HEROES

Commerce software developer and PC products direct-seller ELCOM INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ELCO)") else Response.Write("(Nasdaq: ELCO)") end if %> gained $2 to $7 after the company said it has retained an investment banker to explore strategic alternatives to build value. The company isn't happy that its profitability and sales growth from $58 million to $620 million over the past two years haven't been fully recognized by the market. Of course, selling at a price/sales ratio (PSR) below 0.31 doesn't necessarily mean that Elcom is a great value, especially at 32 times earnings. If a company is selling at a PSR of 0.29 and generates profit margins of 10%, that's entirely different than selling at that PSR ratio and generating the 1.1% net profit margin that Elcom did last quarter. In fiscal 1996, the company generated net margin of 0.8%, or 4/5 of one percentage point of sales. "Value" is based on the cash generating potential of a company, not because one valuation indicator pops up on a "value" screen.

Wireless security systems company ITI TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ITII)") else Response.Write("(Nasdaq: ITII)") end if %> gained $2 3/8 to $22 after announcing a development agreement to supply the security arm of WESTERN RESOURCES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WR)") else Response.Write("(NYSE: WR)") end if %> with a custom wireless security systems. Upon completion of the agreement, ITI will be the exclusive wireless systems provider for Western Resources' Westar unit, which is now the third-largest security services firm in the U.S. The two companies also entered into a strategic alliance under which ITI will provide Westar with equipment offering customers the ability to turn on lights and control the home security system from the car. Robertson Stephens raised its rating on the company to "long-term attractive," estimating 1998 EPS of $1.57.

Dairy products, fruit drinks, and coffee distributor SUIZA FOODS CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SZA)") else Response.Write("(NYSE: SZA)") end if %> gained $3 3/8 to $38 on announcing earlier this week the acquisition of a number of separate entities, including dairy processors in North Carolina and Massachusetts and a plastic container operation, for $400 million in stock and cash. Suiza expects these deals will add to earnings this year. The company added, "We expect Garelick Farms' fine management team and outstanding workforce to stay on and become an important part of the Suiza family," which is an important component of these types of deals. When a company like Suiza can buy a successful family-run business, offering that family a return on its investment and liquidity in the stock that they accept, it can offer the family a buyout multiple below where the public markets value Suiza. Putting together a string of such successful operations and adding that to a stable business only adds to the future earnings estimates. Assuming no expansion of the P/E multiple, it's a heck of a way to build shareholder value.

QUICK TAKES: NUMBER NINE VISUAL TECHNOLOGY CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NINE)") else Response.Write("(Nasdaq: NINE)") end if %> jumped $1 1/8 to $5 after the PC graphics board company walked away from PC Expo with Byte Magazine's "Best of PC Expo '97 Award for Best Multimedia Hardware"... PHOTOELECTRON CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PECX)") else Response.Write("(Nasdaq: PECX)") end if %> gained $1 1/2 to $8 after receiving FDA approval to use its Model 3 PRS x-ray device for the treatment of intracranial tumors... TEMPLATE SOFTWARE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TMPL)") else Response.Write("(Nasdaq: TMPL)") end if %> added $2 3/8 to $14 1/4 after the software development company said the acquisition of a German company will result in an "immediate positive impact"... Oh no! Sell everything! DIAMETRICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DMED)") else Response.Write("(Nasdaq: DMED)") end if %> gained $1 5/16 to $8 1/4 on a "buy" recommendation from the Cabot Market Letter... STANLEY FURNITURE CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: STLY)") else Response.Write("(Nasdaq: STLY)") end if %> rose $2 1/2 to $22 1/8 after saying it will repurchase of 750,000 shares of stock from an investor, which will increase its March quarter EPS, on a pro-forma basis, by $0.06... Water purification and wastewater systems company WATERLINK INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WLK)") else Response.Write("(NYSE: WLK)") end if %> rose $2 to from its IPO price of $11 to close at $13.

