HEROES

Medical device maker HEALTHDYNE TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HDTC)") else Response.Write("(Nasdaq: HDTC)") end if %> gained $3 11/16 to $12 15/16 after INVACARE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IVCR)") else Response.Write("(Nasdaq: IVCR)") end if %> bid $12 per share for the company. To get a handle on how the Invacare has done with the deal, Fools can check out First Call and combine the two companies' estimates. Healthdyne's 12.83 million shares times 1997 estimates of $0.64 per share gives net income of $8.21 million. For Invacare, 1997 EPS estimates of $1.50 multiplied by 30.45 million shares projects income of $45.68 million. At $28 per share this afternoon, Invacare is trading at 18.6 times 1997 estimates. Without making any adjustments for cost savings, the new net income can be estimated by combining the two net figures above. Now subtract the 12.83 million shares paid for in cash. That's earnings of $53.89 million on 30.45 million shares, or $1.77 per share. Taking the above 18.6 multiple, Invacare shareholders might reasonably expect a new valuation of $32.92 per share.

VITESSE SEMICONDUCTOR <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VTSS)") else Response.Write("(Nasdaq: VTSS)") end if %> gained $4 11/16 to $50 1/2 with a handsome 150% increase in Q1 EPS, beating estimates of $0.23 per share by two pennies. The company makes gallium arsenide chips that are used in telecommunications equipment such as PCS systems. Gross margin achieved this quarter was nearly 55%, bearing testament to the unique nature of the company's products and customer relationships. Gross margin in the ultra-specialized FPGA semiconductor companies, such as ALTERA <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ALTR)") else Response.Write("(Nasdaq: ALTR)") end if %>, is generally running above 60%, and at the DRAM companies it runs below 20%. Vitesse falls much closer to the realm of specialized and scarce integrated circuits. At 50 times annualized earnings and 35 times 1998 earnings, Vitesse is priced as if few of the other semiconductor companies in the world will figure out the mysteries of gallium arsenide.

AMERICA ONLINE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> jumped $5 1/2 to $39 5/8 on absolutely no discernible news. Rumors abounded about positive comments by Robertston Stephens' Keith Benjamin to the salesforce today. Another popular theory was the takeover rumors that have sprung up again, which have America Online being swallowed up by AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %> or a Regional Bell Operating Company -- something that seems remote, as it is hard to imagine America Online management selling out at the beginning of what they believe is an incredible growth curve. Short-covering was something else that got cited a lot, as more than 30% of the float is currently held short, creating a really illiquid situation. In the end, though, there was no real news to drive the stock higher -- absolutely none.

QUICK TAKES: Optical character recognition company SCAN-OPTICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SOCR)") else Response.Write("(Nasdaq: SOCR)") end if %> gained $2 1/8 to $7 1/8 after pre-announcing Q4 earnings of $0.24-0.30 per share... Surely the week's big gainer, C-PHONE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CFON)") else Response.Write("(Nasdaq: CFON)") end if %> finished up $4 to $16 1/4 after announcing its consumer videoconferencing product... BROOKTROUT TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BRKT)") else Response.Write("(Nasdaq: BRKT)") end if %> rose $4 1/2 to $25 1/4 after First Albany started the messaging system and router maker with a "buy" rating... Pharmaceutical and biotechnology services company IBAH INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IBAH)") else Response.Write("(Nasdaq: IBAH)") end if %> gained $1 1/4 to $7 7/8 after Hambrecht & Quist gave it a "buy" rating... NORTHSTAR COMPUTER FORMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NSCF)") else Response.Write("(Nasdaq: NSCF)") end if %> rose $3 3/32 to $12 1/4 after the business forms company reported a 100% increase in Q4 EPS... Retailer ABERCROMBIE & FITCH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ANF)") else Response.Write("(NYSE: ANF)") end if %> gained $1 7/8 to $16 1/8 on its addition to the recommended list of Goldman Sachs... GRUBB & ELLIS CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GBE)") else Response.Write("(NYSE: GBE)") end if %> was up $1 to $6 3/8 after the real estate brokerage company held its annual real estate conference with Ernst & Young... Citing new company management, Goldman Sachs added ENRON LIQUIDS PIPELINE L.P. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ENP)") else Response.Write("(NYSE: ENP)") end if %> to its recommended list, sending the shares $4 5/8 higher to $33 1/2... MERCURY FINANCE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MFN)") else Response.Write("(NYSE: MFN)") end if %> jumped $1 3/4 to $13 7/8 after the company said it will buy the car finance unit of BANK OF BOSTON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BKB)") else Response.Write("(NYSE: BKB)") end if %>... Retailer LOWES COMPANIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LOW)") else Response.Write("(NYSE: LOW)") end if %> gained $2 3/4 to $36 1/8 after Prudential upped its rating on the company, which said yesterday that it is comfortable with Q4 estimates... KCS ENERGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KCS)") else Response.Write("(NYSE: KCS)") end if %> spurted $3 3/4 to $42 after money manager Dan Rice named it his top pick on CNBC's Squawk Box... Satellite equipment company VIASAT <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VSAT)") else Response.Write("(Nasdaq: VSAT)") end if %> was launched $1 1/2 to $11 after receiving an order initially valued at $20.7 million from the Department of Defense.

