HEROES

Managed care holding company HEALTH POWER <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HPWR)") else Response.Write("(Nasdaq: HPWR)") end if %> moved up $2 3/8 to $9 on the strength of a turnaround in its HMO operations. A key element in the company's recovery was the recent improvement in its medical loss ratio (health care costs stated as a percentage of total revenues) from just over 100% a year ago to 82.5% for the second quarter of 1997. Assuming the company can continue to improve margins by reducing expenses and keep its Medicaid enrollment momentum, operating earnings may continue to expand in the second half of the year. Health Power operates HMOs in 19 counties in Ohio and has historically focused on serving Medicaid recipients enrolled in the Aid to Families with Dependent Children program (67% of 1996 revenues). The remainder of its revenues come from commercial contracts and its third party administration services subsidiary. Health Power added over $11 million in market capitalization today, moving up to trade at 0.54x sales, still a substantial discount to its peer group.

Reader's Digest is the world's most widely read magazine with a circulation of 27 million, and accounts for roughly 25% of the revenues for THE READER'S DIGEST ASOCIATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RDA)") else Response.Write("(NYSE: RDA)") end if %>. Despite a strong brand name, the company has failed to keep pace with current trends in publishing. The announcement in late April of "another" cash infusion of $400 million to shore up its flagging restructuring attempts in conjunction with a string of missed earnings estimates over the last year had torpedoed the stock to a 52-week low of $22 1/8. Poor operating results can cause heads to roll, and the latest is Chairman and Chief Executive James Schadt whose "resignation" was announced by this morning. Today's $3 1/4 rise to $28 1/8 reflects investor optimism that the company may indeed take the necessary steps required to engineer a turnaround.

QUICK TAKES: HERSHEY FOODS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HSY)") else Response.Write("(NYSE: HSY)") end if %> added a little sugar, rising $4 7/8 to $57 3/8 as the company was upgraded by Morgan Stanley from "neutral" to "outperform"... BENTON OIL & GAS CO (NYSRE: BNO) powered up $13/16 to $14 1/8 on the announcement that it acquired the rights to explore for oil and natural gas with several Jordan government agencies in that country's southeastern region... JENNY CRAIG <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JC)") else Response.Write("(NYSE: JC)") end if %> waddled higher $3/8 to $7 after announcing the details surrounding its new show with ABC... KENSEY NASH CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KNSY)") else Response.Write("(Nasdaq: KNSY)") end if %> climbed $4 to $16 after an FDA action that increased in the addressable market for its products... AMSCAN HOLDINGS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMSN)") else Response.Write("(Nasdaq: AMSN)") end if %> moved up $3 13/16 to $15 15/16 after announcing a merger with Goldman Sachs affiliate Confetti Acquisition Inc... VACATION BREAK USA <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VBRK)") else Response.Write("(Nasdaq: VBRK)") end if %> powered $3 3/8 higher to $17 3/8 on news that FAIRFIELD COMMUNITIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FFD)") else Response.Write("(NYSE: FFD)") end if %> will acquire the time shares company... Hang on, more merger mania as UNISOURCE WORLDWIDE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UWW)") else Response.Write("(NYSE: UWW)") end if %> and NATIONAL SANITATION SUPPLY CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NSSX)") else Response.Write("(Nasdaq: NSSX)") end if %> said that they signed an agreement whereby National Sanitation will become a wholly owned subsidiary of Unisource in a $163 million deal that propelled National Sanitation shares up $3 15/16 to $22.

