The Motley Fool, 04/29/97: The Evening News

HEROES

A flattening yield curve, at least for the moment, was exactly what the doctor ordered for the stock markets today, especially the "interest sensitive" sectors of banking, insurance, and brokerages. A 3% decline in March durable goods orders, including a 5.9% decline in orders for electronics equipment, and an ultra-tame Q1 employment cost index had bond fund managers looking more like rabid equity guys today. Among those stocks making large moves, CITICORP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CCI)") else Response.Write("(NYSE: CCI)") end if %> was up $4 3/8 to $111 5/8; DEAN WITTER DISCOVER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DWD)") else Response.Write("(NYSE: DWD)") end if %> climbed $2 1/2 to $37 3/4 along with merger partner MORGAN STANLEY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MS)") else Response.Write("(NYSE: MS)") end if %>, which gained $4 7/8 to $62 7/8; and annuity company SUNAMERICA INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SAI)") else Response.Write("(NYSE: SAI)") end if %> vaulted $2 5/8 to $44 3/8. TRAVELERS GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TRV)") else Response.Write("(NYSE: TRV)") end if %> put in a stand-out performance, gaining $4 3/4 to $55.

Hotel franchisor CHOICE HOTELS INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CHH)") else Response.Write("(NYSE: CHH)") end if %> gained $1 3/8 to $14 1/8 after announcing that it will split up its real estate operations and its franchising operations through a spin-off. Choice Hotels' franchising operations, which manages franchises such as Quality, Clarion, Comfort, and Econo Lodge, will trade as a separate company, hoping to latch onto some of the plump valuations accorded stand-alone hotel franchisors such as Renaissance Hotel Group, which was recently snatched away from DOUBLETREE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TREE)") else Response.Write("(Nasdaq: TREE)") end if %> by MARRIOT INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MAR)") else Response.Write("(NYSE: MAR)") end if %>. The franchising operation will still do business with the other half of the split-off, which will be a real estate company that will own Choice Hotels' properties.

COMPUSA INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPU)") else Response.Write("(NYSE: CPU)") end if %> jumped $1 3/4 to $19 1/4 on the eve of its Q3 earnings report; analysts are expecting EPS of $0.29. PC and office supplies company GLOBAL DIRECTMAIL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GML)") else Response.Write("(NYSE: GML)") end if %> added $1 5/8 to $16 5/8 after reporting a 25% increase in Q1 revenues and flattish EPS of $0.32. Direct mail computer supplier MICRO WAREHOUSE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MWHS)") else Response.Write("(Nasdaq: MWHS)") end if %> also jumped in with good news, gaining $1 7/16 to $15 11/16 on reporting Q1 EPS of $0.23, which beat estimates of $0.19. We're pretty certain the company is reporting its inventory and cost of goods sold correctly now.

