HEROES

SEAGATE TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SEG)") else Response.Write("(NYSE: SEG)") end if %> gained $4 3/8 to $50 1/2 after announcing the opening of a 220,000-square-foot extension to its recording head fabrication facility in Thailand. This $50 million investment demonstrates two trends in the disk drive manufacturing market. First, with a run-rate operating cash flow approaching $1.2 billion, Seagate and other leaders will continue to invest in vertical integration, representing some risk to suppliers such as READ-RITE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RDRT)") else Response.Write("(Nasdaq: RDRT)") end if %>, APPLIED MAGNETICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: APM)") else Response.Write("(NYSE: APM)") end if %>, KOMAG <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KMAG)") else Response.Write("(Nasdaq: KMAG)") end if %> and HMT TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HMTT)") else Response.Write("(Nasdaq: HMTT)") end if %>. Second, the companies in the industry aren't nearly as afraid of cyclicality in the drive market as analysts can be. While Read-Rite won't see an effect from Seagate's new facility, it does point to the investment, technical, and market challenges faced by independent component suppliers to the drive industry.

Montgomery Securities came out with comments this morning on DRAM prices, sending MICRON TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MU)") else Response.Write("(NYSE: MU)") end if %> $1 1/8 higher to $33 7/8, and TEXAS INSTRUMENTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TXN)") else Response.Write("(NYSE: TXN)") end if %> up $3 1/8 to $79 5/8. While that might be good news in the short term, spot prices are not necessarily indicative of what a company actually receives for its output. Most suppliers will try to lock in a certain contract price for their output. With spot prices for 16 megabit chips dropping into the sub-$7 range recently, contract pricing for the quarter isn't going to be a big factor on the earnings front. Shrinking more bits onto smaller dice on larger wafers, i.e. reducing unit costs, is the most important factor. The market, however, may be obsessed with spot prices in putting valuations on these two companies. Micron is selling at 14 times 1998 estimates, while TI is priced at 17 times estimates, which ignores the vast differences between the two companies.

Drugstore operators CVS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CVS)") else Response.Write("(NYSE: CVS)") end if %> and REVCO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RXR)") else Response.Write("(NYSE: RXR)") end if %> today agreed to merge in a deal that places an enterprise value of approximately $3.7 billion on Revco. CVS gained $3 1/8 to $47 1/8 on the news, while Revco climbed $3 3/8 to $41 3/8. Although the two companies are not planning on wholesale cuts in employment, certain operating expenses can be reduced through the merger. Ignoring the buying power advantage the combined company can realize, if the companies can cut operating costs 5%, that's $100 million in savings (after tax) over the next year. On an average share exchange ratio of 0.9467 shares of CVS for each Revco share, that works out to a savings per share of $0.58. Adding together the estimates for both companies, 1998 EPS may be able to climb to more than $2.48. Putting an industry-standard multiple of 21 on CVS values the stock at $52.

QUICK TAKES: INDIVIDUAL INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INDV)") else Response.Write("(Nasdaq: INDV)") end if %> rose $7/8 to $10 7/8 after the information-push company reported earnings and was reiterated as a "buy" by Robertson Stephens... "Children's leisure products" (aka toys) company ERO INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EROI)") else Response.Write("(Nasdaq: EROI)") end if %> gained $1 1/8 to $10 1/4 after reporting Q4 earnings per share (EPS) of $0.62, beating estimates of $0.56... AWARD SOFTWARE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AWRD)") else Response.Write("(Nasdaq: AWRD)") end if %> continued to benefit from its contract announcement with IOMEGA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IOM)") else Response.Write("(NYSE: IOM)") end if %>, gaining $1 1/4 to $17 1/4... Young women's retailer GADZOOKS INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GADZ)") else Response.Write("(Nasdaq: GADZ)") end if %> added $1 3/8 to $26 7/8 after reporting a 3.9% increase in January same-store sales... CATALYTICA INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CTAL)") else Response.Write("(Nasdaq: CTAL)") end if %> tacked on another $1 3/8 to $7 1/2 as its Fine Chemicals division did a fair piece of business with GLAXO WELLCOME <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GLX)") else Response.Write("(NYSE: GLX)") end if %> earlier this week... Successful turnaround AMES DEPARTMENT STORES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMES)") else Response.Write("(Nasdaq: AMES)") end if %> jumped $1 to $8 3/16 on announcing a 10% increase in January same-store sales... GARDNER DENVER MACHINERY <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GDMI)") else Response.Write("(Nasdaq: GDMI)") end if %> added $2 to $21 on an upgrade from Dillon Read, which set a 12-18 month price target of $26... RIO HOTEL & CASINO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RHC)") else Response.Write("(NYSE: RHC)") end if %> gained $1 3/4 to $17 1/4 after Standard & Poors raised its rating on the company's senior subordinated debt to "B+"... On rumors that ITT CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ITT)") else Response.Write("(NYSE: ITT)") end if %> would buy the company to stave off  HILTON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HLT)") else Response.Write("(NYSE: HLT)") end if %>, HARRAH'S ENTERTAINMENT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HET)") else Response.Write("(NYSE: HET)") end if %> rose $1 7/8 to $20... WESTERN DIGITAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WDC)") else Response.Write("(NYSE: WDC)") end if %> gained $3 1/8 to $69 1/2 on a Bear Stearns upgrade... STORAGE COMPUTER <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: SOS)") else Response.Write("(AMEX: SOS)") end if %> gained $2 7/8 to $17 7/8 after reporting Q4 EPS of $0.27 on a 29% increase in quarterly revenues.

