HEROES

Year 2000 stocks had another great day today for any number of possible reasons: short covering, George Soros buying, the onrush of the millennium. We're just surprised that Jeff Vinik rumors haven't circulated yet. The companies moving up today include some relative newcomers to the group. Newly-public ACCELR8 TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ACLY)") else Response.Write("(Nasdaq: ACLY)") end if %> shot up $1 1/8 to $21 1/2, and TSR INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TSRI)") else Response.Write("(Nasdaq: TSRI)") end if %> gained $10 1/2 to $37 1/2. The more well-known were not left out either: ZITEL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ZITL)") else Response.Write("(Nasdaq: ZITL)") end if %> floated $9 1/8 to $61 1/4, and DATA DIMENSIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DDIM)") else Response.Write("(Nasdaq: DDIM)") end if %> levitated $4 3/4 to $37 3/4. However, VIASOFT <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VIAS)") else Response.Write("(Nasdaq: VIAS)") end if %>, a veritable graybeard of the group, was not resonated by all this activity, falling $3/8 to $53. The Lunchtime News today took a closer look at the projected $600 billion industry and TSR's phenomenal rise of late.

Explosive detection systems company INVISION TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INVN)") else Response.Write("(Nasdaq: INVN)") end if %> gained $6 to $31 1/2 on the company's announcement of an FAA order for at least 54 of its devices to be delivered over the next two years. Backing out developmental revenues from this year's total revenues (10% of revenues this year), at a minimum the company looks like it will accelerate units delivered and sales by almost 75% next year. The lone estimate for next year is calling for 1997 earnings per share (EPS) of $1.85. That estimate doesn't look that far-fetched with today's order and the momentum that might result. On 4.2 million shares currently outstanding, that means the company would have to generate net margin of 20% on $39 million in sales, not a far stretch of the imagination for a well-run, high software content capital goods maker hitting on all cylinders.

LCI INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LCI)") else Response.Write("(NYSE: LCI)") end if %> led a mixed band of telecommunications companies higher today, rising $1 1/4 to $20 3/8. The company benefited from yesterday's filing with a Federal court by key members of Congress supporting the authority of the FCC in deregulating local telephone access charges. While this bodes well for long-distance companies like LCI, the Baby Bells made moves today that would seem to contradict the current mood at the FCC. NYNEX <% if gsSubBrand = "aolsnapshot" then Response.Write(":NYSE" & CHR(34) & ">(NYSE: NYN)") else Response.Write("" & CHR(34) & " onClick=" & Chr(34) & "openWindow('http://quote.fool.com/uberdata.asp?symbols=NYN', 'quotebox', 640, 460); return false;" & CHR(34) & ">(NYSE: NYN)") end if %> moved up $2 to $50 3/4; PACIFIC TELESIS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PAC)") else Response.Write("(NYSE: PAC)") end if %>, up $1 3/8 to $38 3/4; BELL ATLANTIC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BEL)") else Response.Write("(NYSE: BEL)") end if %>, up $2 7/8 to $67 7/8; BELLSOUTH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BLS)") else Response.Write("(NYSE: BLS)") end if %>, up $3 to $43 7/8; and AMERITECH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AIT)") else Response.Write("(NYSE: AIT)") end if %>, up $2 7/8 to $62 7/8. This is due in part to the fact that Internet Service Providers are not out of the woods yet on the issue of being charged for access to the local loop, as the FCC will not rule on this until Q1 1997 at the earliest. Further, the FCC may also decline to set a schedule of access charge reductions and leave it up to the free market

QUICK TAKES: TOY BIZ <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TBZ)") else Response.Write("(NYSE: TBZ)") end if %> gained $1 1/4 to $19 1/4 after the licensee of MARVEL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MRV)") else Response.Write("(NYSE: MRV)") end if %> properties agreed to be bought by Ron Perelman's Andrews Group for $17 a share in cash and Andrews debt (ohhh, joy!)... TICKETMASTER GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TKTM)") else Response.Write("(Nasdaq: TKTM)") end if %> gained $1 13/16 to $12 7/16 after Smith Barney initiated coverage of the concert overlords with a "buy" rating... Fiber optic cable maker SPECTRAN CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SPTR)") else Response.Write("(Nasdaq: SPTR)") end if %> moved up $3 1/8 to $21 1/8 after announcing a joint development and manufacturing venture with Great Britain's Wassall PLC... HUANENG POWER INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HNP)") else Response.Write("(NYSE: HNP)") end if %> smoked the market with a $2 3/4 gain to $22 7/8 after successfully running its new 300 Megawatt power plant in Shantou, China for the last week.C/NET INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CNWK)") else Response.Write("(Nasdaq: CNWK)") end if %> gained $3 1/4 to $25 as the online media company basks in the glory of a nice writeup from Walt Mossberg in the Wall Street Journal's Personal Technology Column.

