The Evening News - Tuesday, December 24, 1996

MARKET CLOSE
~~~~~~~~~~~~

DJIA: 6522.85 +33.83 (+0.52%)
S&P 500: 751.03 +4.11 (+0.55%)
Nasdaq: 1287.63 +8.11 (+0.63%)

HEROES

SINTER METALS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SNM)") else Response.Write("(NYSE: SNM)") end if %> gained $2 1/2 to $29 1/2 after Bear Stearns added the maker of gears, bearings, and sprockets to its recommended list as its best idea in the auto components sector. The company has been adding to its powder metal facilities with the acquisition of the largest such German company, and has also acquired Powder Metal Holding, formerly a company investment. With these additions, the company's revenues should grow by at least 100% in 1997 and will come close to tripling this year's sales. 1997 earnings estimates have increased 13% over the last 90 days to reflect some of these developments, but they could increase further, as these deals have only recently closed. Sinter currently trades at 23 times estimated 1996 earnings and is projected to grow earnings 35% next year.

Energy services company DAWSON PRODUCTION SERVICES <% if gsSubBrand = "aolsnapshot" then Response.Write(":NASDAQ" & CHR(34) & ">(Nasdaq: DPSI)") else Response.Write("" & CHR(34) & " onClick=" & Chr(34) & "openWindow('http://quote.fool.com/uberdata.asp?symbols=DPSI', 'quotebox', 640, 460); return false;" & CHR(34) & ">(Nasdaq: DPSI)") end if %> rose $1 7/8 to $15 after agreeing to buy the land-based well servicing operations of PRIDE PETROLEUM SERVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PRDE)") else Response.Write("(Nasdaq: PRDE)") end if %>. Though this division has seen flattish revenues in 1996, that may be due to Pride's focus in offshore operations. Dawson concentrates on land-based services as a "plumber for the oil & gas industry." This year, Dawson has been generating operating margin north of 10%. If it can achieve that target for these new operations, it will have paid somewhere around 11.5 times operating income, which is a tame valuation in this sector this year. The 407 rigs acquired should boost revenues to around $180 million from 1996 annualized sales of $66 million. If the company issues an equal amount of debt and equity in this deal, it will trade at an enterprise value/sales ratio of 1.36, well within reason for a company generating 10% operating margin in this industry.

KCS ENERGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KCS)") else Response.Write("(NYSE: KCS)") end if %> shot up $7 7/8 to $37 5/8 after settling a legal action with Tennessee Gas, now a part EL PASO ENERGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EPG)") else Response.Write("(NYSE: EPG)") end if %>. A Texas jury recently awarded Tennessee Gas with $143 million judgment, including punitive damages of $114 million, because KCS allegedly increased volumes of natural gas delivered to Tennessee Gas with propane. Propane naturally occurs in natural gas and oil wells and is frequently found in pipelines. KCS also did not have a huge incentive to welsh on their contract since margins would not have expanded much because the company was selling the natural gas at close to four times the market price. KCS will put this episode behind them, though, and move on to other projects such as acquisitions -- today's S&P "CreditWatch" move (with positive implications) helps out on that score.

