HEROES

CTG RESOURCES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CTG)") else Response.Write("(NYSE: CTG)") end if %>, the holding company for Connecticut Natural Gas, powered higher $2 9/16 to $25 7/8 today after A.G. Edwards raised its rating on the company to "buy" from "accumulate." CTG announced yesterday that its board of directors approved a financial recapitalization plan designed to maximize shareholder value. Bracing itself for the grueling battles that lie ahead in the brave new world of deregulation, CTG cut its current quarterly dividend of $0.38 per share ($1.52 annually) to $0.25 per share ($1.00 annually) freeing up a substantially greater amount of cash for reinvestment. The company also announced a "Dutch auction" tender offer to purchase 1.8 million shares (17%) of the company's outstanding stock at a "price of not less than $23.50, nor more than $27.00." CTG has implemented a similar plan at its wholly owned subsidiary, The Energy Network, Inc.

NETSCAPE COMMUNICATIONS CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NSCP)") else Response.Write("(Nasdaq: NSCP)") end if %> rose $2 to $36 9/16 today on announcing that the Defense Technical Information Center (the information repository for the Department of Defense) is using Netscape Enterprise Server software for 87 of its "major" websites. The news is continued evidence of Netscape's reincarnation as a web-based enterprise software purveyor. A chief advantage of Netscape's offerings is its ability to deploy its intranet solutions across a company's entire infrastructure, as opposed to running only in areas where Microsoft dominates. Another prominent contract win for Netscape was LSI LOGIC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LSI)") else Response.Write("(NYSE: LSI)") end if %>, which chose Netscape for its ability to operate across its mix of machines running on UNIX, Windows NT, and mainframe operating systems. In its latest quarter, Netscape experienced a 166% increase in revenues for its "server, commercial applications and other revenues" category over the prior year period.

QUICK TAKES: Commercial and industrial products company NASHUA CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NSH)") else Response.Write("(NYSE: NSH)") end if %> rose $1 1/4 to $12 11/16, even after announcing that it expects to report a pretax loss from operations for the third quarter of approximately $2 million. Speculation that the company might engage in a sale of non-strategic assets boosted shares... Energy concern AES CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AES)") else Response.Write("(NYSE: AES)") end if %> moved higher $4 1/2 to $47 15/16 after the company announced that it has completed the acquisition and takeover of two hydro-electric stations and four combined heat and power stations in the province of East Kazakhstan (through a joint venture)... BURLINGTON NOTRTHERN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BNI)") else Response.Write("(NYSE: BNI)") end if %> said today that it will buy 6,000 covered hopper cars from TRINITY INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TRN)") else Response.Write("(NYSE: TRN)") end if %> to replace older and smaller cars in its grain fleet, boosting shares of Trinity $3 1/8 to $51 7/16.

Interstate/Johnson Lane raised its rating on bedding company PILLOWTEX CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PTX)") else Response.Write("(NYSE: PTX)") end if %> to a "strong buy" from a "long-term buy," fluffing up the company's shares $1 3/4 to $30 3/8... OHM CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OHM)") else Response.Write("(NYSE: OHM)") end if %>, a provider of environmental services, today announced that its subsidiary, OHM Remediation Services Corp., received an EPA contract for $47.2 million over three years, raising shares of OHM $7/16 to $8 5/16... Biorefining technology company ENERGY BIOSYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ENBC)") else Response.Write("(Nasdaq: ENBC)") end if %> surged $1 3/16 to $7 on news that the company has completed the retrofit of its five-barrel-per-day pilot plant, which uses a biocatalytic system to remove sulfur from petroleum... Medical technology company SPECTRX INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SPRX)") else Response.Write("(Nasdaq: SPRX)") end if %> rose $1 1/2 to $8 7/8 today after announcing plans to launch its hand-held infant jaundice product "BiliCheck" on Nov. 19 at the Medica 97 trade show in Dusseldorf, Germany.

