e-mailbox electronically in your preferred format (Excel 4.0, 5.0, 6.0, or 7.0 only).

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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