DJIA: 8032.01 +13.18 (+0.16%) S&P 500: 976.77 +5.09 (+0.52%) Nasdaq: 1615.13 +8.76 (+0.55%) Value Line 874.71 +1.80 (+0.21%) 30-Year Bond 101 17/32 +10/32 6.01% Yield
Hvide Marine <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HMAR)") else Response.Write("(Nasdaq: HMAR)") end if %> rose $2 5/16 to $30 3/8 after it signed definitive agreements to acquire 36 vessels from U.K. company Care Group for about $284 million. The various energy exploration and drilling support vessels operate from the North Sea to South Africa and across the Atlantic and "adds critical mass" the company's operations in Southeast Asia. The acquisition increases Hvide's fleet by about 21%, and is another in a string of deals done this year that have grown the size of the fleet by a third. The deal is expected to close in the first quarter of 1998.
Morgan Stanley initiated coverage on shares of Dril-Quip <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DRQ)") else Response.Write("(NYSE: DRQ)") end if %> with an "outperform" rating, helping the designer and manufacturer of offshore drilling and production equipment gain $2 3/8 to $33 1/8. Elsewhere in the resurgent oil services and equipment sector, drilling pump systems manufacturer Camco International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAM)") else Response.Write("(NYSE: CAM)") end if %> gained $4 1/4 to $66 5/8 and equipment manufacturer Smith International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SII)") else Response.Write("(NYSE: SII)") end if %> rose $6 1/2 to $69 1/16. Oil and gas driller Global Marine <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GLM)") else Response.Write("(NYSE: GLM)") end if %>, which is set to put into service two more deepwater rigs in the first quarter of 1998, gained $2 5/16 to $28 1/16 as it continues to come off recent lows under $25 per share. Deepwater driller Diamond Offshore <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DO)") else Response.Write("(NYSE: DO)") end if %> was boosted $3 9/16 to $51 13/16 in the sector's continued rebound.
QUICK TAKES: Oil rig builder and converter Friede Goldman International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FGII)") else Response.Write("(Nasdaq: FGII)") end if %> jumped $4 1/2 to $35 3/8 after announcing an agreement with Marine Drilling Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MDCO)") else Response.Write("(Nasdaq: MDCO)") end if %> to build a new semisubmersible drilling rig for $87 million. Marine Drilling gained $1 7/8 to $23 5/8 on the news. Shipbuilder Halter Marine <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: HLX)") else Response.Write("(AMEX: HLX)") end if %> also gained $2 1/4 to $26 1/4 and drilling platform construction company Gulf Island Fabrication <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GIFI)") else Response.Write("(Nasdaq: GIFI)") end if %> climbed $4 1/8 to $25 1/2... North Carolina-based bank holding company BB&T Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BBK)") else Response.Write("(NYSE: BBK)") end if %>, parent of Branch Banking & Trust, gained $8 15/16 to $65 after announcing that it will replace Beverly Enterprises <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BEV)") else Response.Write("(NYSE: BEV)") end if %> in the S&P 500 Index. BB&T merger partner Life Bancorp <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LIFB)") else Response.Write("(Nasdaq: LIFB)") end if %> gained $4 3/4 to $36 3/8.
South Carolina bank and financial services company Carolina First Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CAFC)") else Response.Write("(Nasdaq: CAFC)") end if %> rose $2 3/4 to $23 on announcing the dismissal of lawsuits brought against the company's Directors... Former wunderstock and value lovers situation Zeigler Coal Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ZEI)") else Response.Write("(NYSE: ZEI)") end if %> jumped $2 3/8 to $17 3/4 after the company said it will mull "strategic alternatives," including a sale of the company.... America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> picked up $4 13/16 to $82 after Prudential Securities started coverage with a "buy" rating and a target price of $91 per share... Telecom and datacom timing device manufacturer Frequency Electronics <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: FEI)") else Response.Write("(AMEX: FEI)") end if %> added $2 7/16 to $18 1/4 after reporting Q2 EPS of $0.21, just below the First Call estimate of $0.22. With yesterday's blowup of Datum Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DATM)") else Response.Write("(Nasdaq: DATM)") end if %>, another maker of such devices, FEI investors were happy with the performance.
Contract manufacturer Jabil Circuit <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: JBIL)") else Response.Write("(Nasdaq: JBIL)") end if %> got burned for $4 to $42 9/16 today after 3Com Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COMS)") else Response.Write("(Nasdaq: COMS)") end if %> announced that its second quarter will not meet expectations because the company is cutting shipments to distributors in order to reduce inventories. As of the fiscal year ended August 31, 1997, 3Com accounted for 21% of Jabil's net revenues, followed by 20% from Cisco Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %>. 3Com is also a large customer of upstream manufacturer Solectron Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLR)") else Response.Write("(NYSE: SLR)") end if %>. Networking represents 30% of Solectron's business, but 3Com is not its largest customer. Solectron was cut for a $4 7/16 loss to $33 5/16 anyway. Short of a complete cancellation of orders, it is precisely this type of event that scares investors in the contract manufacturing arena the most. However, both Jabil and Solectron are efficient operators with high inventory turns and low day sales outstanding. Assuming that the channel stuffing that 3Com engaged in smoothes out through the holidays, neither company should be significantly off pace in 1998.