Wireless operator AML COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMLJ)") else Response.Write("(Nasdaq: AMLJ)") end if %> gained $1 3/8 to $9 5/16 after receiving a $2.6 million purchase order for cellular multicarrier power amplifiers for an original equipment manufacturer (OEM) serving the Brazilian wireless communications market... Software firm ILOG SA <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ILOGY)") else Response.Write("(Nasdaq: ILOGY)") end if %> rose $1 1/12 to $10 1/2 on a Cowen & Co. upgrade to "strong buy" from "buy"... PETERSON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PTN)") else Response.Write("(NYSE: PTN)") end if %> surged $2 3/4 to $20 1/4 in heavy trading as the publisher of Hot Rod, Motor Trend, and Guns & Ammo went public... Blood chemistry testing company DIAMETRICS MEDICAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DMED)") else Response.Write("(Nasdaq: DMED)") end if %> rose $5/8 to $9 5/8 after it received FDA clearance to market its Paratrend 7+ multiparameter sensor for continuous monitoring of blood gases in critically ill adult and pediatric patients... Medical and dental digital imaging equipment company SCHICK TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SCHK)") else Response.Write("(Nasdaq: SCHK)") end if %> rose $1 1/2 to $21 1/4 after announcing that on Sept. 30 it acquired a 5% interest in privately held Photobit Corp... SONUS PHARMACEUTICALS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SNUS)") else Response.Write("(Nasdaq: SNUS)") end if %> announced that the FDA has notified the company that a Medical Imaging Drug Advisory Committee meeting is "not necessary to complete the review" of the new drug application for its EchoGen emulsion, in effect speeding the approval process along and boosting Sonus stock $3 3/8 to $44 3/8.

GOATS

Earnings pre-announcements continue to stream out today. Network software company TRITEAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TEAL)") else Response.Write("(Nasdaq: TEAL)") end if %> fell $3 to $5 after pre-announcing Q2 1998 revenues of $750,000 and a substantial loss, which will miss the mean estimate of $0.05 per share. The company said it failed to close on a number of large transactions during the quarter, and drew an "underperform" rating from Hambrecht & Quist. Meanwhile, semiconductor design software provider ORCAD <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: OCAD)") else Response.Write("(Nasdaq: OCAD)") end if %> slumped $5 7/16 to $9 5/16 after pre-announcing a 9% increase in Q3 revenues and saying that earnings are expected to be far below estimates but on the good side of zero.

Teleservices concern SITEL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SWW)") else Response.Write("(NYSE: SWW)") end if %> joined in the fray, dropping $1 3/16 to $9 1/4 after pre-announcing worse-than-expected results for the quarter, primarily due to unexplained revenue shortfalls with certain clients (possibly the strike at UPS). The company said higher-than-expected expenses associated with Australian operations also added to a general decline in margins. The long-term ability of teleservices firms to generate superior shareholder returns is still in question. The cash flow statements of these companies show that capital investment needs outweigh gross cash flows. In Sitel's case, an increase in shareholder's equity in the last year has come mostly from stock issuance and not from the generation of free cash flow. At 1.25 times annualized revenues, though, the company is a much better value now than it was when it traded at nearly four times revenues within the last year.

Broadline insurer CIGNA CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CI)") else Response.Write("(NYSE: CI)") end if %> fell $8 1/4 to $172 after the company said Q3 EPS will come in around $3.35 per share, 3% to 4% below estimates. Insurance lines such as property and casualty, indemnity, and financial services were all fine, but the company's 5+ million member HMO business faltered because of higher-than-expected healthcare costs and probably because of a lack of pricing power. Insurer OXFORD HEALTH PLANS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: OXHP)") else Response.Write("(Nasdaq: OXHP)") end if %> was also down earlier today as investors painted the HMO picture with a broad brush, failing to concentrate on the merits of Oxford's Northeast business, where HMO penetration has not reached the rates seen elsewhere in the nation, particularly on the West Coast. In saturated markets, companies like Cigna are more susceptible to matching the low market price if they want to keep market share. A similar earnings pre-announcement from AETNA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AET)") else Response.Write("(NYSE: AET)") end if %> earlier this week has investors worried about the business of health insurance underwriting, thus dragging down HUMANA INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HUM)") else Response.Write("(NYSE: HUM)") end if %> $1 1/8 to $22 1/4 by the end of today's trading.

More earnings warnings to report: 3DLABS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TDDDF)") else Response.Write("(Nasdaq: TDDDF)") end if %> was smashed $5 7/8 lower to $24 3/8 after the designer and marketer of 3-D graphics chips for PCs said Q3 revenues would fall 22% sequentially and that it expects to report Q3 EPS of $0.09 to $0.11, below the $0.38 per share mean estimate. Multimedia chip company ESS TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ESST)") else Response.Write("(Nasdaq: ESST)") end if %> fell $1 1/8 to $13 1/4 on announcing that it expects to report Q3 revenues of $50 to $52 million and EPS of $0.03 to $0.05, below estimates of $0.15 a share. Broadcast and video production equipment maker SEACHANGE INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SEAC)") else Response.Write("(Nasdaq: SEAC)") end if %> lost $3 5/8 to $11 on warning that it expects Q3 revenues of $15 million, up 6% sequentially and 16% year-over-year, but below expectations. The company said it will report EPS of break even to $0.02, below the mean estimate of $0.07.

