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HEROES

Online brokerage AmeriTrade Holding Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMTD)") else Response.Write("(Nasdaq: AMTD)") end if %> gained $2 5/8 to $27 5/8 as the online brokerage was upgraded to "strong buy" from "buy" by CS First Boston as AmeriTrade follows the mass advertising formula that has made E*Trade Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EGRP)") else Response.Write("(Nasdaq: EGRP)") end if %> so popular. E*Trade also moved $1 15/16 higher to $26 7/16, having announced in the last few weeks a number of service innovations. One of the more important, which will differentiate it from other online discount brokerages, is the company's announcement that it has acquired the OptionsLink division of Hambrecht & Quist <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HQ)") else Response.Write("(NYSE: HQ)") end if %>. Employees of what currently amounts to 79 corporations handle their stock options and stock purchase plans through OptionsLink, which brings an established customer base to E*Trade. Significantly, the demographics of such as group are attractive and assets per customer probably exceed the $34,222 per customer in assets under management at E*Trade last quarter. Such a development would help increase earnings per customer at E*Trade, which lags that of AmeriTrade by more than 50%.

BankBoston Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BKB)") else Response.Write("(NYSE: BKB)") end if %> rose $2 15/16 to $81 11/16 after Barron's covered the company this weekend in a highly positive piece entitled "Promise and Peril: There's lots more to BankBoston than just Latin Woes." Having operated in Latin America since 1917, the company says it has weathered worse storms there than what it has seen recently with Latin American debt market volatility. BankBoston recently reported that it will take a $20 million trading loss, which represents less than 1/3 of one percent of the well-capitalized bank's shareholders' equity, due to this volatility. UBS Securities and Smith Barney both reiterated "buy" ratings on the company this morning. Other banks making moves higher today include Citicorp <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CCI)") else Response.Write("(NYSE: CCI)") end if %>, which rose $7 1/4 to $123 1/2; BankAmerica Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAC)") else Response.Write("(NYSE: BAC)") end if %>, which picked up $3 5/8 to $74 3/8; and Chase Manhattan <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CMB)") else Response.Write("(NYSE: CMB)") end if %>, which added $5 1/4 to $108 7/8. All three had backslid on worries about credit and trading exposure in Asia and Latin America.

Unibanco <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UBB)") else Response.Write("(NYSE: UBB)") end if %> surged $2 11/16 to $25 after Morgan Stanley initiated coverage of the Brazilian wholesale and retail bank with a "strong buy" rating. Morgan Stanley's rating goes against the grain of the other analysts covering the Brazilian bank, which is the third-largest private bank in that country ranked by assets and equity. Merrill Lynch lowered its rating on the company on Friday to "accumulate" from "buy," while bank analysts from firms such as DMG and ING Barings recently reiterated "hold" ratings after Unibanco released its nine-month financial results. Looking at the company's return on assets of 1.5% and return on equity of approximately 16%, it appears as though the bank is either not highly leveraged or derives a good deal of net income from fee-based businesses. Without full financial statements, though, Fools would be hard-pressed to make a decision on investing in Unibanco, especially as that decision hinges at the moment on the company's funding position in the face of greatly increased short-term interest rates in Brazil. Without key information on the types of deposits and revenue breakdowns, it is probably best to leave Unibanco to institutional investors with a better information edge.

Private branch exchange telecom services company Shared Technologies Fairchild <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: STCH)") else Response.Write("(Nasdaq: STCH)") end if %> gained $2 1/16 to $14 after competitive local exchange carrier Intermedia Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ICIX)") else Response.Write("(Nasdaq: ICIX)") end if %> offered $15 per share in cash to acquire the company. Shared Technologies had agreed earlier this year to be acquired by long-distance reseller Tel-Save Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TALK)") else Response.Write("(Nasdaq: TALK)") end if %> for $11.50 per share in cash, but Tel-Save said it won't top Intermedia's offer. Tel-Save is currently involved in the acquisition of private branch exchange company ACC Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ACCC)") else Response.Write("(Nasdaq: ACCC)") end if %>, which in turn is merging with US Wats Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: USWIC)") else Response.Write("(Nasdaq: USWIC)") end if %>. Intermedia, for its part, will pick up voice telecom assets that are in-place in corporate sites across the country, which adds to the value of its Digex fiberoptic backbone assets. On a smaller scale, the acquisition of Shared Technologies is reminiscent of WorldCom's merger with MCI Corp., in that both acquisitions combine local access and long-distance services to create cost savings as well as revenue growth.