MORE QUICK TAKES: PLY GEM INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PGI)") else Response.Write("(NYSE: PGI)") end if %> moved $1 3/4 higher to $18 after the manufacturer of windows and construction products agreed to be acquired by private investment group Hicks, Muse, Tate & Furst for $18.75 per share in cash... Property and casualty insurer and reinsurance company TIG HOLDINGS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TIG)") else Response.Write("(NYSE: TIG)") end if %> gained $2 3/16 to $31 1/2 after yesterday's announcement that GMAC will acquire auto insurer INTEGON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IN)") else Response.Write("(NYSE: IN)") end if %>... SHANGHAI PETROCHEMICAL LTD. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SHI)") else Response.Write("(NYSE: SHI)") end if %> added $1 3/8 to $22 3/4 on announcing earlier this week the acquisition of a controlling interest in Zhejiang Acrylic Fibre Plant, with a capacity of 30,000 tons annually of acrylic fiber... Auction house, consultants, real estate broker, and specialty finance company SOTHEBYS HOLDINGS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BID)") else Response.Write("(NYSE: BID)") end if %> was bid up $1 to $17 1/4 after announcing its acquisition of Leslie Hindman auctioneers of Chicago, returning Sotheby's to the Windy City for the first time since 1981.

GOATS

Pharmaceutical development company LIPOSOME CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LIPO)") else Response.Write("(Nasdaq: LIPO)") end if %> was demolished for a $15 1/4 loss to $9 9/16 after its Phase III trial to assess the efficacy of its Ventus drug for acute respiratory distress syndrome flopped. No difference was found between placebos and the drug in cutting down mortality or getting patients off ventilators, according to the company.

HAGGAR CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HGGR)") else Response.Write("(Nasdaq: HGGR)") end if %> fell $3/4 to $12 5/8 after institutional broker Oppenheimer cut its Q3 EPS estimate to a loss of $0.21 from a gain of $0.15. None of the other three analysts covering the company have a loss projected for the quarter and none have lowered estimates in the last 30 days. Haggar has had a rough go of it over the last couple years with hurricanes debilitating its facilities and Levis Dockers advertising pounding away at the brand equity of Haggar's Wrinkle-Free brand. In the most recent quarter and half, sales have fallen and it doesn't appear as though restructuring efforts have taken hold yet. Nevertheless, some can't ignore the low-leverage owner's equity value of $163 million and the company's 0.65 price-to-book value ratio. At that value, if the company can only achieve 10% return on equity, an investor would be paying 6.5 times earnings.

HEARTPORT INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HPRT)") else Response.Write("(Nasdaq: HPRT)") end if %> lost $2 to $18 after Smith Barney cut its rating on the maker of minimally invasive surgical tools to "neutral" from "outperform," citing conversations with physicians who say procedures using the company's products are too expensive and complicated compared with alternative procedures. Heartport says its products provide "comparable safety and efficacy to conventional open-chest surgery, with significant additional patient benefits, such as reduced trauma, smaller incisions, shorter hospital stays, and faster recovery and return to normal activity." Some investors believe that the ultimate customer in these circumstances is the patient who will pay for the heightened benefits the company claims.

Thin-film disk maker KOMAG INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KMAG)") else Response.Write("(Nasdaq: KMAG)") end if %> lost $1 to $23 9/16 before being halted in after-hours trading. The company is warning of missing earnings estimates even though sequential unit volume growth will surpass the double-digit barrier. According to Reuters, Komag says it will miss Q2 EPS estimates of $0.45 and that earnings for the third and fourth quarters will be lower than the first two quarters of the year. Part of the blame for falling short of growth estimates is almost undoubtedly ascribable to shortfalls at SEAGATE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SEG)") else Response.Write("(NYSE: SEG)") end if %> because of two factors. First, Seagate accounts for 52% of Komag's sales. Second, Komag makes disks for the high-end of the market, where pricing pressures have manifested themselves in the last 90 days and where WESTERN DIGITAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WDC)") else Response.Write("(NYSE: WDC)") end if %> is widely believed to be taking market share. Another worry to investors is Seagate's perpetual drive to bring operations in-house, which has hurt other component companies in the past.