QUICK CUTS: Fuller Brush and chemicals company CPAC INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CPAK)") else Response.Write("(Nasdaq: CPAK)") end if %> fell $1 1/8 to $10 on announcing that it expects to report Q2 EPS of $0.25 to $0.27, just touching the lone First Call estimate of $0.27. Various cost increases could not be overcome by a 10% year-over-year increase in revenues... MASTEC INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MTZ)") else Response.Write("(NYSE: MTZ)") end if %> fell another $2 15/16 to $40 1/16 on continuing concerns about a strike by workers at the company's Spanish communications services and construction subsidiary and on concerns about the health of CEO Jorge Mas Canosa, who was recently hospitalized... NATIONAL STEEL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NS)") else Response.Write("(NYSE: NS)") end if %> fell $1 1/16 to $15 9/16 after NUCOR STEEL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NUE)") else Response.Write("(NYSE: NUE)") end if %> earlier this week announced a 7% cut in prices for hot-rolled steel products, one of National's largest product lines... VITALINK PHARMACY SERVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VTK)") else Response.Write("(NYSE: VTK)") end if %> fell $1 3/16 to $19 13/16 after reporting Q1 operating EPS of $0.23, which elicited a Lehman Brothers downgrade to "market perform" from "outperform."

After yesterday's double-digit pop on announcing an agreement to merge with Florida developer Arvida, land development company ST. JOE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SJP)") else Response.Write("(NYSE: SJP)") end if %> gave back $9 1/2 to $105 1/2... SPECTRIAN CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SPCT)") else Response.Write("(Nasdaq: SPCT)") end if %> was mashed for a $14 7/8 loss to $50 before shares of the wireless communications equipment maker were held for pending news... BOEING CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BA)") else Response.Write("(NYSE: BA)") end if %> lost $1 7/16 to $52 1/2 after a representative of Europe's Airbus consortium said the company is considering developing a freighter and combi models of its next-generation Superjumbo A-300 series plane, which would be a further threat to Boeing's dominance in the jumbo jet category.

FOOL ON THE HILL
An Investment Opinion by Louis Corrigan

The Spin on "Straight" Spin-Offs

Last week, we examined some recent studies showing that spin-offs outperform their peers and the S&P 500 by about 33% over a three-year period. That's despite stumbling a bit in the first six months out of the block. The reasons for such outperformance vary. Some spin-offs may leave stodgy parent companies behind and excel because of better access to markets or capital, or an influx of entrepreneurial managers. Many simply become easier to value once their financial results are broken out from the parent. Others attract investors, for example, who wanted to buy a brokerage firm but didn't want to buy a retailer as part of the deal (as with Dean-Witter and Sears). Plus, many newly orphaned companies attract a sugar daddy in the same business who is looking to expand his brood, and so will pay a takeover premium to acquire the new company.

What this short list suggests is that spin-offs outperform the market in part because of improved business practices and in part because the market comes around to value them differently, more efficiently. It's probably a mistake to draw any hard and fast rule about which of these two factors is more important. Still, the lesson should be clear: spin-offs are worth researching because, to a significant extent, they are generally mispriced and often become even more mispriced during their first six months of existence. The odds are pretty good that an investor searching the spin-off bin can find a company whose stock can turn in market-beating results.

As we discussed last time, nowhere is this truer than among those companies spun off directly and completely to shareholders. A parent company will often opt to sell about 20% of a spin-off to the public and then distribute the rest to its current shareholders. That's what AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %> did with LUCENT TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LU)") else Response.Write("(NYSE: LU)") end if %>. These kinds of deals often work out well for the current shareholders since they establish a market for the spin-off as well as some basic price support. Underwriters get in on these deals, and they generally support them if there's any weakness in demand, just as in an initial public offering (IPO). Plus, the new company's management goes on a roadshow to sell Wall Street on the deal. The overall "market," then, actively helps set the price.

None of this kind of support is operative in a straight spin-off, where 100% of the new company is simply distributed to the parent company's current shareholders. While there is often a brief upward blip in the stock's price thanks to enthusiastic outside buyers stepping up to make a purchase, there's also an ensuing wave of selling by investors who find they've been handed shares in a company they may have no interest in owning. A study conducted by Frederic Escherich, managing director of J.P. Morgan, found that these straight spin-offs offer the best returns to new investors, with the smallest companies offering the highest excess returns. A look at some price-performance charts of recent firms involved in straight spin-offs back up what the studies show: investors can often find real bargains in the first six months after the new company has been set adrift among often unappreciative investors.