QUICK TAKES: LA JOLLA PHARMACEUTICAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LJPC)") else Response.Write("(Nasdaq: LJPC)") end if %> rose $1 9/16 to $5 3/4 after signing an agreement to market its lupus drug with ABBOTT LABS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ABT)") else Response.Write("(NYSE: ABT)") end if %>... Wayne Huizenga company FLORIDA PANTHERS HOLDINGS <% if gsSubBrand = "aolsnapshot" then Response.Write(":NASDAQ" & CHR(34) & ">(Nasdaq: PUCK)") else Response.Write("" & CHR(34) & " onClick=" & Chr(34) & "openWindow('http://quote.fool.com/uberdata.asp?symbols=PUCK', 'quotebox', 640, 460); return false;" & CHR(34) & ">(Nasdaq: PUCK)") end if %> gained another $4 1/4 to $17 after signing a snappy-looking real-estate deal yesterday... GERON CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write(":NASDAQ" & CHR(34) & ">(Nasdaq: GERN)") else Response.Write("" & CHR(34) & " onClick=" & Chr(34) & "openWindow('http://quote.fool.com/uberdata.asp?symbols=GERN', 'quotebox', 640, 460); return false;" & CHR(34) & ">(Nasdaq: GERN)") end if %> gained another $1 7/16 to $12 15/16 after yesterday's news of a deal with PHARMACIA & UPHOHN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PNU)") else Response.Write("(NYSE: PNU)") end if %>... Oil service company PRIDE PETROLEUM <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PRDE)") else Response.Write("(Nasdaq: PRDE)") end if %> gained $2 1/4 to $22 1/4 as investors think it got a good deal, too, in selling its land-based re-working rigs (see story above)... ABERCROMBIE & FITCH <% if gsSubBrand = "aolsnapshot" then Response.Write(":NYSE" & CHR(34) & ">(NYSE: ANF)") else Response.Write("" & CHR(34) & " onClick=" & Chr(34) & "openWindow('http://quote.fool.com/uberdata.asp?symbols=ANF', 'quotebox', 640, 460); return false;" & CHR(34) & ">(NYSE: ANF)") end if %> added $1 1/8 to $17 3/4 after Provident Investments filed a 13G indicating that it owns 6.5% of the retailer... Medical/surgical products distributor OWENS & MINOR <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OMI)") else Response.Write("(NYSE: OMI)") end if %> moved up $1/2 to $10 5/8 after announcing a $30 million contract last night... PEDIATRIX MEDICAL GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PDX)") else Response.Write("(NYSE: PDX)") end if %> gained $2 1/8 to $35 1/4 after the medical practice management company was upgraded to "buy" by Donaldson, Lufkin & Jenrette.

GOATS

DAY RUNNER <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DAYR)") else Response.Write("(Nasdaq: DAYR)") end if %> looked a bit disorganized today, falling $4 3/4, or 20%, to $19 1/4 after the company announced last night that second quarter results will fall short of last year's results. The maker of personal organizers said quarterly sales will fall to $34-36 million from last year's $40 million due to lower sales to WAL-MART <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WMT)") else Response.Write("(NYSE: WMT)") end if %> and a shift to "just-in-time" inventories. That sort of move ultimately makes a company stronger if it has its cost structure in place. Anytime a firm has to deal with the move like this the transition period can be rough. Day Runner won't escape those effects this quarter, either, as earnings per share are projected to come in between $0.63-0.68, below last year's $0.75, and far below the mean estimate of $0.91.

Software education company TRO LEARNING <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TUTR)") else Response.Write("(Nasdaq: TUTR)") end if %> was smashed for a $6 3/4 loss to close at $10 1/2 after reporting disappointing operating results last night. Fourth quarter earnings of $0.34 per share fell by more than half and severely undershot estimates of $1.04 per share. Sequential comparisons were good and the company did well on orders, but looking at their remarks from the Q3 conference call, year over year revenue growth was non-existent. TRO was not able to book as revenues a good portion of those orders; rather, they will be pushed back into 1997. The fact that the company is in non-compliance with various loan covenants also hurt the shares today.

QUICK CUTS: Networking equipment company DIGI INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DGII)") else Response.Write("(Nasdaq: DGII)") end if %> was slammed $3 7/8 to $8 7/8 after restating 1996 fiscal year and fourth quarter earnings to much lower levels due to confusion in its accounting treatment of a subsidiary investment... MATRIX PHARMACEUTICAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MATX)") else Response.Write("(Nasdaq: MATX)") end if %> lost $2 3/8 to $6 1/8 after the company learned from the FDA that it needs to clear up some issues with its AccuSite Gel before its regulatory approval application is accepted... Graphics software company METATOOLS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MTLS)") else Response.Write("(Nasdaq: MTLS)") end if %> lost $1 3/4 to $12 after announcing it will issue 1.36 million shares to acquire 3-D graphics company Real Time Geometry Corp... Software developer T*HQ INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TOYH)") else Response.Write("(Nasdaq: TOYH)") end if %> lost $1 to $8 1/2 after filing a registration statement to sell 1.5 million shares, increasing the outstanding shares by a third.

