HEROES

Business Week's "Inside Wall Street" column is probably the most singularly useless, inaccurate column in investing journalism. Story after story that appears in that column turns out to be wrong, untrue, or just plain hype -- odd when one considers Business Week's stated bias against online "chatter." Last week the magazine boldly printed the comments of a fund manager who stated that CARTER-WALLACE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAR)") else Response.Write("(NYSE: CAR)") end if %> would be acquired by a European company, a rumor Carter-Wallace quickly denied. This week, the magazine quoted hedge fund "pro" Mike Lauer as saying that pending spin-offs at TECH-SYM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TSY)") else Response.Write("(NYSE: TSY)") end if %> would help to boost the stock price toward his target of $59 a share. Tech-Sym ended the day up $1 1/2 at $31 1/8. STRIDE RITE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SRR)") else Response.Write("(NYSE: SRR)") end if %> jumped $7/8 to $14 5/8 after the column reported rumors that the company would consider a bid in the $20s. Finally, "money pro" Fran Saldutti, whatever the heck a "money pro" is, was positive on Year 2000 solutions provider CRYSTAL SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CRYSF)") else Response.Write("(Nasdaq: CRYSF)") end if %>, pushing the stock up $1 5/8 to $23 1/4. Perhaps hedge fund managers who want a short-term hit on a big position they own have learned that just dropping a mention to Business Week that a takeover might happen is a great way to make a quick buck.

CIENA CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CIEN)") else Response.Write("(Nasdaq: CIEN)") end if %>, a recently public telecommunications equipment company, rose $7 1/8 to $46 after posting strong second quarter earnings. Ciena reported earnings on Thursday that showed a profit of $0.26 per share compared to a loss of $0.03 per share a year ago. The company had been expected to make closer to $0.15 per share, which explains today's positive reaction from investors. As analysts scrambled to raise their estimates for the company, investors began to move in on the shares. Current estimates show the company is slated to make $0.83 per share next year, but given that its current run-rate (the last quarter multiplied by four) is $1.04 per share, those numbers are probably going to go substantially higher in the coming weeks.

Semiconductor equipment component manufacturer UNIPHASE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: UNPH)") else Response.Write("(Nasdaq: UNPH)") end if %> jumped $4 7/8 to $57 on no specific news. The company signed a sole-supplier deal with industry giant KLA TENCOR <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KLAC)") else Response.Write("(Nasdaq: KLAC)") end if %> last week for its laser-based optoelectronics semiconductor wafer defect examination and analysis equipment. Given KLA Tencor's combined presence in the market, investors are apparently viewing this event as a tremendous positive for the company. With only $94.8 million in trailing sales, however, Uniphase trades at almost 10 times sales. Even backing out one-time charges last quarter, the company only made $0.26 EPS. Analysts expect $1.61 EPS out of the company next year, putting it at 35 times forward earnings. All in all, it appears investors may be getting a little too excited about the future prospects for Uniphase. CYMER <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CYMI)") else Response.Write("(Nasdaq: CYMI)") end if %>, another laser semiconductor capital equipment company, was up $4 1/2 to $57 1/2.

CARDINAL HEALTH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAH)") else Response.Write("(NYSE: CAH)") end if %> soared $4 1/2 to $58 after it was announced that the company would become part of the S&P 500 Index. The company replaces CONRAIL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CRR)") else Response.Write("(NYSE: CRR)") end if %>, which is being acquired by CSX INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CSX)") else Response.Write("(NYSE: CSX)") end if %> and NORFOLK SOUTHERN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NSC)") else Response.Write("(NYSE: NSC)") end if %>. This move triggered a domino effect of index changes, as Cardinal Health was on the S&P 400 MidCap Index. Replacing Cardinal there will be U.S. FILTER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: USF)") else Response.Write("(NYSE: USF)") end if %>, up $1 1/2 to $32 7/8 today on two times normal volume. As U.S. Filter was on the SmallCap 600, the folks at S&P decided that it would be replaced by DELTA PINE & LAND <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DLP)") else Response.Write("(NYSE: DLP)") end if %>, which was up $2 1/4 to $29 3/4 on this news. Changes in the various S&P indexes tend to cause the stocks being added to outperform the market by three to five percent over the first few weeks, according to most of the academic studies that have been done on the subject.