Consider OLIN CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OLN)") else Response.Write("(NYSE: OLN)") end if %> spin-off PRIMEX TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PRMX)") else Response.Write("(Nasdaq: PRMX)") end if %>, a defense and aerospace contractor providing systems management for the completion of everything from large weapons platforms to commercial satellites. Primex shares started trading in December 1996 around $20, dropped to $16 by early January of this year, spent several months in a choppy trading range and then, beginning in April, saw a steady rise to the recent high of $35 a share.

Then there's CORNING <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GLW)") else Response.Write("(NYSE: GLW)") end if %> spin-offs QUEST DIAGNOSTICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DGX)") else Response.Write("(NYSE: DGX)") end if %> and COVANCE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CVD)") else Response.Write("(NYSE: CVD)") end if %>, which operate Corning's former clinical laboratory testing business and contract research business, respectively. Each started trading separately in January 1997. Opening around $17, Quest spent some fruitless days in the wilderness last spring, hitting a low of $13 1/4 before finding its way to a high of $20 7/8. Meanwhile, Covance opened around $20, sank to $14 1/2 by late April, then raced to a new high of $25. Other firms in the research and clinical trials business got walloped during the same stretch. Still, the sell-off followed by a recovery mirrors the classic course of straight spin-offs.

Consider ECHELON INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EN)") else Response.Write("(NYSE: EN)") end if %>, a firm that develops, owns, and manages commercial and residential real estate in the Tampa Bay area. Echelon was spun off by power utility company FLORIDA PROGRESS CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FPC)") else Response.Write("(NYSE: FPC)") end if %> last December at around $15. It sputtered to $12 1/2 in January before reaching a new echelon of success with a high of $25 1/8.

Then there's THE EARTHGRAINS CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EGR)") else Response.Write("(NYSE: EGR)") end if %>, the maker of packaged bakery goods spun off from ANHEUSER-BUSCH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BUD)") else Response.Write("(NYSE: BUD)") end if %> in March 1996. Steven Bregman, an editor of The Spin-Off Report, which analyzes these deals for institutional investors, has said that when Earthgrains was spun off, one Anheuser-Busch analyst initially valued the firm at just $5 a share. And that was just about it when it came to Wall Street coverage. The stock actually first traded around $15 a share. Since then, it's been nearly a straight shot up to the recent high of $44 5/8 just 18 months later.

Or consider COGNIZANT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CZT)") else Response.Write("(NYSE: CZT)") end if %>, the DUN & BRADSTREET <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DNB)") else Response.Write("(NYSE: DNB)") end if %> spin-off that includes such major research operations as Nielsen Media Research and IMS International plus a stake in information technology researchers THE GARTNER GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GART)") else Response.Write("(Nasdaq: GART)") end if %>. Cognizant stock hit the market last October around $33, briefly ran up to $38 on strong demand from outside buyers, dropped to $28 in the April correction, and has since rallied to a recent high of $45.

As persuasive as such examples might be, you still can't break down spin-offs into some mechanical formula. For one thing, many of these companies have undoubtedly been dumped by their parents because they were problem units that showed few signs of promise and thus could not be spun off as part of public offerings because outside investors weren't interested. Such spin-offs are bound to make poor investments, with an initial decline perhaps only getting worse.

All the stock graphs do is reinforce a very general philosophical point about spin-offs that's supported not just by academic research but by common sense observations concerning market inefficiency and the operational improvements seen when more entrepreneurial managers take the reigns of a company. Knowing how spin-offs, especially straight spin-offs, are prone to act gives an investor an advantage. Not only are these companies likely to outperform the market, they are often most worth investigating just after they've turned in a weak performance. Determining which companies will actually make good investments, however, involves all the typical elements of fundamental analysis. In other words, there's still no shortcut around researching a company's basic business to discover what, if anything, other investors are missing.

CONFERENCE CALLS

CANANDAIGUA BRANDS, INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CBRNA)") else Response.Write("(Nasdaq: CBRNA)") end if %>
(800) 964-3296 -- replay through 10/2

THE FINISH LINE, INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FINL)") else Response.Write("(Nasdaq: FINL)") end if %>
(800) 839-8273 -- replay through 10/2

THIS WEEK'S CONFERENCE CALL SYNOPSES

3COM <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COMS)") else Response.Write("(Nasdaq: COMS)") end if %> Call
MICRON ELECTRONICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MUEI)") else Response.Write("(Nasdaq: MUEI)") end if %> Call

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