QUICK TAKES: SI Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SISI)") else Response.Write("(Nasdaq: SISI)") end if %> rose $1 1/8 to $6 7/8 after the manufacturer of specially engineered systems announced that it has shipped its Aero-Caster air-bearing system ordered by Aloha Stadium in Hawaii... Utility software company Cybermedia Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CYBR)") else Response.Write("(Nasdaq: CYBR)") end if %> gained $3 1/16 to $28 5/16 on loosing a barrage of announcements from the COMDEX trade show, including an announcement that CompuServe will include the company's Oil Change software with its "premium online service, Computing Pro"... Yurie Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YURI)") else Response.Write("(Nasdaq: YURI)") end if %> jumped $3 1/4 to $29 3/8 after Cowen & Co. started coverage on the maker of ATM remote access devices and access concentrators with a "strong buy" rating... 3Com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COMS)") else Response.Write("(Nasdaq: COMS)") end if %> jumped $3 13/16 to $34 1/8 on announcing the introduction of its CoreBuilder 9000 LAN backbone switch, which it says tops the throughput and functionality of products from competitors such as Cisco Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %>.

Franklin Electronic Publishers <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FEP)") else Response.Write("(NYSE: FEP)") end if %>, the largest publisher of electronic books, jumped $1 5/8 to $14 1/16 after announcing that it will double production of its REX PC Companion, a personal information management product that acts as a retrieval and storage device for Microsoft Exchange, Lotus Organizer, and Symantec ACT! software... Computer and software distributor CHS Electronics <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CHSE)") else Response.Write("(Nasdaq: CHSE)") end if %> gained $3 3/16 to $23 7/16 on announcing agreements to acquire six distributors in Western and Eastern Europe and Latin America. The acquisitions are expected to increase the company's revenues to over $1 billion in Eastern Europe by 1998... True North Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TNO)") else Response.Write("(NYSE: TNO)") end if %> rose $2 5/8 to $26 after French company Publicis S.A. came public with an offer to merge with the parent company of Foote, Cone & Belding Advertising. True North has rebuked the offer in private and did so in a public letter today.

Brazilian hypermarket and supermarket company Companhia Brasileria <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CBD)") else Response.Write("(NYSE: CBD)") end if %> ascended $1 13/16 higher to $15 as the Brazilian Bovespa index gained 4% on the day... PennCorp Financial <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PFG)") else Response.Write("(NYSE: PFG)") end if %> rose $2 3/16 to $33 1/2 after the life and casualty insurance company reported Q3 operating EPS of $0.68 (before including a $0.20 per share benefit at its Southwestern Life unit), up 15% over last year's Q3 EPS of $0.59... Life sciences equipment company Perkin Elmer Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PKN)") else Response.Write("(NYSE: PKN)") end if %> added $4 13/16 to $72 3/4 on announcing the extension of U.S. patent claims on polymerase chain reaction equipment for genetic analysis... Online giant America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> gained $2 3/4 to $76 1/16 after reporting that its membership has surpassed the 10 million mark. AOL has picked up 540,000 members (net of cancellations) in the last 48 days, putting it on track to add nearly one million members in its second quarter.

GOATS

Supermarket operator Penn Traffic Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PNF)") else Response.Write("(NYSE: PNF)") end if %> lost $15/16 to $8 7/8 after reporting that revenues for its third quarter ended November 1, 1997 were roughly $726 million, a decrease of 10.5% compared with the prior year. Same-store sales decreased 9.7% for the quarter, and the company's same-store sales year to date are suffering as well, off 8.5% for the year. Penn operates 263 supermarkets in Pennsylvania, upstate New York, Ohio, and West Virginia under names like Big Bear, Big Bear Plus, Bi-Lo Foods, Insalaco's, P&C Foods, Quality Markets, and Riverside Markets. According to the company, roughly 65% of its retail supermarket revenues come from smaller communities where Penn believes "it virtually always holds the number one or number two market position." Despite this rural food monopoly, the company has yet to see any benefits from the reorganization it underwent in May, when five division headquarters were eliminated along with 325 employees in a plan to cut costs by $12 million.