QUICK TAKES: Telecommunications billing software company SAVILLE SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SAVLY)") else Response.Write("(Nasdaq: SAVLY)") end if %> rose $3 1/2 to $39 1/2 after it reported Q1 revenues of $20 million and EPS of $0.23, up more than 100% over last year and above consensus estimates of $0.19... AFFYMETRIX INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AFFX)") else Response.Write("(Nasdaq: AFFX)") end if %> picked up $1 1/2 to $22 1/4 after the DNA probe semiconductor company entered into a genomics research consortium with BRISTOL MYERS SQUIBB <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BMY)") else Response.Write("(NYSE: BMY)") end if %>. MILLENNIUM PHARMACEUTICALS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MLNM)") else Response.Write("(Nasdaq: MLNM)") end if %>, another member of the consortium, gained $1 3/4 to $14 7/8... Close-out retailer MAZEL STORES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MAZL)") else Response.Write("(Nasdaq: MAZL)") end if %> gained another $1 1/8 to $12 7/8 as investors believe its Q1 earnings hiccup, which was pre-announced yesterday, is due to temporary factors... SYMANTEC CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SYMC)") else Response.Write("(Nasdaq: SYMC)") end if %> gained $1 1/8 to $13 7/8 as it reported Q4 revenues of $130 million and operating EPS of $0.30, beating estimates by 20%... Wireless communications handset and infrastructure company NOKIA CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NOK.A)") else Response.Write("(NYSE: NOK.A)") end if %> rose $3 7/8 to $61 5/8 after reporting 58% growth in mobile phone revenues in its first quarter and EPS of $0.73, cranking estimates of $0.56... CATALINA MARKETING CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: POS)") else Response.Write("(NYSE: POS)") end if %> printed a $5 gain to $33 3/8 after Donaldson, Lufkin & Jenrette added the point-of-sale systems company to its "recommended list"... Medical laboratory products supplier SYBRON INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SYB)") else Response.Write("(NYSE: SYB)") end if %> rose $3 1/4 to $33 1/8 after announcing the completion of its acquisition of Remel, "a manufacturer and distributor of disposable diagnostic products"... PACIFIC GREYSTONE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GRY)") else Response.Write("(NYSE: GRY)") end if %> gained $1 3/8 to $14 5/8 after the homebuilder reported Q1 EPS of $0.27 due to a "a recovering Southern California economy"... Semiconductor test equipment maker TERADYNE INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TER)") else Response.Write("(NYSE: TER)") end if %> rose $2 3/4 to $32 7/8 on announcing its acquisition of Softbridge, Inc., a software quality testing company... PEPSICO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PEP)") else Response.Write("(NYSE: PEP)") end if %> gained $3 1/8 to $34 3/8 after reporting Q1 EPS of $0.27 on especially strong earnings at its Frito-Lay unit... POLAROID CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PRD)") else Response.Write("(NYSE: PRD)") end if %> rose $3 5/8 to $48 1/4 after announcing digital photography software for the Windows 95 platform... Vacuum and heat transfer equipment company GRAHAM CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: GHM)") else Response.Write("(AMEX: GHM)") end if %> added $1 3/8 to $16 1/8 on reporting quarterly EPS of $0.40 on a 23% increase in revenues... TENCOR INSTRUMENTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TNCR)") else Response.Write("(Nasdaq: TNCR)") end if %> rose $2 3/4 to $45 1/8 after announcing an $8 million order for yield management systems from DRAM manufacturer Samsung. Merger partner KLA INSTRUMENTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KLAC)") else Response.Write("(Nasdaq: KLAC)") end if %> also gained $2 7/8 to $45 38... APPLIED MATERIALS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMAT)") else Response.Write("(Nasdaq: AMAT)") end if %> gained $2 7/8 to $53 3/4 after detailing some of the benefits of its Opal and Orbat acquisitions in a Reuters interview... Consumer finance company MONEY STORE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MONE)") else Response.Write("(Nasdaq: MONE)") end if %> regained $1 15/16 to $21 3/16 after reporting weaker-than-expected results last week.

GOATS

CORESTAFF INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSTF)") else Response.Write("(Nasdaq: CSTF)") end if %> fell $4 1/2 to $18 3/4 after the specialty staffing company reported a better than 100% increase in quarterly revenues of $217 million and EPS of $0.18, which beat estimates of $0.17. Alex. Brown lowered its rating on the company because of comments made in the conference call by the company's CEO, who said pricing pressures will keep down results in coming quarters. Last year, commodity staffing firms in the healthcare and clerical worker industry reported that pricing and intense competition would hurt results, but this warning signifies the spread of demand-side pressure, where customers are telling specialty staffing companies like CoreSTAFF to hold the line on their prices. In addition, the shortage of information technology (IT) middle management and consultants in areas such as Silicon Valley is pressuring the company's gross margin in its IT segment.

Energy construction firm MCDERMOTT INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MDR)") else Response.Write("(NYSE: MDR)") end if %> fell $2 1/4 to $18 3/4 and its marine construction unit J. RAY MCDERMOTT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JRM)") else Response.Write("(NYSE: JRM)") end if %> lost $4 7/8 to $17 5/8 after announcing a restructuring prompted by large fourth quarter losses and possible criminal wrongdoing within the companies. While McDermott International has been flagging since last year when long-term power generation construction contracts were hampering results, J. Ray McDermott has had the good fortune to be in the right place at the right time, serving the energy exploration and production industry. With Gulf of Mexico overcapacity worries hitting the oil services sector yesterday, New Orleans-based J. Ray McDermott was doubly affected today after being halted all day Monday.

Home improvement contractor DIAMOND HOME SERVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DHMS)") else Response.Write("(Nasdaq: DHMS)") end if %>, which does a bunch of business under the Sears name, lost $5 3/4 to $8 5/8 after reporting Q1 EPS of $0.02, missing estimates of $0.08 due to adverse weather conditions in Florida and the northern portion of the U.S. Housing starts in February were quite robust and March was about 10% higher than the beginning of the year, according to numbers at Dr. Ed Yardeni's website. Real estate loan numbers also indicate an upturn since the beginning of the year. Construction permits in the South, however, were mixed through February.

