HEROES

Automotive tool and equipment manufacturer SPX CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SPW)") else Response.Write("(NYSE: SPW)") end if %> gained $6 5/8 to $52 1/2 after announcing that tomorrow it will commence a Dutch auction buyback of 2.7 million of its shares, or approximately 16% of its issued shares. A Dutch auction is an auction where the buying party sets out certain parameters for its purchase, in this case, the price SPX is willing to pay for the stock it is buying back -- between $48 and $56 per share. The sellers put in their "bids" at the prices at which they are willing to sell. Sellers try to offer at prices where their competitive bids will beat the bids of others, but at a price that it still favorable. Meanwhile, the company hopes to pick up as many shares as it can at the low end of the auction range. 1996 Noble Prize Laureate William Vickrey was an advocate of Dutch auctions, and his studies showed the efficiency of such bidding systems.

COMPAQ <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPQ)") else Response.Write("(NYSE: CPQ)") end if %> did decide to make an acquisition of a company starting with the letters "MICR," but it wasn't direct PC seller MICRON ELECTRONICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MUEI)") else Response.Write("(Nasdaq: MUEI)") end if %> as PC Week Online mentioned recently. Instead, the world's largest PC company is acquiring modem maker and connectivity software company MICROCOM INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MNPI)") else Response.Write("(Nasdaq: MNPI)") end if %> for $16.25 per share, or $280 million. Microcom shares jumped $5 7/16 to $15 15/16 on the news. Wondering what a world-leading company will pay for a software and connectivity products company? The bid prices Microcom at 1.5 times sales and 22 times operating earnings (both annualized numbers), and 25 times FY 1998 estimated net income per share.

QUICK TAKES: SUNGLASS HUT INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RAYS)") else Response.Write("(Nasdaq: RAYS)") end if %> zoomed ahead $1 5/16 to $7 13/16 after reporting a 16% increase in total March sales, but only a 0.6% increase in same-store sales... Competitive local exchange carrier (CLEC) ICG COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ICGX)") else Response.Write("(Nasdaq: ICGX)") end if %> rose $1 5/8 to $12 on reporting that it sold 17,491 local access lines in its quarter just-ended... OWENS & MINOR <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OMI)") else Response.Write("(NYSE: OMI)") end if %> was fixed up for a $1 1/8 gain to $12 1/4 after J.P. Morgan rated the surgical and medical supplies company a "buy"... Tubular steel products company MAVERICK TUBE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MAVK)") else Response.Write("(Nasdaq: MAVK)") end if %> gained $1 5/8 to $20 3/4 after Raymond James started coverage of the company with a "buy" rating... METROMAIL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ML)") else Response.Write("(NYSE: ML)") end if %> moved up $1 1/8 to $19 after the consumer information tracking company announced yesterday a contract with SPRINT CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FON)") else Response.Write("(NYSE: FON)") end if %>... Retailer PIER 1 IMPORTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PIR)") else Response.Write("(NYSE: PIR)") end if %> added $1 to $19 1/4 after reporting an 11% rise in March same-store sales.

GOATS

PAIRGAIN TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PAIR)") else Response.Write("(Nasdaq: PAIR)") end if %> was smeared for a $4 1/8 loss to $25 3/4 after the digital subscriber line (xDSL) equipment manufacturer reported Q1 EPS of $0.19 (before acquisition charges), which beat the mean estimate of $0.17 per share. The company finished the quarter with an accounts receivable days-sales-outstanding (DSO) number of 45 days. DSO is a measure of how quickly a company is collecting its accounts receivable balances, how well sales are balanced during the quarter, and is partly a measure of the quality of receivables. That the company's DSO increased from an excellent 34 days last quarter to 45 this quarter worried some analysts. 45 days is still a very good number, especially considering some of the product confusion in the networking business this quarter and the DSO numbers shown by the company's peers last quarter, where DSOs were double that of Pairgain.

Credit card transaction processor FIRST USA PAYMENTECH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PTI)") else Response.Write("(NYSE: PTI)") end if %> lost $1 3/4 to $23 1/2 after parent company FIRST USA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FUS)") else Response.Write("(NYSE: FUS)") end if %> and its merger partner BANC ONE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ONE)") else Response.Write("(NYSE: ONE)") end if %> said they will reduce the combined company's stake in Paymentech. Banc One is a superregional bank with its own point-of-sale processing service. The worry that First USA Paymentech will not participate in the credit card powerhouse that will be formed through the merger is weighing heavily on the shares today. Unless First USA-Banc One divests itself completely from the company, it still has an interest in seeing that the shares do well. As part of a bank corporation that does business in 13 states, Paymentech may also be held back from establishing connections with competing banks. As a stand-alone company, it would be free to combine with other banks without their own networks, or indeed, with other similar transaction processing companies.

