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HEROES

Shares of LOT$OFF Corp. (OTC: LOTS) jumped $3 1/16 to $4 7/8, or 169%, after the company won a major lawsuit against Chase Manhattan Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CMB)") else Response.Write("(NYSE: CMB)") end if %>. A jury awarded LOT$OFF, formerly known as 50-OFF Stores, $13 million in actual damages and $138 million in punative damages for securities fraud and conspiracy. LOTS$OFF said Chase had traded in old shares of the company's stock prior to its bankruptcy and reorganization that it had never paid for, hurting individual shareholders. With only 856,000 shares outstanding, investors this morning saw tremendous upside from the verdict based on the cash per share alone. However, given this rather large award stands a chance of being substantially reduced by the judge, buying the company based on this alone may be rash.

Nabisco Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NA)") else Response.Write("(NYSE: NA)") end if %>, the non-tobacco unit of RJR Nabisco Holdings Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RN)") else Response.Write("(NYSE: RN)") end if %>, gained $3 7/8 to $46 7/8 today. Chairman and Chief Executive Officer John Greeniaus is stepping down due to "health-related" reasons, causing some analysts to get excited about the potential for his successor to improve the business. New Chief Executive James Kilts is a former executive vice president at the Kraft Foods division of Philip Morris <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MO)") else Response.Write("(NYSE: MO)") end if %> and has some admirers on the Street. Goldman Sachs analyst Nomi Ghez put the stock on the firm's "recommended list," concluding that with new management blood the firm could be much more aggressive in selling off non-snack units like Parkay margarine.

About 20 initial public offerings fired off today, abnormal for a Friday. Affiliated Management <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMG)") else Response.Write("(NYSE: AMG)") end if %> rose $3 to $26 1/2. Competitor United Asset Management <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UAM)") else Response.Write("(NYSE: UAM)") end if %> is being valued at 1.17% of assets under management versus Affiliated's 1.47%. Real estate investment trust AMB Property <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMB)") else Response.Write("(NYSE: AMB)") end if %> jumped $2 to $23. International marketing and communications company Healthworld <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HWLD)") else Response.Write("(Nasdaq: HWLD)") end if %> popped up $1 to $10 after its offering, while microwave network communications provider Teligent <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TGNT)") else Response.Write("(Nasdaq: TGNT)") end if %> jumped $4 1/8 to $25 5/8 on its first day. Rayovac <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ROV)") else Response.Write("(NYSE: ROV)") end if %>, the third-largest maker of batteries after Gillette's Duracell and Ralcorp's Energizer rose $2 1/2 to $16 1/2. Seismic instrument and equipment maker OYO Geospace <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: OYOG)") else Response.Write("(Nasdaq: OYOG)") end if %> was singing "Oyo como va" today, climbing $1 1/4 to $15 1/4. The company's Japanese parent owns 59% of the company. Seattle-based RealNetworks <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RNWK)") else Response.Write("(Nasdaq: RNWK)") end if %>, the artist formerly known as Progressive Networks, leapt $5 3/8 to $17 5/8 on prospects for its RealAudio and RealVideo players, software that allows PCs to receive and play audio and video broadcasts.

QUICK TAKES: Specialty steel products company New Jersey Steel <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NJST)") else Response.Write("(Nasdaq: NJST)") end if %> gained $6 13/16 to $22 7/16 after the company agreed to be acquired for $23 per share in cash by Co-Steel Inc. of Ontario, Canada... ACC Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ACCC)") else Response.Write("(Nasdaq: ACCC)") end if %>, a private branch exchange and competitive local exchange telecom services company, gained $3 3/8 to $45 after merger partner Tel-Save Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TALK)") else Response.Write("(Nasdaq: TALK)") end if %> called off its acquisition of Shared Technologies Fairchild <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: STCH)") else Response.Write("(Nasdaq: STCH)") end if %>... Information technology services provider BDM International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BDMI)") else Response.Write("(Nasdaq: BDMI)") end if %> rose $7 to $29 1/2 after agreeing to a $29.50 per share tender offer from TRW Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TRW)") else Response.Write("(NYSE: TRW)") end if %>... Railcar and truck components manufacturer Johnstown America Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: JAII)") else Response.Write("(Nasdaq: JAII)") end if %> added $1 15/32 to $11 1/2 after the company's railcar division announced a tentative three-year pact with the United Steelworkers of America... Investors remembering the magic helped the Walt Disney Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DIS)") else Response.Write("(NYSE: DIS)") end if %> balloon $4 1/16 to $94 3/4, ending a week-long rise after reporting record earnings on Tuesday.