GOATS

FRESH AMERICA <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FRES)") else Response.Write("(Nasdaq: FRES)") end if %> was so fresh it got slapped by the market today, dropping $4 1/4 to $13 3/4. Its largest customer, WAL-MART <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WMT)") else Response.Write("(NYSE: WMT)") end if %>, notified the food distribution company that its distribution services will no longer be needed at 40 of the 370 Sam's Clubs stores that it had supplied with produce. Fresh America expects the move will not have a "material adverse effect," but that in itself should be a sobering recognition that the margins of the Wal-Mart deal were so tight that the entire account meant little to the bottom line to begin with. Still, it looked so good on its client list, and investors apparently believed that catering to the once troubled Sam's Clubs chain was the key to profitability. This Dear John letter sent those investors rushing for the exits, finally leaving the value of the company closer to usual industry levels

Paging companies were slammed by an industry-wide downgrade this morning by J.P. Morgan, whose analyst cited debt levels and the threat of broadband PCS (personal communications services). PAGING NETWORK <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PAGE)") else Response.Write("(Nasdaq: PAGE)") end if %>, the largest U.S. paging company, fell $1 3/8 to $12 1/4, while number three paging company, ARCH COMMUNICATIONS GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: APGR)") else Response.Write("(Nasdaq: APGR)") end if %>, lost $1 to $6 7/8. The analyst also downgraded the shares of PAGEMART WIRELESS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PMWI)") else Response.Write("(Nasdaq: PMWI)") end if %>, which didn't really respond, having already been knocked down over the last year. Arch's CEO, D. E. Baker, responded by telling Dow Jones that he expects the company to hit analysts' estimates for the year, which would put the market cap to cash flow multiple at 1.32. Total enterprise value would be right around 9.7, suggesting a sea change in the way investors value such companies. Three years ago, these multiples were much higher than what they have become.

QUICK CUTS: Physician business software and consulting company PHYSICIAN SUPPORT SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PHSS)") else Response.Write("(Nasdaq: PHSS)") end if %> plunged $8 3/4 to $7 1/2 after pre-announcing break-even Q4 results, falling short of estimates of $0.15 per share... RTW INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RTWI)") else Response.Write("(Nasdaq: RTWI)") end if %> fell $5 3/8 to $9 1/8 after the workers compensation consulting firm was downgraded by Smith Barney and Dain Bosworth following last night's Q4 earnings report of $0.13 per share, undershooting estimates of $0.21... JAYHAWK ACCEPTANCE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: JACC)") else Response.Write("(Nasdaq: JACC)") end if %> was flattened by $1 3/4 to close at $2 1/4 after the auto finance company filed for Chapter 11 bankruptcy... Auto finance company OLYMPIC FINANCIAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OLM)") else Response.Write("(NYSE: OLM)") end if %> lost $1 7/8 to $9 7/8 in the wake of Jayhawk's implosion today... CD-ROM recording systems company MERIDIAN DATA INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MDCD)") else Response.Write("(Nasdaq: MDCD)") end if %> fell $2 3/8 to $4 3/8 after reporting Q4 EPS of $0.05, down 64% from last year, missing estimates of $0.14... Fool portfolio holding ATC COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ATCT)") else Response.Write("(Nasdaq: ATCT)") end if %> lost $3 to $7 1/2 after the teleservices company reported Q2 EPS of $0.04, missing estimates of $0.10 due to a change in senior management this quarter... OPEN MARKET INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: OMKT)") else Response.Write("(Nasdaq: OMKT)") end if %> lost $2 15/32 to $12 5/8 as the Internet commerce middleware firm missed earnings estimates of a loss of $0.23 per share... Video post-production equipment manufacturer VIDEONICS INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VDNX)") else Response.Write("(Nasdaq: VDNX)") end if %> fell $2 3/4 to $5 3/8 after posting Q4 EPS of $0.01, including a tax benefit... CLINTRIALS RESEARCH INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CCRO)") else Response.Write("(Nasdaq: CCRO)") end if %> lost $1 1/2 to $27 after the contract laboratory company reported Q4 EPS of $0.13, meeting analysts' expectations... Data security company CYLINK CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CYLK)") else Response.Write("(Nasdaq: CYLK)") end if %> lost $1 3/8 to $11 5/8 after reporting Q4 EPS of $0.05, in-line with estimates... AMERICA ONLINE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> fell $2 1/4 to $35 7/8 after reporting earnings last night.

FOOL ON THE HILL
An Investment Opinion by MF Templar

A Potent Weapon

[The following article originally appeared on the EETimes website at http://techweb.cmp.com/eet, where Randy writes a weekly column. Check it out.]