SEARS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: S)") else Response.Write("(NYSE: S)") end if %> fell $3 7/8 to $47 after the retailer said 1997 earnings will be affected to an unspecified degree by its improper handling of customer credit records. The company announced in a press release that it will "voluntarily repay Chapter 7 bankruptcy debtors nationwide whose debt reaffirmations were not filed." The company says it will return interest and principal on certain debts that were owed it by bankrupt customers because it hadn't filed the proper papers with the U.S. Bankruptcy Court. Separately, Sears reported a one percent increase in March same-store sales and a 7.3% increase in total March sales.

QUICK CUTS: AMERICAN COMMUNICATIONS SERVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ACNS)") else Response.Write("(Nasdaq: ACNS)") end if %> lost $1 1/8 to $5 after the telecom carrier announced the sale of eight million shares at $5 apiece... GOLDEN BEAR GOLF <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: JACK)") else Response.Write("(Nasdaq: JACK)") end if %> was stymied for a $2 1/4 loss to $10 1/4 after the driving range company bearing the nickname of Jack Nicklaus said it will record a half-million dollar severance charge in connection with the appointment of new presidents at two business units... Semiconductor design software company SYNOPSYS INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SNPS)") else Response.Write("(Nasdaq: SNPS)") end if %> fell $3 5/16 to $24 3/8 after SoundView Financial cuts its rating on the company to "hold" from "buy"... HAMBRECHT & QUIST GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HMQ)") else Response.Write("(NYSE: HMQ)") end if %> shed $2 1/4 to $18 3/4 after Morgan Stanley restarted coverage of the brokerage and underwriter with a "neutral" rating... Health and beauty products company CARSON INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CIC)") else Response.Write("(NYSE: CIC)") end if %> was smeared for a $2 3/4 loss to $8 5/8 after announcing that Q1 earnings will be hurt by flattish sales and higher costs... PRIMARK CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PMK)") else Response.Write("(NYSE: PMK)") end if %> lost $5 1/4 to $18 3/4 after the investment information company said Q1 earnings will be damaged by poor performance by its French unit and by its aircraft repair unit, a decidedly non-core type of business... Shoe retailer FOOTSTAR INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FTS)") else Response.Write("(NYSE: FTS)") end if %> was trampled for a $2 3/4 loss to $24 7/8 after Raymond James lowered its rating on the company... SAFEWAY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SWY)") else Response.Write("(NYSE: SWY)") end if %> dropped $4 1/8 to $43 7/8 after the supermarket company reported Q1 operating EPS of $0.51, which beat estimates by a penny per share, but results next quarter may be affected by a Canadian strike... ACCUSTAFF INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ASI)") else Response.Write("(NYSE: ASI)") end if %> fell $1 3/8 to $16 3/4 despite announcing the addition of "major" new clients during its quarter... Computer and office equipment maintenance company HALIFAX CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: HX)") else Response.Write("(AMEX: HX)") end if %> slipped $1 5/8 to $9 on warning of "minimal net income" in its fourth quarter.

FOOL ON THE HILL
An Investment Opinion by MF Templar

Quality is Forgiving

The strong performance in consumer-related shares this decade has left many investors behind. Almost always appearing overvalued by current standards, names like COCA-COLA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KO)") else Response.Write("(NYSE: KO)") end if %> and GILLETTE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: G)") else Response.Write("(NYSE: G)") end if %> have simply gone on to become more overvalued. Some frustrated pundits have begun to try to assess blame for the situation, using the rise of "passive investing" through indexes as a scapegoat. All the money pouring into index funds has resulted in a new "Nifty Fifty," the one-decision stocks of the '70s that left many investors behind the market for more than a decade.

Although one can easily ridicule the financial media's grasp of the situation from a valuation perspective, the question is legitimate. How high is too high? At what point do the valuations get so extraordinary that the asset is doomed to underperform? At what point has the price been run up to such a point that only extraordinary performance will guarantee that the investor does not lose precious capital. Although many would like to believe the maxim "great company, great stock," the reality remains that stocks are auction-priced instruments only tenuously connected with the underlying corporations that they represent. The best company in the world can be overpriced, while the worst company in the world can be undervalued.

At the risk of sounding like a wild-eyed proponent for so-called "one decision" stocks, or companies that you only have to buy once and hold forever, quality is very forgiving of pricing mistakes. If a company will be in business in a decade and will have grown earnings by 15% a year out to that point, the potential for it being overvalued today relative to its future value is very low. This company will grow earnings 404.6% over that decade. Even if its fair value based on its constancy of earnings is 20 times trailing earnings and it is trading at 40 times trailing earnings, in a decade, if the earnings base more than quadruples and the price stays the same, it will only be priced at 10 times earnings. If it were to be at 20 times earnings in a decade, it would have given you 7.1% annual returns plus whatever dividend it pays out. If the multiple were to only slip to 30 times, you have 11.6% annualized gains plus the dividend.

