DJIA: 7794.78 -14.17 (-0.18%) S&P 500: 951.64 +0.82 (+0.09%) Nasdaq: 1594.50 +5.46 (+0.34%) Amsterdam Index 882.35 +11.15 (+1.28%) 30-Year Bond 100 3/32 +6/32 6.04% Yield
Information technology training company Computer Learning Centers <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CLCX)") else Response.Write("(Nasdaq: CLCX)") end if %> gained $7 1/4 to $52 1/4 after reporting Q3 EPS of $0.30, up from $0.19 last year, on revenues of $25.7 million. Two good pieces of news highlighted the company's news release other than the nice earnings and revenue growth. The company's Chicago Learning Center was notified last year that it was no longer eligible to participate in the Federal Family Education Loan (FFEL) and Federal Pell Grant programs. Computer Learning's re-application for those programs was accepted. In addition, cohort default rates are dropping for those who have taken out loans to attend classes at Computer Learning Centers around the country. With the trend going in the right direction, investors came away from this quarter's report assured that the company is turning out better prepared students or is being more selective about the students it selects.
Tax and personal finance software company Intuit <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTU)") else Response.Write("(Nasdaq: INTU)") end if %> jumped $ 3 9/16 to $30 7/8 after reporting a pro-forma loss of $0.26 per share, beating the mean analyst estimate of a loss of $0.28 per share. Pro-forma is defined as "a matter of form," and is used by corporations in projecting financial performance or to depict financial performance under a given set of circumstances. Intuit used pro-forma financials for the period because it sold its Parsons Technology unit to Broderbund Software <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BROD)") else Response.Write("(Nasdaq: BROD)") end if %> and because it incurred one-time acquisition-related expenses. Pro-forma results are given for investors to assess the earnings power of a company net of these unusual and non-recurring financial events. Intuit also reported positive results for its QuickBooks software, saying it has retained an 80% market share for small business bookkeeping software.
Capital Savings Bancorp <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CAPS)") else Response.Write("(Nasdaq: CAPS)") end if %> gained $4 to $22 1/2 after Union Planters Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UPC)") else Response.Write("(NYSE: UPC)") end if %> announced that it will acquire the savings & loan company for about $48 million, or $23 a share. The acquisition is called a "filler" acquisition by bankers, and fits the definition perfectly, as this fills out Union Planters' Missouri presence following its 1996 acquisition of Capital Bancorporation in that state. Union Planters will exchange 0.3812 shares of its stock for each Capital Savings share. The deal is priced at 2.17 times book value, 19.8% of assets, 28% of deposits, and 19.2 times trailing EPS of $1.20. Without any cost savings in the deal, the combination of the shares is only slightly dilutive to Union Planters' earnings outlook over the next year. Capital Savings, as a very traditional S&L, deals mostly in consumer mortgages, and thus leaves a lot of room for Union Planters to offer insurance services, credit cards, and investment management and brokerage services. Within a year of closing, the acquisition should be nicely accretive to Union Planters' EPS. Should Union Planters ever agree to be acquired itself, it would instantly translate the 2.17 times book value it is paying for Capital Savings into something closer to three times book value.
QUICK TAKES: Deflecta-Shield Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TRUX)") else Response.Write("(Nasdaq: TRUX)") end if %>, a manufacturer of light truck and heavy truck accessories, rolled $3 9/16 higher to $15 9/16 after signing a definitive merger agreement with Lund International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LUND)") else Response.Write("(Nasdaq: LUND)") end if %>. Lund will pay $16 per share in cash, for a total deal value of $76.8 million (without the $10 million in assumed debt)... Advanced Fibre Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AFCI)") else Response.Write("(Nasdaq: AFCI)") end if %> gained $1 11/16 to $26 11/16 after it announced that it had been awarded "a tender" to provide "Next Generation Digital Loop Carrier (NGDLC) systems" to Cable & Wireless Panama... Medical equipment supplier Universal Hospital Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: UHOS)") else Response.Write("(Nasdaq: UHOS)") end if %> rose $2 3/4 to $14 3/4 after it was revealed that W. Childs Equity Partners L.P. will buy the company for $15.50 a share, or $133 million including debt and transaction expenses.
Here's a turkey-day story that's good for consumers, but bad for investors in Great Atlantic & Pacific Tea Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GAP)") else Response.Write("(NYSE: GAP)") end if %>, which was dumped in the harbor today for a $5 13/16 loss to $30 after receiving numerous analyst downgrades. Both Lehman Brothers and Morgan Stanley lowered their ratings on the firm from "outperform " to "neutral." Goldman Sachs took the company off its recommended list and rated it "market outperform." The operator of such names as A&P and Super Fresh announced that its third-quarter earnings would be below earnings reported in the prior year period, primarily due to increased spending on Thanksgiving promotions. With many turkey promotions starting 2 months ago and a lot of them serving as loss leaders, grocers and supermarkets stuck their necks out early hoping that they could recoup their revenue on other Thanksgiving staples bought in conjunction with the bird. In the last five years, Great Atlantic's share price has appreciated only 6.5% while its dividend growth rate over the same period comes in at -15.24%, which goes a long way toward explaining investors' impatience with the "turnaround" story.
