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HEROES

Tab Products <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: TBP)") else Response.Write("(AMEX: TBP)") end if %> rose $1 5/8 to $13 3/8 after money manager J. Carlo Cannell picked the office products and software company's stock to outperform randomly chosen stocks in the Wall Street Journal's quarterly "Investment Dartboard" contest. Cannell is the reigning champion in the contest, which was set up many years ago to test the "random walk" theory of stock performance. The mention in this morning's WSJ was enough to pop the stock up about $1 1/8 at the open, with traders taking care of the rest of the move today. This brings up an interesting point -- the short term is almost completely random in the market, but the long term is dictated by earnings and intrinsic value of a company. Those who adhere to the loosely efficient market theory have no quarrel with the random walk theory in the short term, but they argue that movements over the long term are far from random and have more to do with business models, management strengths, and intelligent allocation on the part of the investor. Trading in stocks because they were mentioned in a daily newspaper doesn't count in the category of intelligent capital allocation.

Deposition equipment manufacturer VEECO INSTRUMENTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VECO)") else Response.Write("(Nasdaq: VECO)") end if %> bounced back $4 5/8 to $40 today after announcing shipments worth $5 million for ion beam deposition systems for disk drive manufacturers. The equipment will be used for the manufacture of magnetoresistive and giant magnetoresistive (GMR) read/write heads. For the coming quarter, Veeco has firm orders for physical vapor deposition equipment that will be used specifically for GMR processing. Those orders are not exclusively for IBM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %>, either, which earlier this week announced the commercial availability of drives using GMR heads. Independent head companies also have orders in for those GMR PVD machines, indicating a healthy pipeline for Veeco and showing that GMR is in the works elsewhere in the drive and drive components industry.

QUICK TAKES: Various disk drive industry participants such as Read-Rite <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RDRT)") else Response.Write("(Nasdaq: RDRT)") end if %>, up $15/16 to $19, gained ground today perhaps because the parent of drive maker Micropolis announced that it was shutting down that division, removing some capacity from the industry... Quantum <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: QNTM)") else Response.Write("(Nasdaq: QNTM)") end if %> drove ahead $2 7/8 to $28 5/8 as analysts continue to back the company, saying that its tape drive division and new products, such as its solid state data storage units, will cushion the pricing decline seen elsewhere in the industry... Holmes Protection Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HLMS)") else Response.Write("(Nasdaq: HLMS)") end if %> rose $1 3/4 to $19 1/4 after the security systems company said it has retained J.P. Morgan to look into a sale, merger, or other deals to enhance shareholder value.

Consumer and commercial finance company CIT Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CIT)") else Response.Write("(NYSE: CIT)") end if %> rose $3 from its IPO price of $27 to close at $30. CIT will use part of the proceeds to purchase an option to acquire 20% of its common stock... Northeast Utilities <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NU)") else Response.Write("(NYSE: NU)") end if %> gained $1 1/4 to $13 3/4 after announcing that it has received an unsolicited $1.4 billion offer to acquire its non-power generating assets in New Hampshire. The offer comes at the right time, with an S&P Watch with negative implications out on Northeast... Industrial equipment manufacturer Ingersoll Rand Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IR)") else Response.Write("(NYSE: IR)") end if %> added $2 13/16 to $37 9/16 after Smith Barney raised its rating on the company to "buy" from "hold"... Retailer Crowley Milner & Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: COM)") else Response.Write("(AMEX: COM)") end if %> moved up $1 7/8 to $10 3/4 after reporting Q2 EPS of $0.48 and strong Q3 same-store sales increases.

GOATS

CPI Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPY)") else Response.Write("(NYSE: CPY)") end if %>, an operator of 1,200 photography studios (1,030 in Sears stores), fell $2 7/16 to $20 1/8 after announcing that sales from its portrait studios are going to be lower than expected and slightly below year-ago levels of $91.3 million. The company has weathered some pretty serious competition in the portrait studio business over the last five years, as total entrants into the business have risen from 600 to 4,000 in the last six years. CPI has managed to grow gross cash flow from operations at a compound rate of 12% annually since 1993, despite a $147 million R&D budget to improve the quality of its video capture technology. Still, investors want earnings, and the company has seen patchy performance in this area (the company confirmed that it will take a third quarter $2.7 million after-tax charge on the sale of its remaining 49% stake in the Fox Photo joint venture with Eastman Kodak). The bright spots for CPI continue to be strong cash flow and the best brand awareness in the business. However, without the necessary top line growth, CPI may continue to be "overexposed."