GOATS

Not that we will make any Jimmy Rogers-type comments on the matter, but Japan's NIKKEI stock index was down 4 1/4% last night, equating to a Dow Jones Industrial Average plunge of about 280 points. Whether or not individual Fools choose to invest overseas or in depository receipts traded here, the value of the underlying companies should be noticed by Fools invested in their competitors, such as GENERAL MOTORS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GM)") else Response.Write("(NYSE: GM)") end if %> or COMPAQ <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPQ)") else Response.Write("(NYSE: CPQ)") end if %>. For instance, the huge consumer electronics company MATSUSHITA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MC)") else Response.Write("(NYSE: MC)") end if %> fell $6 3/4 to $152 3/4. Semiconductor firm NEC CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NIPNY)") else Response.Write("(Nasdaq: NIPNY)") end if %> fell $2 7/8 to $59 1/4, while CANON <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CANNY)") else Response.Write("(Nasdaq: CANNY)") end if %>, maker of semiconductor capital equipment among other things, lost $3 7/16 to $100 9/16. HONDA MOTORS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HMC)") else Response.Write("(NYSE: HMC)") end if %> fell $1 5/8 to $52 1/4, and NISSAN MOTORS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NSANY)") else Response.Write("(Nasdaq: NSANY)") end if %> declined $1 1/8 to $10 5/8.

Multimedia software firm MACROMEDIA <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MACR)") else Response.Write("(Nasdaq: MACR)") end if %> nearly slid of the face of the earth today, dropping another $4 3/16 to $9 5/16. The company has been in a very ugly spiral since last summer, due in part to market share decline at APPLE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AAPL)") else Response.Write("(Nasdaq: AAPL)") end if %> and strategic decisions that have not totally panned out. Earnings descended into the red this quarter as it lost $0.06 per share compared to estimates of positive earnings of $0.15 per share. Macromedia hadn't warned of any problems with the numbers since last quarter, but the company certainly knew the level to which it was stepping up operational expenses, and that sales softness probably didn't materialize during the last week of the quarter. The failure to notify investors of what was going on, in conjunction with its over-generosity with stock options, speaks to the company's consistent lack of regard for shareholder value.

SEAWAY FOOD TOWN <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SEWY)") else Response.Write("(Nasdaq: SEWY)") end if %> fell $2 3/4 to $24 3/4 after reporting Q1 EPS of $0.45, below the estimate of $0.50. This is a supermarket and drugstore chain, and earnings don't vary all that much in this business when a company is running the business well. Seaway's recent earnings rebound comes from a steady ticking up of gross margin and a tight lid on selling, general, and administrative expenses. Since the company's capital expenditures have been steadily increasing in the last few years, naturally the non-cash charges will increase. 15% of its cap ex. budget goes into "technology items" such as scanners and inventory control -- helping reduce "shrinkage" on expenses such as theft. The company aims to reinvest its depreciation charges, rather than pocketing the cash. While free cash flow is important, the company first wants to modernize its stores and enhance the shopping experience.