QUICK CUTS: Data network management software company NETWORK GENERAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NETG)") else Response.Write("(Nasdaq: NETG)") end if %> plummeted $4 1/8 to $13 3/4 after reporting a 26% rise in Q1 revenues of 26%, to $68 million, and operating EPS of $0.29, in line with estimates... AVONDALE FINANCIAL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AVND)") else Response.Write("(Nasdaq: AVND)") end if %> declined $3 1/8 to $13 1/8 after the bank holding company reported a Q1 loss of $2.15 per share due to high loan delinquency rates... Wireless telecom equipment company SAWTEK INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SAWS)") else Response.Write("(Nasdaq: SAWS)") end if %> fell $1 7/8 to $27 after announcing an offering of 2.5 million shares... PHARMACEUTICAL PRODUCT DEVELOPMENT <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PPDI)") else Response.Write("(Nasdaq: PPDI)") end if %> slid $2 1/2 to $17 3/4 after the pharmaceuticals contract research organization reported Q1 revenues of $57.7 million and EPS of $0.17, which beat estimates of $0.16.

FOOL ON THE HILL
An Investment Opinion by Randy Befumo

Origin of Species

Very little effort on Wall Street is spent reflecting on the past beyond twelve-month trailing earnings and three-year historical charts. Investment philosophies arise, gain adherents, and fall regularly through the years, but investors seldom consider this drama as it truly is -- a series of events decades long in scope. Much like in any biological system, what works on Wall Street is not a single, ultimate truth that can be propounded in a single book. Rather, it is an evolving tableau where participants constantly conflict with one another in an attempt to find inefficiencies in the system, whatever their nature, in a quest for "value."

One of the few areas I believe traders have an edge on investors who focus on the actual business behind the ticker price is mental flexibility. Not the judicious setting of stop-losses and careful watching of trading volumes, but the ability to recognize when an old system doesn't work anymore. Although traders are always afire with discussion on the latest book on the subject, very rarely is any attention given to a book written more than fifty years ago. This is not because short-term traders did bad in history -- rather, it is the inherent recognition that as markets change, the structural inefficiencies that short-term trading is designed to take advantage of change as well.

Whether or not investors are conscious of it, they are always relentlessly looking for pricing inefficiencies. Whether large scale, like D. E. Shaw's secretive trading firm that accounts for 6% or more of the volume on the New York Stock Exchange, or small-scale, like SOES bandits huddled over their terminals entering orders for less than 1,000 shares, investors are looking for the places where markets break down and do not function very well. Unlike traders, who rely on structural inefficiencies, investors who favor fundamentals (or facts, as we sometimes like to call them) are looking for informational inefficiencies -- places where the prices of securities do not fully reflect all of the known information about the companies behind them.

When Ben Graham sat down to write Security Analysis in the 1930s, facts about companies were for the most part poorly distributed. Careful, judicious research would often reveal companies that traded below the amount of working capital the firm currently had at its disposal. Corporations valued at extraordinarily low price/earnings ratios relative to their prospects dotted the landscape. By and large, the march of information systems has removed almost all of these informational inefficiencies. For a little more than a $100 a year, anyone can get the S&P Stock Guide with this kind of information on thousands of companies. These days, when a company trades below working capital or has a low P/E, odds are there is a pretty good reason. Only one in a thousand of these companies is actually worth buying.

Traders have known for years that old systems stop working and need to be replaced with new systems. Fact-based investors sometimes forget this, mistakenly believing that what may have once worked must always continue to work. Take the example of "momentum investing," which verges on complete refutation here in the second quarter of 1997 after five years of stunning performance. It used to be if a stock outperformed estimates, the quantitatively based traders would pour in, knowing the stock was due for a rise. Mysteriously, in the last few months so-called "whisper" estimates have spontaneously begun to appear, helping to remove this easy money from the pockets of those who used to make it. Many decry the rise of whisper estimates, calling them unfair and unjust to the little guy. These people blindly fail to see the relentless application of the "law of tooth and claw" to equities markets, slowly squeezing out inefficiencies over time.

Estimate-beating stocks used to be an inefficiency in the market. A group of investors discovered that estimate-beating stocks tended to outperform other stocks. This knowledge spread among many and the approach reached a crescendo in May of 1996. Something eventually had to give. Informational inefficiencies, particularly easily identified quantitative inefficiencies, cannot exist forever without some deeper, structural problem underlying them that keeps them from being eradicated -- normally hubris. At some point, something had to give to make estimate-beating stocks not quite the guaranteed hits they once were. In this case, it happens to be the spontaneous rise of "whisper" estimates. It just as easily could have been something else. Markets must evolve beyond their inefficiencies or they risk collapse. At some point, the easy money in momentum strategies had to become more difficult to make.

In the turmoil accompanying the collapse of the efficacy of momentum investing, investors who relied on only one way to identify undervalued stocks are in turmoil. Unfortunately for the fact-based crowd, far too many of its adherents are functionally fixed on one way of valuing stocks and are unable to move beyond this. Additionally, closet traders masquerading as fact-based investors who apply quantitative strategies with the same rigor that one would apply to a trading system confuse investors into thinking that true fact-based investing requires a rigorous set of rules that will never, ever change. Understanding the lessons in investing inherent in Darwin's Origin of Species would resolve much of this. Viewing the system as a dynamic one with changing rules and remaining mentally flexible with the subjective valuation of publicly traded companies requires, in the end, more mental fortitude than enacting a few rules. Rules-based systems die out and are replaced by those more fit, i.e., those that are getting more capital.