Triton Energy Ltd. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OIL)") else Response.Write("(NYSE: OIL)") end if %> lost $2 7/16 to $35 3/4 after announcing that a government change in Thailand may result in a delay in the company's purchasing agreements for natural gas sales from the Joint Development Area in the Gulf of Thailand. The company originally forecast that the sale would close by the end of 1996. Triton expects to produce up to 300 million cubic feet of natural gas a day from the gas fields, which could add roughly 25% to earnings each year. With a lot riding on the agreements, today's announcement by CEO Tom Finck that he feels "less confident that the Heads of Agreement can be signed by year-end'' did not help investor confidence. However, Triton has already executed a similar agreement in Colombia, and patient investors may yet see the light at the end of the tunnel.

QUICK CUTS: Virus Research Institute <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VRII)") else Response.Write("(Nasdaq: VRII)") end if %> dropped $3 1/2 to $5 3/8 after the company said results from a Phase II study of an influenza vaccine using the company's delivery system were inconsistent with Phase I study results, although the vaccine was "well tolerated" in the Phase II trial... Carrizo Oil & Gas <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CRZO)") else Response.Write("(Nasdaq: CRZO)") end if %> slid $1 3/8 to $11 1/4 after reporting a 9.1% increase in Q3 operating cash flow per share and EPS of $0.03, 25% below last year's Q3 results and less than the lone EPS estimate of $0.05... Lodging properties renovation and procurement services company Hospitality Worldwide Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: HWS)") else Response.Write("(AMEX: HWS)") end if %> lost $1 1/8 to $10 1/4 after reporting a 42% decline in third quarter EPS of $0.07. The company said that it expects overhead expenses to decline as a percentage of revenues in coming quarters and that it has put in place a poison pill takeover defense plan.

Provider of semiconductor substrate material-handling products Brooks Automation <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BRKS)") else Response.Write("(Nasdaq: BRKS)") end if %> fell $2 1/8 to $19 1/8 despite reporting Q4 EPS of $0.23 versus estimates for $0.14 a share... Dental products company American Dental Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ADLI)") else Response.Write("(Nasdaq: ADLI)") end if %> was drilled for $11/16 to $6 3/8 after reporting Q3 EPS of $0.02 versus $0.10 in the prior year period... HORIZON Pharmacies <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: HZP)") else Response.Write("(AMEX: HZP)") end if %> lost $1 3/4 to $14 3/4 after announcing that it acquired Scott's Pharmacy and Florist located in Lockhart, Texas, for a combination of cash, debt, and stock.

FOOL ON THE HILL
An Investment Opinion by Jim Surowiecki

The Lion that Squeaked

In the case of Metro-Goldwyn-Mayer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MGM)") else Response.Write("(NYSE: MGM)") end if %>, the closely held movie studio that put up 19.3% of itself in an IPO that started trading today, what we're looking at is not the mouse that roared but rather the lion that squeaked. And we're also looking at yet another installment in the continuing misadventure that the American movie business has become.

Before today, MGM was co-owned by financier Kirk Kerkorian's Tracinda Corp. and the Australian company Seven Networks Ltd., who together bought the studio in 1996 for $1.3 billion from the French bank Credit Lyonnais. The bank had, in turn, inherited the property from corrupt Italian financier Giancarlo Parretti, who bought MGM -- from Kerkorian -- in 1990 and then wasted no time looting it and running it into the ground.