GOATS

PREMISYS COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PRMS)") else Response.Write("(Nasdaq: PRMS)") end if %> fell $7 to $35 3/8 on heavy volume today after Needham & Co. analyst Ari Arjavalingam reportedly made hesitant comments about the company's upcoming quarter. The consensus estimate for the company's second quarter stands at $0.23 per share, not a huge leap from Q1 earnings of $0.22 per share. Any worries about estimates for this quarter are bound to cause some jitters as Premisys and its customers face tough competition from the likes of NOKIA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NOK.A)") else Response.Write("(NYSE: NOK.A)") end if %> in wireless infrastructure and ASCEND <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ASND)") else Response.Write("(Nasdaq: ASND)") end if %> and CASCADE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCC)") else Response.Write("(Nasdaq: CSCC)") end if %> in central office access products. Other worries may include the company's relationship with number-two customer DSC COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DIGI)") else Response.Write("(Nasdaq: DIGI)") end if %>, a telco equipment supplier which has not exactly been the generator of glad tidings in the last couple quarters.

Touch screen input company MICROTOUCH SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MTSI)") else Response.Write("(Nasdaq: MTSI)") end if %> fell $2 3/4 to $25 1/4 after announcing it will restate income for 1995 and for nine months in 1996 as a result of a change in accounting recognition of arbitration expenses. For fiscal 1995, earnings will be restated to $0.20 per share, a 26% reduction of the previously-reported $0.27 per share. For the first nine months of this year, EPS will be taken down to $0.46 from $0.54. Through nine months of 1996, then, the company has increased earnings 130% -- the comparison is actually more flattering with the charges to income thrown in. The company also announced that it expects sequential revenue growth of 12% and 38% year-over-year, beating the "Street's" expectation. The day could have been worse for Microtouch -- it bounced back from its low of $22 1/4 and also said that European sales are strong.

QUICK CUTS: GROUPE AB <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ABG)") else Response.Write("(NYSE: ABG)") end if %> lost $2 3/8 to $14 1/2 on news of a dispute between the French direct broadcast satellite company and a programming partner... Internet connection wholesaler PSINET <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PSIX)") else Response.Write("(Nasdaq: PSIX)") end if %> slipped $1 1/4 to $11 3/4 after investment group Amerindo cut its stake in the company to 9.7% from above 15%... VIVRA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: V)") else Response.Write("(NYSE: V)") end if %> lost $1 1/2 to $25 7/8 after the specialty healthcare company announced it has received a grand jury subpoena in Massachusetts relating to its kidney dialysis facilities.

FOOL ON THE HILL
An Investment Opinion by MF Templar

Big Software and Tough Comparisons

COMPUTER ASSOCIATES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CA)") else Response.Write("(NYSE: CA)") end if %> plunged $13 1/4 to $48 1/2 on more than fifteen times normal volume today after the software concern warned that third quarter revenues would not live up to expectations. The deafening flood of sell orders on the company rocked many a professionally managed portfolio, as the firm was widely viewed as one of the "safe technology" companies that could churn out double-digit quarters until the end of time. Through a canny fusion of acquisitions and internal growth, Computer Associates has managed an annual profit growth of 45% over the past five years, with 1991 its only down year since 1990.

With this kind of track record, what is dampening the shares today? Forecasts of fourth quarter revenues only up 10% from the levels Computer Associates achieved a year ago. The problem seems to be concentrated in its European business, with management stressing that the product pipeline looks good but that deals are just not closing as fast as anticipated. Analysts are being forced to adjust their revenue estimates for the entire year, as Computer Associates sees sales in Europe down $100 million in the coming twelve months compared to last year. Computer Associates described a problem in the transition to client/server systems from mainframe systems in Europe, saying that although the mainframe business has been healthy it is the client/server side that has let them down.