GRAND PRIX ASSOCIATION OF LONG BEACH <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GPLB)") else Response.Write("(Nasdaq: GPLB)") end if %> sped ahead $2 1/4 to $14 3/4 after announcing the sale of equity to PENSKE MOTORSPORTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SPWY)") else Response.Write("(Nasdaq: SPWY)") end if %> and INTERNATIONAL SPEEDWAY CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ISCA)") else Response.Write("(Nasdaq: ISCA)") end if %>... M.A.I.D. PLC <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MAIDY)") else Response.Write("(Nasdaq: MAIDY)") end if %> gained $1 3/4 to $13 5/8 as M.H. Meyerson & Co. initiated coverage on the company with a "speculative buy" rating... MEDIS EL LTD <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MDSLF)") else Response.Write("(Nasdaq: MDSLF)") end if %> rose $1 to $8 1/8 as the U.S. Patent and Trademark Office allowed all patent claims for the company's "synchronous twin piston reciprocating linear compressor"... SYSTEM SOFTWARE ASSOCOCIATES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SSAX)") else Response.Write("(Nasdaq: SSAX)") end if %> was up $1 1/4 to $10 3/16 after the company reported record revenues for its fiscal third quarter... Boston Partners' Wayne Archambo reported in this weekend's Barron's that he was "partial" to ESS TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ESST)") else Response.Write("(Nasdaq: ESST)") end if %>, which helped the shares climb $1 7/8 to $17 1/4... SAC TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SACM)") else Response.Write("(Nasdaq: SACM)") end if %> rose $1 1/4 to $12 1/4 on the announcement of a big contract with AdC of Las Vegas, Nevada... 800-JR CIGAR INC <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: JRJR)") else Response.Write("(Nasdaq: JRJR)") end if %> continued its advance from last week, rising $3 1/8 to $33 5/8 despite shipping difficulties related to the UPS strike.

GOATS

ASCEND COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ASND)") else Response.Write("(Nasdaq: ASND)") end if %> fell $4 3/4 to $44 11/16 after filing an 8-K interim report with the SEC in which it reported revenues of $62.8 million and EPS of less than $0.02. Montgomery Securities downgraded the stock to "hold" from "buy," which worried some investors as Montgomery is seen as one of Ascend's institutional brokerage champions. Investors may be worried that 56K concentrator demand is not progressing smoothly, competition in ATM and frame switching has stepped up, Europe is turning out to be lighter than expected, or the merger with Cascade isn't progressing as expected. Ascend has been guiding investors to expect a back-end loaded quarter, though, and says that it is comfortable with Q3 EPS estimates of $0.36.

TELETECH HOLDINGS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TTEC)") else Response.Write("(Nasdaq: TTEC)") end if %> was dropped into the depths of a sector scorned, losing $3 11/16 to $15 1/16 after Morgan Stanley lowered its rating on the company to "hold" from "buy." Usually such a rating change only comes after an analyst has checked in with a company's management and has come away not liking what he or she has heard or after the analyst has put together a number of incremental bits of information. TeleTech's 60% decline from its 52-week high has been the rule and not the exception in the teleservices outsourcing sector. Other such declines include those of APAC TELESERVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: APAC)") else Response.Write("(Nasdaq: APAC)") end if %>, which has fallen 74%, and the Fool portfolio's holding ATC COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ATCT)") else Response.Write("(Nasdaq: ATCT)") end if %>, which has lost 80% from its high. Most of these companies haven't been public for that long and many of them have only been around for five years or so, due in good part to downsizing in the Bell family. Some think that many of the companies chose a great time to sell equity, when valuations were peaking last year and outsourcing was the zeitgeist.

Boston Market parent company BOSTON CHICKEN <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BOST)") else Response.Write("(Nasdaq: BOST)") end if %> was plucked for a $1 3/16 loss to $12 3/16 following last week's company guidance for a possible decline in Q3 earnings due to soft same-store sales results. Alex. Brown lowered its rating on the company to "market perform" from "buy," and Merrill Lynch lowered the company to "intermediate-term accumulate" from "buy." Long term, Merrill still has a "buy" rating on the stock, which is now selling at about 10 times 1998's lowest EPS estimate and 7.8 times the high EPS estimate.

QUICK CUTS: Coke's largest bottler, COCA COLA ENTERPRISES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CCE)") else Response.Write("(NYSE: CCE)") end if %>, fell $1 9/16 to $28 3/8 after Friday's announcement that COCA-COLA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KO)") else Response.Write("(NYSE: KO)") end if %> expects operating earnings growth to be light, which investors take to mean less than robust unit volume growth for the bottler... FAIRFIELD COMMUNITIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FFD)") else Response.Write("(NYSE: FFD)") end if %> lost $1 5/8 to $31 after announcing the acquisition of VACATION BREAK USA <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VBRK)") else Response.Write("(Nasdaq: VBRK)") end if %>... Restaurant and hotel operator FRISCH'S RESTAURANTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: FRS)") else Response.Write("(AMEX: FRS)") end if %> lost $1 to $14 13/16 after reporting earnings on Friday afternoon and announcing that it expects to buy back 1.14 million shares at $15 apiece in its previously announced Dutch auction tender offer.