QUICK TAKES: Montgomery Securities initiated coverage of WESTINGHOUSE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WX)") else Response.Write("(NYSE: WX)") end if %> with a "buy," helping it to rise $1 7/8 to $18 7/8... MEDTRONIC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MDT)") else Response.Write("(NYSE: MDT)") end if %> soared $5 to $71 7/8 after reporting fourth quarter EPS of $0.62... PALMER WIRELESS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PWIR)") else Response.Write("(Nasdaq: PWIR)") end if %> accepted a takeover bid from PRICE COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: PR)") else Response.Write("(AMEX: PR)") end if %> for $17 1/2 a share in cash, causing the stock to rise $4 1/16 to $16 1/8... MEDAPHIS CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MEDA)") else Response.Write("(Nasdaq: MEDA)") end if %> jumped $7/8 to $8 3/16 after the company completed an initial public offering (IPO) of its HEALTH RECOVERIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HCRI)") else Response.Write("(Nasdaq: HCRI)") end if %> unit... New York-based ACC CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ACCC)") else Response.Write("(Nasdaq: ACCC)") end if %> continues to rise, climbing $3 3/16 to $24 7/8 after yesterday's "buy" recommendation from Lehman Brothers. ... BTG INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BTGI)") else Response.Write("(Nasdaq: BTGI)") end if %> rose $1 1/8 to $13 3/8 after the ailing contractor announced it was acquiring Nations Inc.... PCS infrastructure builder OMNIPOINT <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: OMPT)") else Response.Write("(Nasdaq: OMPT)") end if %> popped up another $2 1/16 to $14 3/8 as speculation builds that the company is "ripe for foreign investment"... MASTECH CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MAST)") else Response.Write("(Nasdaq: MAST)") end if %> powered ahead $7/8 to $18 after the firm reported that it had contracted to provide Year 2000 services to FLORIDA POWER & LIGHT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FPL)") else Response.Write("(NYSE: FPL)") end if %>... RJR NABISCO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RN)") else Response.Write("(NYSE: RN)") end if %> rose $1 1/2 to $33 3/8 on a Wall Street Journal report that a liability settlement is close at hand for the tobacco industry... CHATTEM INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CHTT)") else Response.Write("(Nasdaq: CHTT)") end if %> rose $1 5/8 to $10 after acquiring the brands of Sunsource International... UNICOMP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UCMP)") else Response.Write("(NYSE: UCMP)") end if %> rose $1 3/4 to $9 1/8 after announcing that it would assist HEWLETT-PACKARD <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HWP)") else Response.Write("(NYSE: HWP)") end if %> with the Year 2000 problem.

GOATS

PARAMETRIC TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PMTC)") else Response.Write("(Nasdaq: PMTC)") end if %> plunged $3 to $44 3/8 after a meeting with analysts today in Boston. The company stated that it saw fiscal 1997 revenues around $825 million and fiscal 1998 revenues around $1.06 to $1.08 billion. The revenue guidance for 1997 was at the lower end of analyst expectations, but the company said it would buoy 1997 and 1998 earnings by increasing margins. Parametric anticipates making $2.05 to $2.10 per share in 1998, slightly lower than current consensus estimates. Analysts had been looking for $1.1 to $1.2 billion in revenues, which means that the company is going to have to raise margins substantially to hit those targets. Although the stock is reacting negatively, the comparisons to last year are still excellent as the company earned $1.19 per share on $600 million in revenues.

Disk drive companies plunged today after INNOVEX <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INVX)") else Response.Write("(Nasdaq: INVX)") end if %> confirmed rumors that READ-RITE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RDRT)") else Response.Write("(Nasdaq: RDRT)") end if %> had cut orders for head suspension components. Although Innovex stressed that the lost orders had been made up by increased orders from Yamaha and QUANTUM <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: QNTM)") else Response.Write("(Nasdaq: QNTM)") end if %>, investors still panicked. Unconfirmed reports from Read-Rite attribute the order cut to an "inventory imbalance," although it is not clear whether that changes any assumptions that could be made about demand. Investors have been increasingly concerned that once drives came off of allocation, pricing would fall apart. As this order cut could possibly confirm that drives are off of allocation, investors are selling their shares in advance of falling prices. Read-Rite slumped $2 1/8 to $19 7/8, WESTERN DIGITAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WDC)") else Response.Write("(NYSE: WDC)") end if %> fell $4 1/4 to $52 7/8, and SEAGATE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SEG)") else Response.Write("(NYSE: SEG)") end if %> lost $2 1/8 to $40 1/4. Innovex, Quantum, and Hutchinson Technology were all down marginally.