Got all that? Actually, that doesn't even begin to cover the tangled history of the studio, which Kerkorian has actually owned three different times. The two most important things to remember about MGM are that it no longer owns its pre-1948 film library (that's in Ted Turner's hands) and that it isn't really a movie studio in the classic sense at all. MGM owns no lots and no production facilities, and has just 900 employees, most of whom work out of an office building in Santa Monica, California. The studio's main assets, then, are its ability to come up with financing for movies and its ownership of certain crucial franchises, including the MGM name and the James Bond series.

Of course, the lack of a studio lot is not necessarily a bad thing, since it means that MGM's overhead is lower than it might otherwise be. When the studio wants to make a film, it leases property and production equipment, which it believes keeps overall costs down. And the leaner-is-better strategy is also reflected in MGM's plans to release fewer films each year than the other major studios -- 10-12 annually as opposed to the typical 20-25. MGM also intends to distribute five films a year made by outside producers who come to the studio for its distribution network and its name.

Releasing fewer films, though, does not guarantee that you'll be releasing better films, and MGM's record in recent years does not fill one with great hopes for the future. The studio has not been profitable since 1988, and in 1996 it lost a staggering $744 million. Even in 1995, when it released the popular and profitable Get Shorty and The Birdcage, MGM lost money. And this entire year has essentially been a wash as the Kerkorian acquisition has been consummated. About all MGM has done this year was buy Orion Pictures' film library from Metromedia <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: MMG)") else Response.Write("(AMEX: MMG)") end if %> for $573 million -- more than a fourth of what MGM as a whole is valued at by the IPO -- and release two films, Hoodlum and Red Corner, neither of which have brought people flooding to the box office.

MGM is looking to get back into television, and it still has a huge film library that generates relatively steady cash flow. But even the prospectus for the IPO said that it would likely be years before the company returned to profitability. In the short term, MGM is staking almost everything on Tomorrow Never Dies, the newest James Bond film, which premieres in mid-December. Bond is about the only guaranteed winner in MGM's stable, which made the recent news that Sony Pictures plans to start making its own Bond films -- plans that MGM is, of course, contesting in court -- rather disturbing.

MGM is currently carrying more than $450 million in debt and next to nothing in cash since its films have generated almost no cash flow this year. If the IPO goes as planned, the company should be able to reduce that debt enough to save substantially on interest payments, but most of the capital raised in the IPO will have to go into operations.

In any case, before today the IPO already hit a couple of snags. MGM initially wanted Goldman, Sachs to underwrite the deal, but Goldman recommended that the studio wait a year until it had some sort of track record that investors could look to. Then, earlier this week, the number of shares being offered was reduced from 12.5 million -- at $20 to $23 apiece -- to 9 million when Kerkorian announced that Tracinda would be buying 3.5 million shares in what seems to be an attempt to reassure investors. Considering that Tracinda was going to own 56% of the company even with the IPO, this is either a well-considered long-term investment or a foolish, even cinematic, gesture.

Either way, Tracinda's decision is yet another reason to stay far away from this company. MGM is clearly hoping that its name and the mystique that still surrounds Hollywood will attract investors anxious to own what will be the only pure-play investment in a major film studio. (Disney, Fox, Universal, Warner Bros., and Sony are all parts of larger conglomerates.) The company has come public now, in fact, in an attempt to take advantage of the buzz created by Tomorrow Never Dies. But pure-play movie investments have actually done remarkably poorly in the past. Carolco Pictures saw its stock become worthless when it went bankrupt. Savoy Pictures' stock has dropped 35% per year since 1993 in spite of fact that the company was sold to HSN <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HSNI)") else Response.Write("(Nasdaq: HSNI)") end if %>, and Cinergi Pictures fell 41% per year over the past year and a half before being liquidated. The only recent pure-play movie company that's been successful is tiny Cinar Pictures (OTC: CINRF), whose shares are up 81% per year over the last three years. But MGM's fundamentals are rather different from Cinar's.

MGM was once the home of Irving Thalberg, whom F. Scott Fitzgerald fictionalized as The Last Tycoon. But there are no tycoons left in Hollywood, just financiers doing their best to use Hollywood names to hide the fact that their businesses are in shambles.

CONFERENCE CALLS

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