FOOL ON THE HILL
An Investment Opinion by Randy Befumo

Risk vs. Reward

High growth deserves a high valuation. Since Philip Fisher and T. Rowe Price began independently promoting the idea of buying quality companies with fast-growing earnings in the '40s and '50s, the idea that above-average growth can justify buying a company that does not meet traditional Graham and Dodd value characteristics has gained an impassioned following. What is the point of buying a business that is cheap as measured by statistical tools if the company will only be getting cheaper in the near future? Investors scared by buying "cigar butt" companies trading at historically low valuations in an effort to get one last "puff" out of them certainly saw that the position Fisher and Price were advocating made quite a bit of sense.

The dark side to paying up for companies with high rates of earnings growth is that the risk that you have paid too much is increased. Although economists measure the "risk" of investing in stocks in terms of the variability of future returns based on past trading history, the real risks that investors face are not knowing enough about the company they buy and overpaying for the stock. Although we discussed information risk back on August 1st in a column about Orbit F/R, the idea of valuation risk is a topic we have never explicitly addressed. By valuation risk, I simply mean the idea that despite a company's arguably great prospects, you can pay too much for the future cash flows, creating the risk that the stock will go down instead of up. The higher the valuation, the more likely you are to face future volatility.

Investors in USCS INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: USCS)") else Response.Write("(Nasdaq: USCS)") end if %> discovered today that a high valuation -- even one considered reasonable relative to the earnings growth rate -- can make for a nasty spill if any news breaks that short-term oriented investors view as negative. A major provider of billing services (an industry profiled on June 30th), USCS nose-dived $10 7/8 to $20 1/8 after customer Tele-Communications, Inc. announced that it was throwing all of its business to competitor CSG SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSGS)") else Response.Write("(Nasdaq: CSGS)") end if %> in the form of an exclusive, 15-year contract. Cable company TCI represented $55.7 million in USCS revenues last year -- 21% of the company's total revenues -- explaining why many investors viewed this as a major negative. One analyst was quoted on CNBC as saying the revenues were possibly "irreplaceable" -- not necessarily the kind of words that bring calm to the impassioned heart of an institutional investor.

Contrary to the market reaction today, it has been widely disclosed both by USCS International and CSG Systems that the TCI business could potentially go away. Anyone who has been following these companies knows that TCI has been considering bringing all of its billing services in-house for at least six months, and it has been beta testing its billing platform for the last few weeks. In fact, the most surprising thing that happened today was that TCI decided to sell its SUMMITrak system to CSG Systems for $106 million in cash, $26 million in contingent payments, and warrants for 1.5 million shares of stock, not that one of the two companies lost TCI's billing business. In a press release today, USCS revealed that it had actually bid on TCI's business and its billing services system, but apparently CSG Systems topped its offer.

As the deal will add approximately $55.7 million in revenues plus customer growth and whatever other TCI revenues are out there, the price is close to 2 times the sales that it will add to CSG's revenue base. With CSG trading at 4 times sales before the deal was announced, the purchase was below the current company's valuation and stands a good chance of adding to earnings, explaining CSG's $3 1/4 rise to $26 3/8 today. However, given that USCS has said time and time again in federal filings that it might lose TCI's business, investors can hardly claim they are surprised. For instance, in a 10-Q filed May 13th, USCS stated: "TCI has announced that it is developing and testing an in-house system and that such in-house system will replace the Company's customer management software system." This, folks, was not a bolt from the blue.

So if prudent investors read the company's federal filings -- precious communications that a company spends innumerable hours completing -- why did the stock go down 35% today? What new information was introduced into the market that can explain the dramatic drop? Events like these are the ones that make efficient market theorists scratch their heads and wonder. Information that USCS might lose the TCI business was hardly insider information -- the company might as well have posted it on a billboard given that they put it in federal filings that can be accessed by any investor with a modem and a personal computer. The real sin USCS International committed was not the loss of the TCI business, but the fact that it was trading at 37.8 times trailing earnings when analysts were forecasting only 20.7% growth from 1997 to 1998.