Energy reseller Keystone Energy (OTC: KESE) had its power cut $1 3/16 to $6 27/32 after an article in the online Stockdetective raised serious questions concerning the company's structure and future profitability. The fundamental question raised by the piece is the company's claim that it can penetrate 1% of the $22.5 billion California electricity market in its first year of operations. The article notes that almost 200 companies have been certified to provide power in California on January 1, which makes reselling electricity quite a horserace. Other troubling issues raised by the article include the fact that the company went public through a reverse merger with a public shell that presumably still holds 6.5 million of the outstanding shares (intimating that this group might be the grand beneficiary of a "pump and dump" strategy), allegedly false and misleading press releases, and finally, its sky-high market capitalization. At its peak, Keystone's market cap was $189 million, on par with full-fledged electric utility companies that have been operating for years.
QUICK CUTS: Automotive safety products company OEA Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OEA)") else Response.Write("(NYSE: OEA)") end if %> lost $4 15/16 to $30 5/16 after it said its first quarter numbers will fall below expectations due to the "higher costs of the ramp-up of its four new production lines and continued customer program delays"... Signal transmission products company Ortel Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ORTL)") else Response.Write("(Nasdaq: ORTL)") end if %> fell $1 15/16 to $18 1/16 after recording Q2 EPS of $0.15, matching the consensus estimate for the quarter but falling below the prior year quarter of $0.17... Play-By-Play Toys & Novelties <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PBYP)") else Response.Write("(Nasdaq: PBYP)") end if %> slipped $11/16 to $16 3/4 after the maker and distributor of stuffed toys and novelties went through with a public offering of 2 million shares of common stock at $16.00 per share... Robert W. Baird downgraded medical equipment company Marquette Medical Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MARQ)") else Response.Write("(NASDAQ: MARQ)") end if %> to "buy" from "long-term buy," which hurt shares $1 1/2 to $23... Automated test equipment maker Teradyne Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TER)") else Response.Write("(NYSE: TER)") end if %> fell $3 to $32 7/8 after misleading rumors circulated that a $25 million order from Samsung had been cancelled.
FOOL ON THE HILL
An Investment Opinion by Louis Corrigan
Give Thanks for Inefficient Markets (Or Not)
It's fitting today to give thanks and to talk about turkeys. To kill two birds with one stone, one could turn to the alleged Mob manipulation of HealthTech International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GYMM)") else Response.Write("(Nasdaq: GYMM)") end if %> and the latest efforts by the SEC, the FBI, and the NASD's regulatory division to crack down on securities fraud in the rough and tumble world of penny stocks. In this high profile case, some Mob-backed turkeys (soon, perhaps, to be jailbirds) are alleged to have worked in concert with the company's own executives to illegally pump up HealthTech's stock. They then dumped their shares onto unsuspecting retail investors who didn't know the company was lying about its assets. Whenever the good guys score a victory against jerks willing to scam people out of their savings, we should all give thanks.
Yet if we're going to talk turkey, distinguishing between a goose and a gander may not matter much. When crooked company officials are in cahoots with greedy stock promoters, it's clear that the market in that security won't work efficiently. The information flow is simply inequitable and inaccurate. One might argue, though, that such fraud is simply a special case of the market's general inefficiency, which is both a problem and an opportunity for individual investors.
On the one hand, investors willing to do diligent research can potentially make a tidy return, in part because markets sometimes don't do a great job at pricing available information into stocks, particularly smallcaps and midcaps. As we've seen lately, securities markets are also susceptible to shifts in investor psychology, which can lead to radical mispricing.
At the same time, there are plenty of turkeys out there who make markets less efficient. This includes everyone from unscrupulous market makers to corporate officials who have apparently never considered their disclosure obligations. When the SEC et. al. are finished with the Mob, they might consider that individual investors may actually lose more money each year through these more mundane and institutionalized forms of abuse than they do from the cloak and dagger schemes that make for good press conferences
Consider the recent activity in shares of Timberline Software <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TMBS)") else Response.Write("(Nasdaq: TMBS)") end if %>. This Oregon-based firm sells project accounting and cost estimating software for the construction and property management industries. It also makes a nice chunk of change providing technical support services. While sales grew by a healthy 20% in the first nine months of this year, Timberline constructed a monumental 89% earnings gain to $0.36 per share thanks to an exceptional third quarter. Some new products have met with strong acceptance by contractors who are digging the low inflation business environment. The company has also tightly managed expenses.
Though Timberline has just a $100 million market cap, it's not wholly undiscovered. In May, it made Business Week's list of Hot Growth Companies. Last month, it made Forbes' list of the "200 Best Small Companies in America" for the third year in a row, thanks to a five-year return on equity of 23.5% and annual earnings growth of 66%. Even before the past week's trading, the stock had more than doubled in just six months. Yet with apparently just two analysts covering the company (neither First Call nor Zack's shows any earnings estimates at all), it's hardly surprising that some news might bring additional attention to the stock.