Three-Five Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TFS)") else Response.Write("(NYSE: TFS)") end if %> brightened up $1 5/16 to $20 1/8 after the manufacturer of liquid crystal displays reported that it has received an order from a European medical device manufacturer... Logility <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LGTY)") else Response.Write("(Nasdaq: LGTY)") end if %> rose $1 3/8 to $14 1/2 after the software company reported earnings of $0.08 per share, blowing away estimates of $0.02... Hambrecht & Quist <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HQ)") else Response.Write("(NYSE: HQ)") end if %>, the San Francisco investment bank run by AOL Chairman Steve Case's older brother, jumped $4 1/2 to $39 3/8 on takeover speculation... Business Week hype in the "Inside Wall Street" column helped shares of Galoob Toys <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: GAL)") else Response.Write("(AMEX: GAL)") end if %> to jump $15/16 to $12 7/16... Allied Waste <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AWIN)") else Response.Write("(Nasdaq: AWIN)") end if %> rose $1 5/32 to $21 after swapping some assets with USA Waste <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UW)") else Response.Write("(NYSE: UW)") end if %>... Centocor <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CNTO)") else Response.Write("(Nasdaq: CNTO)") end if %> jumped $1 1/2 to $43 after the firm announced that it would benefit from recent legislation to speed up the Food & Drug Administration drug approval process... Smart Modular <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SMOD)") else Response.Write("(Nasdaq: SMOD)") end if %> rose $1 9/16 to $63 1/16 on solid earnings and a two-for-one stock split... Tower Automotive <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TWR)") else Response.Write("(NYSE: TWR)") end if %> added $2 1/16 to $38 7/8 after Bear Stearns and PaineWebber upgraded the shares... Cortecs International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DLVRY)") else Response.Write("(Nasdaq: DLVRY)") end if %> rose $1 7/8 to $16 3/8 after the Australian drug development company said it would move to be domiciled in the United Kingdom and trade on the London Stock Exchange.

GOATS

For the third quarter in a row, Micron Electronics <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MUEI)") else Response.Write("(Nasdaq: MUEI)") end if %> announced it will earn less than expected. Micron shares dropped $2 5/16 to $11 9/16 after the company said it sees a "minimal profit" as a result of lower-than-expected sales and bloated inventories. Although the direct manufacturer of PCs and contract manufacturer will see sales up 30% over last year and 10% over last quarter, it had set its internal forecasts higher -- so high that it had started to make machines to meet this anticipated demand. Much like Gateway 2000 <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GTW)") else Response.Write("(NYSE: GTW)") end if %>, it misforecast and suddenly found itself sitting on inventory. Even worse, the inventory was rapidly declining in value, so its margins contracted. This may be why the company said margins on notebook computers effectively went to 0% in the quarter. Ironically, the 30% sales increase kicks the heck out of the 12% to 24% the company has been doing over the last few quarters and is 1.5 times the industry's overall rate of growth.