The Islandia, New York-based enterprise suggested that earnings estimates of $0.75 per share for the quarter may still be achievable, but remained rather vague about expense levels. Computer Associates would have to cut expenses sequentially in order to make the $0.75 earnings per share number, although this is not outside the realm of possibility. However, to fix the European problem Computer Associates is sending more technical people to the Old Country. To make more sales, the company is sending higher level executives they are calling "product evangelists" over to Europe and bringing more European customers stateside to technical centers located here. A new general manager in Europe has recently been added to orchestrate this effort, a project that somehow does not fit with the notion of sequentially lower expenses. Wall Street seems to be heavily discounting the suggestion that Computer Associates can in fact make its numbers.

So what is Computer Associates and why is it so high profile? Although it might not be a household name, Computer Associates is one of the largest computer software development companies in the world. Computer Associates is the third-largest independent software company behind MICROSOFT <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> and ORACLE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ORCL)") else Response.Write("(Nasdaq: ORCL)") end if %> and sells a broad range of software applications to businesses, with more than 95% of the Fortune 500 using some Computer Associates product. Chairman Charles Wang has been known to brag that Computer Associates has software that works on more than 500 platforms, selling to more than 100,000 customers, suggesting that comparisons with Microsoft and Oracle on revenues alone is a little one-sided. The most famous Computer Associates product is "Unicenter," which is a client/server application that provides centralized control over its information technology "infrastructure," from the actual network and databases in the server to the applications used on the client machines.

Computer Associates is probably best known for its "gobble-to-grow" approach to the software business, a bit of black horse in an industry dominated by internal growth aficionados. Recently Computer Associates snatched up CHEYENNE SOFTWARE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CYE)") else Response.Write("(NYSE: CYE)") end if %> and in 1995 closed a deal to buy LEGENT Software, the biggest software deal ever until IBM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %> purchased LOTUS Development a few months later. All in all, Computer Associates has done fifty acquisitions in the past decade. Computer Associates products you might be familiar with include CA-Simply Tax and Kiplinger's Simply Money, the company's two major consumer software offerings. Despite these two products, the company focuses mainly on mainframe and "client/server" software offerings. Mainframes are the "big iron" that IBM specializes in, while "client/server," jokingly called "return to the mainframe" by some, is an environment where the client computers have independent processing power but they still "query" a central computer for information, much like a mainframe set-up.

Computer Associates is the second major "chicken" stock to get smashed for double-digits in one day. EDS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EDS)") else Response.Write("(NYSE: EDS)") end if %> crashed $11 1/4 to $48 1/4 back on October 23rd when the outsourcing and electronic transaction firm reported that slack government business would slow growth in its fiscal fourth quarter. These are "chicken" stocks -- technology companies that average portfolio managers feel safe holding, except that suddenly they have become not so safe. If you add Oracle's recent penny per share earnings disappointment to the woes of Computer Associates and EDS, the picture looks even more askew. Factor in Microsoft's warnings that it will have slower growth this year because of tough Windows 95 and Windows NT comparisons on top of higher than normal capital spending as it builds up MSN and MSNBC, and you have the cream of the software world all experiencing declining revenue growth rates going into 1997.

If this were not bad enough, almost all of these big software names have hit their highest price/earnings ratios of the year in the past few weeks on investor enthusiasm about what is to come. The slower growth that all of these companies are describing makes it a little harder to justify the premium multiples they have attained here at the close of 1996. The tier one software companies have had excellent returns in 1996, but with this slowing revenue growth problem 1997's returns could be at risk at the current prices being paid. The lone exception, detailed yesterday in this space, might be Microsoft, which with its deferred revenue accounting has much stronger cash flow than the earnings statement suggests -- and on a cash flow valuation sells at about the same level as the S&P 500. Other than that, big cap software may just not be the place to be next year.

CONFERENCE CALLS

12/27/96 (Friday)
COMPUTER ASSOCIATES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CA)") else Response.Write("(NYSE: CA)") end if %>
To Discuss Q3 Sales and Earnings
(888) 243-0816 (Code: 4321) Toll Free
10 AM EST 12/27 through 10 AM 12/28

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, demonstrating 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 at keyword: FoolMart on America Online or at our website (). You might also be interested in his weekly Industry Decathlon report, delivered by e-mail or fax. In it, Bogey examines a different industry each week and runs its top players through his decathlon to discover which one company looks the most attractive.

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

Happy Holidays, Fools

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