Rather than focusing on the TCI risk that was widely disseminated before it ever happened, it seems clear that the real risk in USCS International at $31 a share was the valuation. At more than 2.8 times enterprise value with operating margins only in the 13% range, the company's valuation by any measure was rather high if people were really pricing in the 20% earnings growth that consensus estimates seemed to anticipate. Although valuation may not matter quite so much when the news is good, the minute the news appears bad investors are very likely to re-evaluate their holdings. If the company that is overvalued has news that is perceived as negative -- even if everyone already knew the news was coming -- it can drive a sell decision purely on reconsideration without a single change in the fundamentals.

For investors looking at battered and tattered USCS International today, is all lost? While replacing the TCI business will probably eat up all of the company's projected growth over the next four quarters, this is a profitable company that should average 20% growth into the future. The company will certainly not lose money, is not in danger of bankruptcy, and has a passable -- although not spectacular -- balance sheet. Assuming the company's revenues will be flat over the next four quarters and start to rise again sometime in the latter half of 1998, the company trades at approximately 21 times forward earnings and 1.7 times forward sales.

While certainly not a bargain yet, as the company continues to lose momentum investors over the next few days over a shock that should have been anticipated, ironically the valuation may fall enough so that the valuation risk in purchasing the stock is very low. Investors who are interested should spend some time reducing the information risk by learning something about the company and reading the very informative federal filings -- something that apparently all of the momentum investors selling today did not bother to peruse.

CONFERENCE CALLS

INFORMIX <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IFMX)") else Response.Write("(Nasdaq: IFMX)") end if %>
(800) 475-6701 (code: 350911) -- replay

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

TIDEWATER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TDW)") else Response.Write("(NYSE: TDW)") end if %>
(800) 475-6701 (#348218) -- replay

PAPA JOHN'S PIZZA <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PZZA)") else Response.Write("(Nasdaq: PZZA)") end if %>
(800) 642-1687 (ask for Papa John's Int'l conference call) -- replay

CREE RESEARCH <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CREE)") else Response.Write("(Nasdaq: CREE)") end if %>
(800) 642-1687 (code: 523215) -- replay
(706) 645-9291 (code: 523215) -- replay for international callers

SARA LEE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLE)") else Response.Write("(NYSE: SLE)") end if %>
(402) 220-3124 -- replay through 8/14

CISCO SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %>
(800) 633-8284 (code: 2875731) -- replay through 8/15

08/12/97 (Tuesday)
EDGE PETROLEUM CORP <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EPEX)") else Response.Write("(Nasdaq: EPEX)") end if %>
10:30 am EDT
(800) 370-0869 -- live

08/12/97 (Tuesday)
FOUNDATION HEALTH SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FHS)") else Response.Write("(NYSE: FHS)") end if %>
(402) 220-0104 -- replay from 2:00 pm EDT through 8/15

08/12/97 (Tuesday)
WAL-MART <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WMT)") else Response.Write("(NYSE: WMT)") end if %>
(800) 633-8284 (code: 3029325) -- replay from 11:30 am EDT through 5:00 pm EDT

08/12/97 (Tuesday)
APPLIED MATERIALS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMAT)") else Response.Write("(Nasdaq: AMAT)") end if %>
(800) 642-1687 (code: 522530) -- replay from 8:30 pm EDT through 8/14 @ 8:30 pm EDT

THIS WEEK'S CONFERENCE CALL SYNOPSES

RAINFOREST CAFE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RAIN)") else Response.Write("(Nasdaq: RAIN)") end if %> Call
AMERICA ONLINE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> Call
APPLE and MICROSOFT Call

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What's that jingling? Is it lots of belled jester caps, flittering in the breeze? Nope -- it's the sound of telephones ringing on the desks of business editors at newspapers across the country, as Foolish readers call and request that The Motley Fool's syndicated newspaper feature be carried. (You can e-mail a bunch of these editors, too.) Check out the list of newpapers that have signed up for us and consider making a call or sending a note. Click the link above for a list of phone numbers of some major newspapers. Join the merry campaign and help bring Foolery to your hometown paper -- call or e-mail an editor today! (We'll be reporting on the results periodically.)

Randy Befumo (TMF Templr), a Fool
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Ups & Downs

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