CONFERENCE CALLS

US ROBOTICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: USRX)") else Response.Write("(Nasdaq: USRX)") end if %>
(800) 696-1563 (code: 164010) -- replay

THE MONEY STORE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MONE)") else Response.Write("(Nasdaq: MONE)") end if %>
(800) 964-4236

RAINFOREST CAFE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RAIN)") else Response.Write("(Nasdaq: RAIN)") end if %>
(402) 222-9939

HEWLETT PACKARD <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HWP)") else Response.Write("(NYSE: HWP)") end if %>
VERIFONE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VF)") else Response.Write("(NYSE: VF)") end if %>
Replay available from 4:15 PM EDT today through 8:00 PM EDT on 4/25, and from 10:00 AM EDT on 4/28 through 8:00 PM EDT on 4/30
(800) 633-8284 (reservation # 2699996)

FORCENERGY INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FGAS)") else Response.Write("(Nasdaq: FGAS)") end if %>
(800) 475-6701 (code: 338955) -- replay avail. through 4/29
(320) 365-3844 (code: 338955) -- replay (outside US)

MATTSON TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MTSN)") else Response.Write("(Nasdaq: MTSN)") end if %>
(402) 220-6969 -- replay available through 5/6

GENZYME TISSUE REPAIR <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GENZL)") else Response.Write("(Nasdaq: GENZL)") end if %>
(402) 220-5189 (confirmation # 664581) -- replay through 4/30

MICROWARE SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MWAR)") else Response.Write("(Nasdaq: MWAR)") end if %>
(800) 633-8284 (code 2686530)

CANANDAIGUA WINE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WINEA)") else Response.Write("(Nasdaq: WINEA)") end if %>
After 2:30 PM ET for 48 hours
(800) 677-7940

04/29/97 (Tuesday)
MORROW SNOWBOARDS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MRRW)") else Response.Write("(Nasdaq: MRRW)") end if %>
(402) 220-4250 -- replay through 5/6

ACCEPTANCE INSURANCE COS. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AIF)") else Response.Write("(NYSE: AIF)") end if %>
(800) 633-8284 (reservation # 2684868) -- replay until 5PM ET on 4/30

COMPUTER ASSOCIATES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CA)") else Response.Write("(NYSE: CA)") end if %>
(Re: New Addition to CA Open Applications Mgmt. Initiative)
(888) 243-0816 -- replay from 2:00 PM ET through 6:00 PM ET on 4/30
(703) 736-7255 -- replay (International callers)

04/30/97 (Wednesday)
COMPUSA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPU)") else Response.Write("(NYSE: CPU)") end if %>
(800) 642-1687 (ID # 381120) -- replay for 24 hours
(706) 645-9291 (ID # 381120) -- replay (International callers)

US WEST MEDIA GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UMG)") else Response.Write("(NYSE: UMG)") end if %>
Replay available through 8PM ET on 5/2
(800) 839-5620
(719) 448-2012 (International callers)

NOVATEL INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NGPSF)") else Response.Write("(Nasdaq: NGPSF)") end if %>
After 6:00 PM ET through midnight 5/6
(800) 475-6701 (code: 339778)
(320) 365-3844 (code: 339778) (Intl callers)

THIS WEEK'S CONFERENCE CALL SYNOPSES

ATLAS AIR <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ATLS)") else Response.Write("(Nasdaq: ATLS)") end if %> Q1 Conference Call
ASCEND COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ASND)") else Response.Write("(Nasdaq: ASND)") end if %> Q1 Conference Call
SUN MICROSYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SUNW)") else Response.Write("(Nasdaq: SUNW)") end if %> Q3 Conference Call
APPLE COMPUTER <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AAPL)") else Response.Write("(Nasdaq: AAPL)") end if %> Q2 Conference Call
C-CUBE MICROSYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CUBE)") else Response.Write("(Nasdaq: CUBE)") end if %> Q1 Conference Call
INTEL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %> Q1 Conference Call
RAINFOREST CAFE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RAIN)") else Response.Write("(Nasdaq: RAIN)") end if %> Conference Call

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ANOTHER FOOLISH THING
Rogue In-Depth Insights

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Randy Befumo (TMF Templr), a Fool
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Dale Wettlaufer (TMF Ralegh), another Fool
Ups & Downs

Brian Bauer (TMF Hoops), yet another Fool
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