FOOL ON THE HILL
An Investment Opinion by MF Templar

The Tax Effect, Part 5

TAX-LOSS BARGAINS?

The "January effect" appears to be one of the more enduring inefficiencies in the stock market. The evidence supporting some kind of January effect is convincing, although it does not necessarily support the conventional wisdom that has been built up around it. In Stocks for the Long Run, author Jeremy J. Seigel says that during the 68 Januarys between 1925 and 1992, the S&P 500 had an average return of 1.6%, while the average return on "small stocks" was 6.9%, a difference of 5.3 percentage points. According to that data, there are only six years in the 68-year period where small stocks got creamed by large stocks, although four of these were in the last ten years --1982, 1987, 1989 and 1990.

The January effect, however, does not appear to have much endurance; the majority of the so-called "effect" happens in the first week of the new year and is completely gone by the second week. Also, from all indications in would appear that small stocks actually give back some of their January gains by the end of the year. For the 68 years between 1925 and 1992, the S&P 500 showed an average annual return of 12.4%, while small stocks tore up the track with 17.4%, a 4.8% difference. Now, if small stocks are doing 5.3% better than large stocks in January but only 4.8% better for the entire year, this would suggest that small stocks actually underperform large stocks for the rest of the calendar year.

Although the data supports the existence of some kind of January effect, the exact nature of such a thing is in dispute. Why would small capitalization stocks tend to outperform in one month, but give back some of that performance in the subsequent eleven? Why would such an effect be limited to the first week or two of January? Furthermore, why would the effect appear to be diminishing in frequency over the past decade?

Evidence exists that some kind of tax-related seasonal effect exists on all stock exchanges throughout the world, regardless of when their tax year ends. The heart of the January effect is when a company's stock has had its normal buy-sell equilibrium thrown off by an excess of selling in the last two to three months of the year. Beginning with the end of the mutual fund tax year (October 31st) and continuing to the end of the individual investor's tax year (December 31st), there is a deluge of selling. In issues with smaller floats that are less liquid, there is a disproportionate drop. It would seem that the stocks that tend to outperform in January are the stocks that investors wanted to sell for tax-loss reasons in the last two to three months of the previous year. Although many link the January effect to small stocks, there are plenty of large stocks that fit the criteria that tend to pop as well.

Take the example of FRANKLIN QUEST <% if gsSubBrand = "aolsnapshot" then Response.Write(":NYSE" & CHR(34) & ">(NYSE: FNQ)") else Response.Write("" & CHR(34) & " onClick=" & Chr(34) & "openWindow('http://quote.fool.com/uberdata.asp?symbols=FNQ', 'quotebox', 640, 460); return false;" & CHR(34) & ">(NYSE: FNQ)") end if %> a year ago. The company had reported two disappointing quarters in a row and had achieved a nadir of about $19 in the late December. After the turn of the new year, Franklin shot up to $24 in short order, propelled by the cessation of tax-related selling. As this was simply the correction of a previous imbalance, Franklin enjoyed some extraordinary volatility until mid-May, when it returned to the $19 level. At this writing, Franklin trades at $21 1/4, still up slightly for the year.

Here in late December there are tremendous opportunities to profit from tax-related inefficiencies in the market. The ideal tax-loss candidate has: (1) disappointed somehow in the last quarter of the year; (2) attracted a lot of speculators in for a quick pop who had their expectations dashed; and (3) remained profitable with decent growth and a strong balance sheet. Off the top my head, NOVELL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NOVL)") else Response.Write("(Nasdaq: NOVL)") end if %> seems like it fits the profile. The company has had flat revenue growth year over year due to a massive restructuring and some internal businesses that are decaying, like NetWare 3.0. However, it remains profitable with 17% margins and has some properties that appear to be growing apace. Many investors bought it this year as a takeover speculation, and those same investors seem to be taking their tax losses here at year-end with the stock now trading within a hair of its 52-week low. Could Novell see a pop in January? The chemistry appears right.