QUICK CUTS: CFC INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CFCI)") else Response.Write("(Nasdaq: CFCI)") end if %> lost $1 7/8 to $9 3/4 after Everen Securities cut its earnings estimates on the maker of chemical coatings following the company's Monday evening pre-announcement... Browser software company SPYGLASS INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SPYG)") else Response.Write("(Nasdaq: SPYG)") end if %> lost $1 1/16 to $7 15/16 after forecasting a Q3 loss per share of $0.26 to $0.28... ZEIGLER COAL HOLDINGS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ZEI)") else Response.Write("(NYSE: ZEI)") end if %> lost $2 1/2 to $24 3/4 after the company said in a roundabout way last night that it would miss earnings estimates of $0.60 per share, which drew a rating downgrade from PaineWebber to "hold" from "buy"... Semiconductor and electronics distributor ARROW ELECTRONICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ARW)") else Response.Write("(NYSE: ARW)") end if %> slumped $4 to $53 3/8 on a Morgan Stanley downgrade to "neutral" from "outperform"... Potash and phosphate producer IMC GLOBAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IGL)") else Response.Write("(NYSE: IGL)") end if %> fell $2 1/8 to $36 1/16 after acquiring a company that increases its retail farm store outlets to 240.

FOOL ON THE HILL
An Investment Opinion by Randy Befumo

Gadzooks!

Clothier GADZOOKS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GADZ)") else Response.Write("(Nasdaq: GADZ)") end if %> elicited cries of despair from shareholders today after informing them that second quarter earnings would not meet expectations. Shares of the vendor of casual apparel and accessories to teenagers plunged $15 1/2 to $20 1/8 on more than 27 times normal volume. Selling fashionable tops, jeans, shorts, swimwear, T-shirts, dresses and other trendy accessories made by companies like Calvin Klein, Mossimo, JNCO and 26 Red, Gadzooks caters to the youth fashion market by designing stores that connote a "high-energy, fun environment." The trendy stock of the retailer has been quite volatile since its October 1995 initial public offering, ranging between $39 3/4 and $17 1/2 in the last twelve months alone.

Today's 44% drop comes after Gadzooks management stated that the company will not meet current First Call consensus estimates of $0.26 EPS in the fiscal second quarter ending July 31. Although they did not clarify how much it might make, analysts appear to have expected somewhere around $40 million in sales in the quarter. Gadzooks earned $0.18 per share on $28.5 million in sales in the second quarter of 1996. A reasonable expectation for the sales number would be somewhere around $34 million, similar to the company's first quarter results of a $0.15 EPS profit on $34.1 million in revenues. Earnings might actually fall below the $0.15 per share level achieved in the first quarter if the company has been spending more on operations in anticipation of higher sales volumes.

The lower-than-expected sales in the first three weeks of June come as a result of a key change in notoriously fickle teen fashion trends. After management saw that sales volume for June was coming up short, they concluded that they could not make the July forecasts -- the most important month in the company's second quarter. Although missing one fashion trend might not sound bad, one or two particularly hot items can make the difference between tepid and sizzling sales. Should a clothing retailer miss that key item, the subsequent shortfall can cause severe damage to the company's income statement, depending on how much the retailer had ramped up expenses.