Unmet high expectations for earnings from Applied Materials <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMAT)") else Response.Write("(Nasdaq: AMAT)") end if %> and the resulting guidance in its quarterly conference call combined with some downgrades from Adams Harkness & Hill have shares of semiconductor equipment vendors down today. KLA-Tencor <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KLAC)") else Response.Write("(Nasdaq: KLAC)") end if %> was off $2 13/16 to $44 11/16 and Novellus Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NVLS)") else Response.Write("(Nasdaq: NVLS)") end if %> dropped $2 15/16 to $43. Although Applied reported $0.47 EPS, some argue that a two-cent charge it took for legal expenses should be backed out of the results. Although some might back this expense out, given that legal representation and legal battles are par for the course in this industry, backing that out does not necessarily make sense. Even if you do, though, earnings were flat quarter-over-quarter due to a huge increase in research and development spending, and orders only grew 10% sequentially compared to 20% sequential revenue growth, meaning supply is quickly catching up with demand. All that said, an industry where supply and demand are in sync that grows at 8% to 10% quarter-over-quarter is hardly terrible.

QUICK CUTS: Neoprobe <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NEOP)") else Response.Write("(Nasdaq: NEOP)") end if %> dropped $3 3/16 to $9 1/8 after the European Agency for Evaluation of Medicinal Products asked the company to resubmit its application for the RIGScan 249 colorectal cancer detection system... Versatility <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VERS)") else Response.Write("(Nasdaq: VERS)") end if %> fell $2 to $6 1/4 after the company said a shift in emphasis to current customers away from acquiring new customers will cause it to lose $0.21 per share in the upcoming quarter versus a four cent profit last year... A decline in PrimeCast sales and larger expenses for two plants drove shares of Atchison Casting <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FDY)") else Response.Write("(NYSE: FDY)") end if %> down $3 7/8 to $16... Walbro <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WALB)") else Response.Write("(Nasdaq: WALB)") end if %> was dumped for $3 1/8 to $16 3/4 after the manufacturer of precision fuel systems for automobiles announced an intense restructuring... Anaren Microwave <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ANEN)") else Response.Write("(Nasdaq: ANEN)") end if %> fell $1 3/4 to $20 1/4 after it sold 1.603 million shares at $18 1/2.

SigmaTron International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SGMA)") else Response.Write("(Nasdaq: SGMA)") end if %> lost $3/4 to $10 two days after the company announced that current quarter revenues would be down 12% to 16% sequentially on soft demand... Abercrombie & Fitch <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ANF)") else Response.Write("(NYSE: ANF)") end if %> slipped $1 13/16 to $32 7/16 after Merrill Lynch analyst Mark Friedman cut his rating on the shares to "near-term accumulate" from "near-term buy"... Lone Star Steakhouse & Saloon <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: STAR)") else Response.Write("(Nasdaq: STAR)") end if %> was chopped $2 15/16 to $18 1/4 after the company held a conference call with institutional analysts during market hours telling them to lower their fourth quarter earnings estimates to the $0.40 to $0.42 per share range, apparently deciding that it does not really want to have individual investors own its shares after all... Outsourcer Paychex <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PAYX)") else Response.Write("(Nasdaq: PAYX)") end if %> slipped $2 7/16 to $41 15/16 and Concord EFS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CEFT)") else Response.Write("(Nasdaq: CEFT)") end if %> dropped $1 1/2 to $26 1/2 on no news we can find... Kaman Corp. Preferred <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KAMNZ)") else Response.Write("(Nasdaq: KAMNZ)") end if %> fell $8 to $71 after the company said it would convert one-third of its outstanding shares into common shares.

FOOL ON THE HILL
An Investment Opinion by Dale Wettlaufer

Investors Strike Oil

Oil services, energy exploration, and drillers have been on the minds of investors for a while now. Since the third quarter of 1996, ask any money manager what he or she likes, and in many cases you'll hear a beautifully delivered analysis of day rates, stratigraphy, rifts, global minute-by-minute oil consumption, and reserve levels. In other words, money managers love these companies and have soaked up tons of research looking for the best values. An industry coming out of a more than decade-long recession is a beautiful thing to behold, both from the perspective of managements and employees in these industries and from the perspective of investors. From the trough of a cycle, investment returns can be huge for cyclical industries.