QUICK CUTS: SPORTS AUTHORITY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TSA)") else Response.Write("(NYSE: TSA)") end if %> stumbled $4 1/8 to $17 1/2 after Alex Brown. cut its Q4 earnings estimate three pennies to $0.50 per share... Feeder airline COMAIR HOLDINGS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COMR)") else Response.Write("(Nasdaq: COMR)") end if %> lost $1 1/2 to $23 1/2 after one of the firm's planes crashed on approach to an airfield outside Detroit... COMPUTERVISION CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CVN)") else Response.Write("(NYSE: CVN)") end if %> tumbled $1 1/2 to $7 1/4 on pre-announcing a Q4 loss of $0.09 per share... PC-card company CENTENNIAL TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CTN)") else Response.Write("(NYSE: CTN)") end if %> fell another $3 to $39 3/8 after denying that its recent stock drop was due to fundamental problems... XOMED SURGICAL PRODUCTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: XOMD)") else Response.Write("(Nasdaq: XOMD)") end if %> was sterilized for a $5 1/4 loss to $14 after the underwriters that managed last month's IPO cut Q4 earnings and revenue estimates... After its Lou Gehrig's Disease drug failed in Phase III trials, REGENERON PHARMACEUTICALS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: REGN)") else Response.Write("(Nasdaq: REGN)") end if %> struck out for a $8 1/8 loss to $11... Information services company APACHE MEDICAL SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMSI)") else Response.Write("(Nasdaq: AMSI)") end if %> was scalped for a $1 3/4 loss to $5 5/8 after pre-announcing a Q4 earnings loss of $0.19-0.22 per share... BUFFETS INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BOCB)") else Response.Write("(Nasdaq: BOCB)") end if %> was chewed for a $1 11/16 loss to $8 1/16 after warning of Q4 earnings below estimates... Citing poor same-store sales, BOOKS-A-MILLION <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BAMM)") else Response.Write("(Nasdaq: BAMM)") end if %> lost $1 1/8 to $6 1/2... U.S. SATELLITE BROADCASTING <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: USSB)") else Response.Write("(Nasdaq: USSB)") end if %> lost $1 5/8 to $10 3/8 after reporting second quarter user statistics... Mass flow controller company UNIT INSTRUMENTS INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: UNII)") else Response.Write("(Nasdaq: UNII)") end if %> fell $1 1/8 to $9 3/8 after reporting earnings that felt the effects of the semiconductor slowdown.

FOOL ON THE HILL
An Investment Opinion by MF Templar

Thine Own Guidance

Critical data released over the past two days has raised the question of when the semiconductor and semiconductor equipment industry will see a broad-based turnaround. An earnings report and crucial forward guidance from MOTOROLA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MOT)") else Response.Write("(NYSE: MOT)") end if %> combined with the release of semiconductor bookings and ugly results at INTERNATIONAL RECTIFIER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IRF)") else Response.Write("(NYSE: IRF)") end if %> could indicate that the consensus view of an early 1997 turnaround for the chip-makers and mid-1997 turnaround for the equipment manufacturers might be off.

Motorola reported earnings of $0.39 per share before a $150 million one-time charge for restructuring, about two times the charge that analysts were anticipating. Comparing this result to the consensus estimates of $0.41 per share is made difficult by the lack of information as to whether the estimates attempted to account for the one-time charge. Sequential improvement and a near-doubling of the profit margins in the Semiconductor Group clearly indicate that things have gotten a lot better, but to justify the current $67 share price the company needs to start generating double the profits it is currently bringing to the bottom line.

Increasing Motorola's take in 1997 might be more difficult than many had previously thought. Chief Executive Christopher Galvin indicated this morning that the company will "slowly" right itself in 1997, but operating margins in the semiconductor business will stay in single digits for the entire year. Analysts who are expecting better than this are being "too aggressive," management warned during the conference call. Motorola has risen more than 50% from its lows in the past three months as its price/sales ratio has risen to 2.0 from about 1.3 at its lows. This is close to the top of the company's historical price/sales range over the past six years. Although historical ranges were made to be broken, they are broken when perception about the worth of the company's basic business shifts -- like an INTEL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %> or a DELL COMPUTER <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %> -- not when it emerges from an ugly downturn.