QUICK CUTS: HEALTH MANAGEMENT SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HMSY)") else Response.Write("(Nasdaq: HMSY)") end if %> slipped $7/8 to $5 1/2 after the company said it saw a second quarter loss of $0.07 to $0.08 per share... Software developer TALX CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TALX)") else Response.Write("(Nasdaq: TALX)") end if %> fell $7/8 to $4 3/4 when it reported fourth quarter earnings below estimates... Multimedia product and imaging display system designer SIGMA DESIGNS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SIGM)") else Response.Write("(Nasdaq: SIGM)") end if %> dropped $3/4 to $4 after reporting earnings below expectations... PAGING NETWORK <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PAGE)") else Response.Write("(Nasdaq: PAGE)") end if %> fell $1 1/8 to $7 3/16 after Alex. Brown cut its rating on the paging company to "market performer."

FOOL ON THE HILL
An Investment Opinion by Randy Befumo

3Com's Spectacle

Three months ago, the consensus wisdom held that INTEL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %> was going to obliterate 3COM <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COMS)") else Response.Write("(Nasdaq: COMS)") end if %>. On February 6th, Intel cut as much as 40% off of prices for network interface cards (NICs). Intel slashed prices on its Fast Ethernet 10/100 megabit NICs to $99 from $159, dropping the price on those units to the point where they were as cheap as much slower 10 megabit NICs. Widely viewed as auguring disastrous price cuts for 3Com, suddenly the Street was abuzz with the notion that Intel was going to destroy 3Com in the NIC market, a product that makes up more than 40% of 3Com's total revenues. Needless to say, the smart money began selling 3Com shares and within days they were below $40 after having traded as high as $73 1/2 on January 23rd.

Negative sentiment about 3Com had already been amassing after 3Com Chief Executive Eric Benhamou made comments to analysts in December about slowing growth in the corporate networking market. The price cuts that 3Com announced on February 10th to maintain pricing parity with Intel only exacerbated that slowdown's affect on the company's earnings, causing 3Com to warn that third quarter net would be "in the mid-$0.40s to low $0.50s" on a per share basis. Analysts had been looking for $0.60 EPS, 42.8% growth compared to the $0.42 EPS that the company made in the prior year. Knowing the quarter was going to be viewed as a disaster anyway, 3Com actually undercut Intel on 10/100 megabit NIC pricing, quoting their product at $94 each in lots of 100. 3Com also announced price reductions on low-end hubs and some switches. 3Com ended up earning $0.47 per share in the quarter, towards the low end of expectations.

Further complicating an already complicated picture, on February 27th 3Com announced that it was merging with U.S. ROBOTICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: USRX)") else Response.Write("(Nasdaq: USRX)") end if %>. The deal valued each share of U.S. Robotics at 1.75 shares of 3Com, or $63 1/2 on the first day of trading after the merger. Skeptical analysts viewed the deal as the weak marrying the weaker, with 3Com under assault in the NIC arena buying up a U.S. Robotics that was bound to lose the standards war for 56 kilobit per second modems. Although U.S. Robotics had launched its own "X2" technology roughly a month before the ROCKWELL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ROK)") else Response.Write("(NYSE: ROK)") end if %> consortium began shipping their own version, Rockwell had managed to erode some of U.S. Robotics substantial lead time and still had the majority of the original equipment manufacturer (OEM) market. With more and more modems shipping in PCs and not bought on store shelves, many believed that the handwriting on the wall was plainly visible.

Needless to say, amidst all of the hysteria, 3Com and U.S. Robotics shares promptly fell below the level they were at when the merger was announced. In fact, 3Com fell to levels it had not seen since the end of 1994, hitting a low of $24. Unhappy U.S. Robotics shareholders saw their company valued at $42 a share, as their stock slipped back to October 1995 levels. Panicked e-mails from otherwise reasonable sources called for the sale of all 3Com shares. As 3Com shares plunged to the lowest valuation relative to trailing sales and earnings that had been seen since the company exited the software business in 1993 and was crushed by 40% in a few days, most observers were advising that the shares be sold... perhaps even sold short.