A sluggish European economy has doused two fast-growing enterprise-software providers. COMPUTER ASSOCIATES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CA)") else Response.Write("(NYSE: CA)") end if %> and ORACLE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ORCL)") else Response.Write("(Nasdaq: ORCL)") end if %> both disclosed weakness in Europe in December, news that has created some price erosion in the stock of each company. A slow recovery across the Atlantic combined with key transitions in product lines has caused both companies significant heartache.

Since December 1, Computer Associates has fallen from the high $60s to its current perch in the mid-$40s, a 33% decline. Over the same period, Oracle has also given up significant ground, sliding from the $50-range to trade lately in the high $30s, nearly a 30% drop. Both companies have suffered these drops while the Nasdaq Composite has surged more than 6%, meaning that shareholders have seen capital erode while the market has surged to new highs.

Larry Ellison-led Oracle Corp. reported in early December that European sales in the quarter ended in November were lower than expected. Growth in EMEA (Europe, Middle East and Africa) was only 16% over the same period last year, well below the company's overall 36% revenue growth rate. This weakness and Oracle's failure to best estimates left momentum investors with the belief that Oracle was going to be an under-performer over the next six to twelve months.

The news from Oracle was quickly followed by Computer Associates' revelation that revenue in its third quarter would be about $100 million light due to lower than expected growth in Europe. Computer Associates' European sales constitute about one-third of its total revenue. The weakness Computer Associates experienced was made more difficult because of the strong growth it had enjoyed in Europe a year before. In fiscal 1995, Computer Associates closed the acquisition of Legent Corp., a company whose products had never been sold in Europe before.

Why was Computer Associates having problems in Europe? The region's growth has slowed for Computer Associates, as the large software concern has begun to transition to client/server software from mainframe software. The transition in the Old Country is not going quite as well as the move in North America, creating a revenue speed bump for the company in the third quarter. Although the client/server side in Europe is growing well, this segment will not be large enough to drive overall revenue growth until 1998.

Since the next few months in Europe are looking painful for the number two and number three companies in the software industry, you probably should avoid the stocks, right? With $1.23 in earnings per share (EPS) expected this year, and $1.68 next year, at $39 1/2 Oracle trades at 32 times this year's estimates and 22.3 times next year's estimates, with growth of 36.6% year-over-year anticipated. Given that the lowest P/E that Oracle has enjoyed over the past five years is 26, it would appear that an investor who can hold on until 1998 might be able to make some real moolah.

Computer Associates is expected to earn $2.51 EPS this year and $3.02 the year after. Priced at $46, Computer Associates trades at 18 time this year's earnings and 15 times next year's earnings, with growth around 20% expected. Although Computer Associates has traded as low as 11 times earnings in the past five years, it would appear that purchasers of these shares with a two-year time horizon should be able to beat the market through growth in underlying earnings as well as margin expansion.

Buying at short-term speed bumps and being patient is one of the best weapons in a Fool's arsenal.

CONFERENCE CALLS

RTW INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RTWI)") else Response.Write("(Nasdaq: RTWI)") end if %>
through Thursday, February 13
(800) 475-6701 code 330818.

RAINFOREST CAFE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RAIN)") else Response.Write("(Nasdaq: RAIN)") end if %>
(402) 222-9929 -- through February 11

CISCO SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %>
(800) 633-8284 in USA
(303) 446-5399 elsewhere
passcode: 2338711#

MORGAN STANLEY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MS)") else Response.Write("(NYSE: MS)") end if %>,
DEAN WITTER DISCOVER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DWD)") else Response.Write("(NYSE: DWD)") end if %>
Re: Merger proposal
(800) 633-8284, passcode: 2463547

GENZYME <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GENZ)") else Response.Write("(Nasdaq: GENZ)") end if %>
(re: PharmaGenics acquisition & new oncology division)
(402) 220-6028 -- replay avail through 2/10

FIRST DATA CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FDC)") else Response.Write("(NYSE: FDC)") end if %>
(800) 925-0560 -- replay through 2/7

ANN TAYLOR STORES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ANN)") else Response.Write("(NYSE: ANN)") end if %>
(re: January sales)
(402) 351-9977 -- replay through 5:30 PM EST on 2/14

ALLIED SIGNAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ALD)") else Response.Write("(NYSE: ALD)") end if %>
(800) 633-8284 (reservation # 2216671)
replay avail. thru 2/13

ANOTHER FOOLISH THING
A New Fool Tool!

Valuations! Ratios! Factors! Rates! There are so many numbers tossed around Fooldom that it's easy to get lost, swimming in a sea of calculations, adrift on the waves of fractional roots, desperately searching for the shores of mathmatical reason. Okay, that might be a bit dramatic, but there are a lot of numbers to crunch. Enter Fooldom's brand-new and exciting ValuTool! This Foolish software package is a simple and powerful way to work with the vast amount of data necessary to determine the value of a stock. Give ValuTool the raw numbers and it'll compute many of the ratios and valuations that you read about as you wander through Fooldom and beyond -- The Foolish eight, the PEG strategies, and lots more! Spend more of your time researching and less of it doing calculations. Check out ValuTool in FoolMart today!

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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