QUICK CUTS: Geophysical products leasing firm Bolt Technology Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: BTJ)") else Response.Write("(AMEX: BTJ)") end if %> lost $3/4 to $8 1/16 after announcing that it was buying privately held Custom Products Corp. for $6 million in cash and stock... Magellan Health Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MGL)") else Response.Write("(NYSE: MGL)") end if %> lost $2 3/16 to $26 15/16 after the behavioral healthcare company posted Q4 EPS of $0.33 versus estimates for $0.36... QLT PhotoTherapeutics <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: QLTIF)") else Response.Write("(Nasdaq: QLTIF)") end if %>, a maker of pharmaceutical products for photodynamic therapy, dropped $1 3/16 to $13 7/16 after reporting a Q3 loss of $0.14 per share versus expectations for a loss of $0.04 per share... Manufacturer of deflection yokes for color television sets and computer monitors Asia Electronics Holding Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AEHCF)") else Response.Write("(Nasdaq: AEHCF)") end if %> lost $7/8 to $10 after reporting Q3 EPS of $0.25 compared with prior year EPS of $0.17.

FOOL ON THE HILL
An Investment Opinion by Randy Befumo

A Lesson in Valuation

How do you value a company? The principal asset any company has is its ability to generate cash. Whether it does this by selling a product, service, or its own assets, the value of any company ultimately comes down to how much cash it could hand over to investors. Many academics argue that the value of this future stream of cash expressed in today's dollars is the intrinsic value of the company, whether it comes from making anti-gravity devices or bubble gum.

If a company is worth the current value of the entire stream of cash it will generate over its life, determining the dollar amount of this stream of cash becomes the duty of all intelligent investors. This is particularly challenging for companies that do not currently generate any cash. When a company has a history of profitability, estimating the future cash flows is usually a matter of assuming a conservative growth rate and trying to build in some room for error. When a company has never been profitable, small shifts in what that the perceived future profits could be can cause huge shifts in the current value of the company.

Take today's implosions in shares of Immunex <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IMNX)") else Response.Write("(Nasdaq: IMNX)") end if %> and Anesta <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NSTA)") else Response.Write("(Nasdaq: NSTA)") end if %> as cases in point. Immunex plunged $6 5/8 to $63 1/2 after investors became concerned about how much of its new injectable rheumatoid arthritis drug the company could sell. In a written report, two analysts at NationsBanc Montgomery questioned whether Immunex could meet the high expectations investors are currently pricing into the stock given that the drug is expensive to make and competes with equivalent products made by competitors. High costs combined with uncertain pricing power equal questionable future profits, something that caused the share price to decompress.

Anesta also took a header, losing $3 9/16 to $16 15/16, on reports that the Food and Drug Administration (FDA) stated it was not ready to approve its painkiller "lollipop" for use on cancer patients. The FDA demanded further data and analysis before any approval could go through. The blow came completely out of the blue for Anesta, as the painkiller had been unanimously approved by the FDA advisory panel that previously reviewed data surrounding the drug. As Anesta has been losing money at an accelerating rate over the past few years, its entire valuation hinged on the cash flows the new product could generate. When yet unseen dollars were questioned, the value of the company changed radically in just a few minutes.

Although plenty of investors maintain that the actual financials of the underlying business are insignificant when purchasing stock, preferring instead to examine trading data for signs that shares are being accumulated by institutions, it is hard to deny the reality of how businesses are priced when looking at reactions to news like this. Until today's debacle, shares of Immunex had been rising on decent volume. After one research report questioned whether the company could actually make money with its product given that cheap generic alternatives abound, the entire company is being valued at 10% less than it was the day before. As Immunex has been losing money for the last few years, the valuation completely hinged on unknown future events -- nothing in its past indicated at all what kind of earnings power the company had.

In the end, Immunex and Anesta represent object lessons about how much risk investors assume when they buy a company whose business model has never been proven. Even if these drugs are blockbusters, questions still remain about pricing, costs of manufacturing, overhead costs related to other company endeavors, and the continued issuance of shares as a means to finance future development. If a company has never shown a lick of cash on its balance sheet and does not generate substantial revenues from an existing and proven product, the valuation becomes extraordinarily volatile and subject to massive shifts if there are even tiny changes in future assumptions. By and large, unless an individual investor has a powerful knowledge advantage due to education or experience, these kinds of investments would seem best avoided.

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Randy Befumo (TMF Templr), a Fool One

Dale Wettlaufer (TMF Ralegh), Fool Two

Alex Schay (TMF Nexus6), Fool Three
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Brian Bauer (TMF Hoops), Fool Four
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