If it was not bad enough that analysts were painting NICs and modems as future growth areas for Intel and consequently major future disaster for the "new 3Com," analysts also began to question whether or not the combined company's crown jewel, its remote access gear, could cut the mustard against ASCEND COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ASND)") else Response.Write("(Nasdaq: ASND)") end if %> and CISCO SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %>. As for corporate switches, forget it. Cisco owned that business, so 3Com did not have a chance there either. The ChipCom acquisition two years before had yet to yield any benefits and 3Com's market share in that area was marginal at best. How the company ever managed to get to $73 1/2 a share in January could not be explained, as everyone under the sun was uniform in their denunciation of the company's technology. One of the lead articles in Upside Magazine ridiculed the merger, painting it as the merger of two commodity electronics business doomed to extinction by Intel. For a few moments, all the smart people on Wall Street hated 3Com more than they hated AMERICA ONLINE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %>.

Three months later, the doomsaying has cooled. 3Com shares stand at $43 1/4, up 57.2% in the last 30 days. U.S. Robotics has risen 59%, getting the extra 2.8% as the discount to the implied merger price has narrowed. Over the same period, Cisco Systems is up 38.6% and Ascend Communications has managed a 29.6% return that seems almost paltry by comparison. What has happened to the grand thesis that held the "new 3Com" was a commodity electronics company bound to be crushed by an Intel that had third-generation switch and remote access technology? Reality, apparently.

In the past week, "third-rate" enterprise networking technology actually won an award. The Transcend Enterprise Manager software received "Top Honors" from Network Computing magazine, beating out Cisco and CABLETRON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CS)") else Response.Write("(NYSE: CS)") end if %>. More importantly, Dell'Oro Group reported on May 15th that 3Com had gained "substantial" market share relative to Intel in the first quarter. 3Com sold 1.3 million units, almost double Intel's 730,000 units. Finally, X2's comfortable lead over the competing 56KFLEX technology from Rockwell has been magnified as a number of OEMs have had problems getting the technology out to market. At 17.5 times forward earnings estimates, 3Com has regained a multiple on forward earnings more in line with a 20% annual grower, commodity product or not. Those who for a few months turned the investment issue from a question of relative return on capital to a battle between good and evil technologies have hopefully covered their shorts and moved on with their lives, as their thesis is apparently not going to pan out.

At any rate, it has been quite a show.

CONFERENCE CALLS

APPLIED MATERIALS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMAT)") else Response.Write("(Nasdaq: AMAT)") end if %>
(800) 642-1687 (code: 353749) -- replay

INTERNATIONAL RECTIFIER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IRF)") else Response.Write("(NYSE: IRF)") end if %>
(Re: Restructuring)
(800) 633-8284 (reservation # 2765732) -- replay

HOME DEPOT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HD)") else Response.Write("(NYSE: HD)") end if %>
(402) 220-3005 -- replay after 12:00 noon until 5/23

DAYTON HUDSON CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DH)") else Response.Write("(NYSE: DH)") end if %>
(800) 633-8284 (reservation # 2703946) -- replay from 12:30-5:00 p.m. EDT

ROSS STORES INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ROST)") else Response.Write("(Nasdaq: ROST)") end if %>
(402) 220-1007 -- replay available from 5:00 p.m. EDT through 5/27 @ 8:00 p.m. EDT

WIND RIVER SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WIND)") else Response.Write("(Nasdaq: WIND)") end if %>
(800) 633-8284 (reservation # 2748792, code: 2589) -- replay
(303) 248-1201 (reservation # 2748792, code: 2589) -- replay (Intl. callers)

THIS WEEK'S CONFERENCE CALL SYNOPSES

DAYTON HUDSON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DH)") else Response.Write("(NYSE: DH)") end if %> Q1 Call
HEWLETT-PACKARD <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HWP)") else Response.Write("(NYSE: HWP)") end if %> Q2 Call
STAPLES INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SPLS)") else Response.Write("(Nasdaq: SPLS)") end if %> Q1 Call
HADCO CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HDCO)") else Response.Write("(Nasdaq: HDCO)") end if %> Q2 Call
PAPA JOHN'S INT'L <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PZZA)") else Response.Write("(Nasdaq: PZZA)") end if %> Q1 Call
APPLEBEE'S <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: APPB)") else Response.Write("(Nasdaq: APPB)") end if %> Q1 Call
DELL COMPUTER <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %> Q1 Call
FAMILY GOLF CENTERS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FGCI)") else Response.Write("(Nasdaq: FGCI)") end if %> Q1 Call
HOME DEPOT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HD)") else Response.Write("(NYSE: HD)") end if %> Q1 Call
URBAN OUTFITTERS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: URBN)") else Response.Write("(Nasdaq: URBN)") end if %> Q1 Call