The news came last Friday afternoon. A Dow Jones article reported that Thomas P. Cox, Timberline's VP of finance, said that fourth quarter sales should be up 20% and that analysts' estimates of $0.45 to $0.46 per share for this calendar year were "too conservative." Now, companies should not be in the business of offering such guidance to analysts or to reporters unless they have already informed or are simultaneously informing their shareholders, preferably through a company press release. Nonetheless, telling the story directly to Dow Jones, which will broadly disseminate the news, is certainly a far less egregious sin than those committed lately by executives at Rational Software <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RATL)") else Response.Write("(Nasdaq: RATL)") end if %>, Adobe <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ADBE)") else Response.Write("(Nasdaq: ADBE)") end if %>, and Lone Star Steakhouse <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: STAR)") else Response.Write("(Nasdaq: STAR)") end if %>.
Arguably, though, Cox's comments were hardly news, at least to anyone paying attention. Even if Timberline simply duplicated the $0.17 per share it earned in the third quarter, earnings would hit $0.53 per share. And the fourth quarter is usually Timberline's strongest. Still, investors quickly pushed the stock up 11% to close at just over $13 on volume of 207,000 shares, equal to the previous three weeks worth of trading.
The story now gets more interesting. A previously declared 5-for-4 stock split took effect Monday. All the numbers above are post-split. The pre-split close last Friday was actually $16 3/8. On Monday, Timberline stock opened at $19 3/4! That was about 20% above the apparent close on Friday, but fully 50% above Friday's actual split-adjusted price. Within the first half-hour, the stock dipped back below $17. And it just kept falling from there. The shares closed Monday at $14 3/4 on 718,900 shares traded. They sank to $14 Tuesday.
What happened? Well, Dow Jones got the numbers wrong in its Friday article, which indicated that Timberline made $0.44 per share post-split in the first nine months of the year. But perhaps that didn't matter. The likely explanation is that some investors drawn to the stock by the Dow Jones article but apparently oblivious to the split placed market buy orders for Monday. The wholesale dealers that make a market in Timberline likely realized there was a backlog of blind demand. So they seem to have jacked up the price on the open, benefiting either by selling their own holdings at a handsome profit or selling yet to be borrowed shares they could easily cover later when the stock made its inevitable fall.
Market makers have been allowed certain privileges other investors don't enjoy -- such as the ability to take a "naked" short position -- so they can better fulfill their obligation to create a smooth and efficient market in a stock. Yet in this case, it certainly appears that they may have abused those privileges in order to take advantage of average investors. At the very least, they spectacularly failed to meet their basic obligation. Some investors lost 29% of their money in just two days. With so many shares changing hands, it's possible that individual investors collectively lost as much in this Timberline spike as the $1.3 million the Mobsters allegedly gained in the HealthTech scam.
Analyst Gary Siperstein of Barrett & Co. in Providence, Rhode Island, covers Timberline. He thinks the company will earn $0.60 to $0.65 per share this year and potentially $0.80 per share next year. His 12-month target price, based on a PE of 25, is $20. Siperstein said that when the stock spiked Monday, he briefly wondered if the company was in play. He thinks that Timberline might make a good target for J.D. Edwards <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: JDEC)") else Response.Write("(Nasdaq: JDEC)") end if %> or AutoDesk <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ADSK)") else Response.Write("(Nasdaq: ADSK)") end if %>. Yet with the price so high, Siperstein said that his firm tried to sell some of its shares into the strong open but had no luck. His guess is that "the wholesalers goosed it up prior to the open" because they were "inundated with market buy orders" and thought they could make some easy money shorting against these orders. He agreed that would be "less than scrupulous" behavior.
The morals to the story? For one, the SEC might do well to keep its eye on Nasdaq's market makers even while it pursues penny stock scams run by Mobsters. For two, caveat emptor. There are turkeys you eat, and others that will eat you if you are an ill-prepared investor. Finally, the market inefficiencies that contributed to the past week's trading in Timberline suggest that investors willing to do their homework can almost always find good opportunities (long and short) if they try hard enough.
The Fool message folders can help you with your homework. Reading through the conversation in the Timberline folder, particularly the last month's worth, it is once again obvious that there are many serious-minded and helpful individual investors right here in Fooldom. And these investors often can be found following relatively undiscovered but solid growth companies selling at decent prices. The quality of this community and the advantages it can bring you, both as an investor and as a person, are indeed things to be thankful for.
Please see the Motley Fool's Conference Calls page for call information and links to synopses.
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ANOTHER FOOLISH THING
Fools on the Radio
Tom and David are coming to a radio near you. These founding Fools will be hosting this weekend's edition of MoneyTalk.
Randy Befumo (TMF Templr), a Fool One
Dale Wettlaufer (TMF Ralegh), Fool Two
Alex Schay (TMF Nexus6), Fool Three
Louis Corrigan (TMF Seymor), Fool Four
Contributing Writers
Brian Bauer (TMF Hoops), Fool Five
Editor