The Semiconductor Industry Association also released an interesting report last night, the last book-to-bill ratio that the world will ever see. Although the actual book-to-bill of 1.10 is of questionable value for half a hundred reasons, the sequential decline in the three-month trailing indicator implies that demand dropped off a little more than expected. Because the ratio is composed of the average of the last three months adjusted for seasonality, one can infer that December orders dropped off from October and November levels. What does this have to do with the Motorola issue? If demand has clicked down further than expected from the Christmas blip, then the projections of this being the absolute bottom of the cycle might be off by a quarter or two, pushing full recovery out to the end of the year. Nasty results from International Rectifier confirm that the turn ain't here yet in the fourth quarter of 1996.

There is a lot of information to digest here, and investors should look at the forward guidance coming from many of these companies in the next few weeks. The last time a flurry of news came out on the subject was November, when bullish news from Intel, a higher than expected book-to-bill, and positive future guidance from APPLIED MATERIALS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMAT)") else Response.Write("(Nasdaq: AMAT)") end if %> conspired to initiate a broad-based rally in both sectors. Although many of the so-called secondary stocks are well off the interim highs they hit while the frenzy was going on, many of the so-called bellwethers have hung tough. Applied Materials, Motorola, Intel, and NATIONAL SEMICONDUCTOR <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NSM)") else Response.Write("(NYSE: NSM)") end if %> still remain close to 52-week highs, while companies like LAM RESEARCH <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LRCX)") else Response.Write("(Nasdaq: LRCX)") end if %>, MICRON TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MU)") else Response.Write("(NYSE: MU)") end if %> and International Rectifier hang out closer to the lows.

What implications could a turn in the third or fourth quarter of 1997 have for the semiconductors? It would definitely mean that companies at the high end of their historical valuation range like a Motorola represent substantially more risk than reward here at the current quote. With principal analyst Clark Fuhs of Dataquest noting that the equivalent of 14 wafer fabrication facilities sit idle in South Korea and 26 are dead in Japan, there are still capacity issues that need to be worked out for commodity chips. Infrastructure, a Web-based research organization, has gone so far as to suggest that should the industry as a whole move to 300 mm wafers from 200 mm wafers, it could delay a turnaround in the semiconductor equipment companies for 12 to 18 months, putting 1995-like results out to 1998 or early 1999.

During the surge Applied Materials and the semiconductor equipment group witnessed in November, my reaction was very skeptical -- particularly because of the valuations a number of these companies attained in a very short time. For the most part, these companies have stayed within a dollar or two of the prices they hit that one spectacular day on November 22nd, and are at or below the highs of the next day, the 23rd. The frenzy of analysts raising their "holds" on Applied Materials to "buys" that morning when the stocked opened at $38 is very similar to the gang now busily upgrading Motorola to a "buy." So why wasn't Motorola a buy near its historical price/sales lows three months ago, but is all set to outperform now when it is more than 50% higher? Applied is up about 10% from the "buy" recommendations issued in November, while Motorola is up more than 50% over the same period when the analyst community rated it a "hold." It seems clear that individual investors are best served taking their own guidance in these waters.

CONFERENCE CALLS

INTERNATIONAL RECTIFIER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IRF)") else Response.Write("(NYSE: IRF)") end if %>
(800) 633-8284 (reservation # 2316641) -- replay
(avail. for 1 week following call)

TENET HEALTH CARE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: THC)") else Response.Write("(NYSE: THC)") end if %>
available until Friday, 1/10
(402) 220-1008

CHESAPEAKE ENERGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CHK)") else Response.Write("(NYSE: CHK)") end if %>
Operations update
(402) 220-1006
Replay available thru January 13

FOOLISH FEATURES

Motorola was in the news today, following its earnings announcement. MF Templar took a look at the results in today's Lunchtime News. We also have a Pitchers' Duel on Motorola in Today's Pitch, featuring MF Parlay from the bullpen and MF Apollo from the bearpen.

This weekend, Fool's Gold will feature the usual roster of helpful investing features, including the Weekend Research Center, the EE Times, and part three of the Sector Snapshot on Cellular Services. The highlight of Fool's Gold will be Louis Corrigan's Rogue piece on investors' rights and NIRI, the National Investor Relations Institute.

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 in FoolMart. 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

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