Over the last two years, the energy drillers and service companies have generated eye-popping returns. Deepwater driller, jackup rig operator, and contract driller Global Marine <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GLM)") else Response.Write("(NYSE: GLM)") end if %> has created an annualized compound return of 108%, while fellow deepwater driller Diamond Offshore <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DO)") else Response.Write("(NYSE: DO)") end if %> has returned 113% annually over that same time (using returns through last Friday). At the same time that these companies were making a ton of money gnawing and clawing into the crust of mother earth and winning the undying affection of everyone from value managers to momentum managers, other cyclical companies were also coming back from their hybernation. Yet, one hears so little about these companies in the daily market updates. This phenomenon may bear some reflection.

In the airline sector, companies such as USAirways <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: U)") else Response.Write("(NYSE: U)") end if %> have come back from the overleveraged near-dead status reached by Global Marine at the bottom. From January 1995, USAirways has returned 133% on an annualized basis. The more staid UAL Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UAL)") else Response.Write("(NYSE: UAL)") end if %> has returned 63% per year over that time period. Is there a huge difference in the way these companies operate? Well, besides the fact that it's really tough to drill an 11,000-foot hole in the North Sea with a Boeing 777, there are some, but the main similarity is that they are highly cyclical. Both industries are highly leveraged to supply and demand cycles in the economy, to supply of capital equipment, and to prices customers will pay. When good times are rolling for such companies, they really roll. Once revenues cross the plane of high fixed costs -- such as depreciation, base labor force expenses, and interest expenses -- each additional amount of revenues translates into an even greater amount of additional operating earnings. When things get bad, though, they can get really bad.

Witness the ten-year recession in oil services and the devastating price wars in the airline industry. The upside leverage over operating revenues seen in the up cycles that advances earnings so quickly also kills earnings on the downside. Whether you talk about steel, semiconductors, PCs, disk drives, or auto companies, the cycles can be hell. Therefore, the valuations on these companies can be hard to deal with. Right now, Global Marine is priced at 13 times earnings, while supply boat company Tidewater <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TDW)") else Response.Write("(NYSE: TDW)") end if %> is trading at 18 times earnings. Apply five-year estimated growth rates to forward earnings estimates and the various flavors of the PEG (price-to-earnings growth) ratios out there point to serious undervaluation. Not quite, the investor with a long memory would counter. Since earnings are not easily predictable, the hope that these stocks will trade at fair value based on the PEG shouldn't rule the decision-making process here. Because of the unpredictability of earnings and the swiftness with which forward visibility can disappear, their P/E ratios will be lower once they've ramped up to full earnings power.

The specifics of the situation now are that oil stocks are at their highest point in the last year or more. Per-barrel oil prices have dropped to the $20 range, but futures are holding up well right at the $20 mark, indicating that producers are selling all their future production for fears of price drops. That's exactly what happened to the gold producers, another industry where you can measure its current recession in decades. As for pricing, investors may be forgetting that West African countries, Latin American producers, and Asian nations would love to pull in more hard currency these days. Emerging markets demand for petroleum will probably slacken because of recessionary pressures and imploded currencies. The future is still bright, according to bulls, as oil prices don't matter.

Oil prices, the delicate balance of supply and demand, and capacity all matter very much. The really compelling stories in the sector don't look ridiculously expensive. For instance, Global Marine doesn't face the same sort of ready capacity that can scare the hell out of disk drive executives or the price pressures launched by an irrational airline exec trying to capture a market. One can't just come up with a new ultra deepwater drill ship -- they take years to build. Investors might also want to look at the replacement value of the assets at these companies. Many of these ships were built 15-20 years ago and are on the balance sheet way below what it would cost to build new ones. Nevertheless, if you own these stocks and see a drop, don't be surprised if you find out three days later that someone has turned on a pipeline somewhere or some country is kissing off OPEC and increasing its production. In a deflationary global economy, hard currency is king and supply/demand imbalances can come out of the woodwork and hit those who aren't intimately familiar with the industry.

CONFERENCE CALLS

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Randy Befumo (TMF Templr), a Fool One

Dale Wettlaufer (TMF Ralegh), Fool Two

Alex Schay (TMF Nexus6), Fool Three
Contributing Writers

Brian Bauer (TMF Hoops), Fool Four
Editor