The crucial thing to remember is that if you are just trading the January pop, you could get mashed. However, if you are identifying a solid business that has been smashed down for short-term concerns toward the end of the year and has seen bargain basement valuations because of tax-loss selling, then you might have something that could be an opportunity. Clearly identify companies with solid core businesses to purchase at extremely low prices, or else you might just be loading up on companies to sell for tax losses next year. David Forrest (MF Bogey) was kind enough to supply me with a list of small capitalization companies that had performed dismally this year as a place to start looking for tax-loss sale gems. Check them out to your heart's content.

They include:

RIDE INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RIDE)") else Response.Write("(Nasdaq: RIDE)") end if %>
PETE'S BREWING <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WIKD)") else Response.Write("(Nasdaq: WIKD)") end if %>
PHAMIS INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PHAM)") else Response.Write("(Nasdaq: PHAM)") end if %>
PHYSICIAN RELIANCE NETWORK <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PHYN)") else Response.Write("(Nasdaq: PHYN)") end if %>
XETA CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: XETA)") else Response.Write("(Nasdaq: XETA)") end if %>
FIRST TEAM SPORTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FTSP)") else Response.Write("(Nasdaq: FTSP)") end if %>
BOSTON BEER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SAM)") else Response.Write("(NYSE: SAM)") end if %>
APPLIED INNOVATION (Nadsaq: AINN)
MEDIA 100 <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MDEA)") else Response.Write("(Nasdaq: MDEA)") end if %>
ASECO CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ASEC)") else Response.Write("(Nasdaq: ASEC)") end if %>
PROGRESS SOFTWARE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PRGS)") else Response.Write("(Nasdaq: PRGS)") end if %>
HICKOK INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HICKA)") else Response.Write("(Nasdaq: HICKA)") end if %>
MORROW <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MRRW)") else Response.Write("(Nasdaq: MRRW)") end if %>
MERCER INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MERCS)") else Response.Write("(Nasdaq: MERCS)") end if %>
SPECTRUM SIGNAL PROCESSING <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SSPIF)") else Response.Write("(Nasdaq: SSPIF)") end if %>
THERMO POWER CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: THP)") else Response.Write("(AMEX: THP)") end if %>
CEM CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CEMX)") else Response.Write("(Nasdaq: CEMX)") end if %>
ARBOR SOFTWARE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ARSW)") else Response.Write("(Nasdaq: ARSW)") end if %>
TRANSMEDIA NETWORK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TMN)") else Response.Write("(NYSE: TMN)") end if %>
C COR ELECTRONICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CCBL)") else Response.Write("(Nasdaq: CCBL)") end if %>
WATKINS JOHNSON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WJ)") else Response.Write("(NYSE: WJ)") end if %>
RAYONIER TIMBERLANDS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LOG)") else Response.Write("(NYSE: LOG)") end if %>
MINNTECH CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MNTX)") else Response.Write("(Nasdaq: MNTX)") end if %>
IN FOCUS SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INFS)") else Response.Write("(Nasdaq: INFS)") end if %>
INTERVOICE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTV)") else Response.Write("(Nasdaq: INTV)") end if %>
NATIONAL MEDIA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NM)") else Response.Write("(NYSE: NM)") end if %>
CERNER CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CERN)") else Response.Write("(Nasdaq: CERN)") end if %>
NUTRITION FOR LIFE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NFLI)") else Response.Write("(Nasdaq: NFLI)") end if %>
SPARTAN MOTORS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SPAR)") else Response.Write("(Nasdaq: SPAR)") end if %>

NO-PRIZE WINNERS

CONFERENCE CALLS

12/23/96 (Monday)
CABLETRON SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CS)") else Response.Write("(NYSE: CS)") end if %>
(402) 220-6028 -- replay

12/31/96 (Tuesday)
SERVICE MERCHANDISE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SME)") else Response.Write("(NYSE: SME)") end if %>
(holiday update message #3, 5-10 minutes)
starts at 9:00 a.m. EST (and runs continually until 12/31)
(402) 280-9014

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.

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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