Stretching out the time period only increases the return. Given that stock price appreciation correlates well with earnings growth, in the end regardless of what price you pay for a stock, its rate of stock price appreciation will converge with its rate of earnings growth. Over short periods of time this can be dicey, even with a quality company. Buying anything at 40 or 50 times earnings is a substantial five-year risk. Over five decades, however, it is a completely different story. If the company can stay in business for the next fifty years, even if you buy it at 10 times its true value and it grows at 10% a year, the earnings base will be 117.3 times greater in 50 years than it is today. Assuming it falls to fair value, that is 5% a year plus dividends at 10 times overvaluation today -- not stunning, but certainly not a devastating loss of capital either.

For long periods, each additional chunk of time adds disproportionate value. Take our example above of a company that trades at 10 times its true value that is growing at 10% a year. Add another ten years to our fifty year holding period and the earnings base will have ballooned 304.5 times instead of the 117.3 times over 50 years. Our return per year assuming it falls to only fair value from 10 times fair value is 5.8%. For each decade we push this out, the return will continue to inch toward 10% per year, the rate of earnings growth. While not a stunning argument for purchasing stocks at ten times their fair value, if they are only two or three times fair value the numbers work out in your favor much more quickly. Although "great company, great stock" might not work out over a five year period, it almost has to work out over a twenty year period unless you have actually not picked a great company.

There is a flip-side to this as well, which is not quite as positive. Patience is an absolute requirement if you purchase something that is overvalued. Buying substantially overvalued assets with three year time horizons is a quick way to the poorhouse. The reason so many caution against buying stocks that are overvalued is that they have an annoying tendency to become fairly valued within a few weeks of your purchase. This is fine if your horizon is truly twenty years and you have purchased a "great" company, meaning one that will be in business in twenty years growing earnings at about the same rate. This can help justify the high valuations of Coca-Cola and Gillette, to name a few. However, investors who lose money tend to lose patience and sell. You absolutely have to commit to long holding periods to buy stock in the so-called "great" names.

CONFERENCE CALLS

04/10/97 (Thursday)
CASCADE COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCC)") else Response.Write("(Nasdaq: CSCC)") end if %>
(800) 936-0941 (code: 319193) -- replay through midnight 4/15

04/10/97 (Thursday)
ASCEND COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ASND)") else Response.Write("(Nasdaq: ASND)") end if %>
(800) 475-6701 (code: 336995) -- replay through 4/18 (North America)
(320) 365-3844 (code: 336995) -- replay through 4/18 (International)

04/10/97 (Thursday)
TENET HEALTHCARE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: THC)") else Response.Write("(Nasdaq: THC)") end if %>
(402) 220-1007 -- replay from 3:00 PM EDT on 4/10

04/10/97 (Thursday)
COGNOS INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COGNF)") else Response.Write("(Nasdaq: COGNF)") end if %>
11:15 a.m. EDT
(800) 997-6906 -- replay available until midnight 4/11

SALLIE MAE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLM)") else Response.Write("(NYSE: SLM)") end if %>
(800) 844-8633 (passcode 2334)
Replays at 5:00 PM ET on 4/10, 11:00 AM ET on 4/11,
and 11:00 AM ET on 4/14

THIS WEEK'S CONFERENCE CALL SYNOPSES

CUTTER & BUCK <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CBUK)") else Response.Write("(Nasdaq: CBUK)") end if %> Q3 Conference Call
WILLIAMS-SONOMA <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WSGC)") else Response.Write("(Nasdaq: WSGC)") end if %> Q4 Conference Call
ST. JOHN KNITS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SJK)") else Response.Write("(NYSE: SJK)") end if %> Q1 Conference Call
ADVANCED MICRO DEVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMD)") else Response.Write("(NYSE: AMD)") end if %> Q4 Conference Call
SEAGATE TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SEG)") else Response.Write("(NYSE: SEG)") end if %> Q3 Conference Call

MORE FOOLISHNESS
New and Improved Spreadsheet

Fooldom is all about interactivity and do-it-yourself investing, right? Right. What fits in better with such a tradition than the Dow Dividend Spreadsheet? Developed by our own industrious TMF Templr, 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 36 years (1961 through 1996), 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, available at FoolMart , 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 (TMF Templar), a Fool
Fool Plate Special

Dale Wettlaufer (TMF Raleigh), another Fool
Ups & Downs

Brian Bauer (TMF Hoops), and yet another Fool
Editing