The sudden demand for young men's fashion tops was cited as one of the areas where the company could not meet demand. Apparently, Gadzooks attempts to improve inventory turns in the last few months. Inventory turns, the number of times per year a company theoretically goes through its inventory, are a measure of how efficiently a company uses its inventory. With the $25.7 million in inventories at Gadzooks constituting 54% of its current assets and representing almost a full quarter's worth of sales, it is no wonder management and many investors were concerned. However, the attempt to increase turns by reducing the inventory at the store level has had the unintended consequence of leaving Gadzooks less flexible when it came to dealing with the shifting sands of fashion. When men's fashion tops became hot, the company did not have any in stock and consequently lost sales. Gadzooks has revisited its inventory policy and it is now "aggressively increasing store-level inventories."

Managing assets at a retailer, particularly a retailer vulnerable to changes in fashion like Gadzooks, is a very delicate process. When boys started wearing more fashionable tops after the "grunge" look finally passed, Gadzooks needed to have the product in inventory in order to sell it. However, having product in inventory is not always the best idea. If a company has too much of a not-so-hot product in inventory and misses a fashion trend, depending on its financial structure the subsequent earnings shortfall and inventory write-down can kill it. Merry-Go-Round's bankruptcy was a direct result of a precariously capitalized company making one particularly bad bet on fashion and leaving itself unable to meet its financial obligations when earnings did not materialize. While Gadzooks is hardly in the same boat, these companies certainly lack the earnings consistency of a Coca-Cola or Automated Data Processing.

Beyond the company-specific asset management problem, some analysts have been negative on youth-oriented clothing retailers for a few months now. Merry-Go-Round's final death rattle in 1996 as well as several other smaller bankruptcies have wiped out more than 4,500 youth-oriented fashion stores over the past two years. The remaining players like HOT TOPIC <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HOTT)") else Response.Write("(Nasdaq: HOTT)") end if %> and WET SEAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WTSLA)") else Response.Write("(Nasdaq: WTSLA)") end if %> benefited disproportionately from the lack of competition. Whether or not their accelerated sales and earnings growth will be sustainable as 1997 moves on has been in hot debate, particularly as sales at companies like URBAN OUTFITTERS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: URBN)") else Response.Write("(Nasdaq: URBN)") end if %> have ebbed. Although Hot Topic is down $3 5/8 to $20 1/8 and Wet Seal is down $2 1/2 to $27 in sympathy with the Gadzooks news, investors should probably analyze whether or not these companies can continue to show strong sales and earnings growth into 1998 before concluding that they are bargains created by a company-specific problem at Gadzooks

CONFERENCE CALLS

3COM <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COMS)") else Response.Write("(Nasdaq: COMS)") end if %>
Available though 7:00 p.m. EDT on 6/26
(800) 696-1563 (code: 204860) -- replay

ECHLIN INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ECH)") else Response.Write("(NYSE: ECH)") end if %>
(800) 683-1535 (password: McCurdy) -- replay through 6/27

CABLETRON SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CS)") else Response.Write("(NYSE: CS)") end if %>
(402) 220-5185 -- replay available through 6/30

06/26/97 (Thursday)
COGNOS INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COGNF)") else Response.Write("(Nasdaq: COGNF)") end if %>
(800) 997-6910 -- replay available from 1:15 p.m. EDT to midnight 6/30

THIS WEEK'S CONFERENCE CALL SYNOPSES

JABIL CIRCUIT <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: JBIL)") else Response.Write("(Nasdaq: JBIL)") end if %> Q3 Call
ST. JOHN KNITS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SJK)") else Response.Write("(NYSE: SJK)") end if %> Q2 Call
MICRON ELECTRONICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MUEI)") else Response.Write("(Nasdaq: MUEI)") end if %> Q3 Call
MICRON TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MU)") else Response.Write("(NYSE: MU)") end if %> Q3 Call
BRODERBUND <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BROD)") else Response.Write("(Nasdaq: BROD)") end if %> Q3 Call
COMPAQ <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPQ)") else Response.Write("(NYSE: CPQ)") end if %> / TANDEM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TDM)") else Response.Write("(NYSE: TDM)") end if %> Merger

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The Industry Snapshot

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

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Editing