E*Trade Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EGRP)") else Response.Write("(Nasdaq: EGRP)") end if %> lost $2 5/16 to $21 1/4 after information was disseminated that president Christos Cotsakos announced at a Deutsche Morgan Grenfell conference that new account signings slowed in November to an increase of 5%, compared with an increase of 7% in October. In addition, the average number of trades per customer dropped to 1.5 in November from 2.8 in October. This news comes on top of recent reports of fierce price competition in the segment. In early October, E*Trade dropped 10% on concerns that its business would be hurt by price cuts from Ameritrade <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMTD)") else Response.Write("(Nasdaq: AMTD)") end if %> and Fidelity, and more recently by new low trading fees from Suretrade. Compounding the company's woes are a slew of class action suits filed against online brokerages in the wake of record volume during and following the October 28 market decline -- E*Trade's gift from the lawyers was filed in California Superior Court yesterday. Ameritrade was also down today, falling $4 to $31 1/4.
QUICK CUTS: Consumer financial services company Arcadia Financial Ltd. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AAC)") else Response.Write("(NYSE: AAC)") end if %> fell $5/8 to $7 13/16 after it announced that it expects 1997 fourth quarter loan purchases of $600 million, and due to this development the company expects EPS for the fourth quarter to be lower than the prior year... CBS Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CBS)") else Response.Write("(NYSE: CBS)") end if %> dropped $1 3/4 to $30 1/8 after Morgan Stanley DWD downgraded the industrial and broadcasting company to neutral from outperform... National Semiconductor <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NSM)") else Response.Write("(NYSE: NSM)") end if %> lost $1 5/8 to $30 11/16 as the chip maker was downgraded by NationsBanc Montgomery Securities to "hold" from "buy." The brokerage also cut fiscal 1998 earnings estimates to $1.85 a share from $1.95.
Anchor Gaming <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SLOT)") else Response.Write("(Nasdaq: SLOT)") end if %> lost $11 3/4 to $64 1/4 today after it told a "select group of analysts" last night that it may not meet earnings estimates for its upcoming quarter, according to TheStreet.com...Deutsche Morgan Grenfell lowered its rating on Altera Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ALTR)") else Response.Write("(Nasdaq: ALTR)") end if %> to "accumulate" from "buy," slamming the stock for a second day as it lost $2 3/16 to $38 9/16... Bandwidth management products company Adaptec Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ADPT)") else Response.Write("(Nasdaq: ADPT)") end if %> dropped $4 1/8 to $41 3/16 after Soundview Financial took the company off of its focus list and cut 1998 earnings estimates by $0.02 to $2.22 per share.
FOOL ON THE HILL
An Investment Opinion by Louis Corrigan
Risky Business
A week ago Tuesday, a poster to the Fool's "Shorting Stocks" message folder on America Online breathlessly offered a new short idea, "One of the best candidates I've ever seen," he said. He ran down a list of reasons for the stock being wickedly overvalued at just under $7 a share and made the bold prediction that it would fall below $1 a share within the next 12 months.
He forgot to actually name the company, but by the weekend, the folder's short-selling sleuths had uncovered the mystery. By Monday evening, some had done preliminary due diligence, with one poster agreeing the stock was indeed "a stinky little dog." Others regretted that they couldn't find shares to borrow; rumor had it that someone was already aggressively shorting the stock. In the three days since the poster recommended it, this "dog" had already taken on more fleas, having sunk 24% to $5 3/16. Not bad.
Twelve hours later, the dog in question, Food Technology Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VIFL)") else Response.Write("(Nasdaq: VIFL)") end if %>, was running toward a close of $11 11/16, up 125% on the day (though it did fall back to $8 1/4 today). Food Tech is in the business of irradiating food, a process that kills bacteria such as E. coli. Yesterday, the Food and Drug Administration (FDA) acted on a proposal submitted three years ago by the meat industry and Isomedix Inc., now a unit of Steris Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: STRL)") else Response.Write("(Nasdaq: STRL)") end if %>, and approved the irradiation of beef. As the only pure-play food irradiator, Food Tech had investors glowing. Meanwhile, the shorts were losing their appetites, their shirts, and probably some small fortunes.
Although this dramatic episode highlights the inherently greater risk of going short a stock rather than going long, it also suggests the general risk of investing in stocks and the need for us to take that risk seriously. To do so, it's first necessary to evaluate yourself, including your reasons for investing, your time horizon, your comfort level with market volatility, your desire to actively manage your own investments rather than have someone else do that for you, your investment philosophy or style, and your intellectual and emotional capacity to make that style work for you.
The Fool's core mission is to educate investors in matters financial so that they will be able to make their own decisions and profit handsomely from them. For people who conclude they don't have the time or the desire to actively manage their own investments, that may mean one of two decisions: selecting a mutual fund indexed to the S&P 500 or putting money into some variation of the Dow Dividend Approach, a high-yield, super-charged variation of the S&P 500. Ultimately, though, the Fool aims to prepare and assist investors who wish to run their own portfolios.
While some investors may err on the side of caution, it's far more common to see people fail to adequately weigh the risks of an investment. Looking at a company's rapid earnings growth, optimistic analyst estimates, hot new products, or a period of rapid stock price appreciation, it's easy to begin to fantasize about your potential return. But don't be seduced by your own fantasy, often a collective fantasy. Just as you should be able to write out at least one solid paragraph explaining why you've bought a stock, you should be able to add another paragraph laying out the challenges facing the company, evaluating the chances that things could go wrong, and listing the developments that would make you consider selling your shares.
If you can't make a strong devil's advocate case against an investment decision, you probably don't know the company or its industry well enough to take the plunge. Some of the world's greatest investors have an almost obsessive need to understand the other side of the story. George Soros, for example, has said he was only satisfied with an investment thesis when he knew its flaw. As a trader, he was interested in playing the thesis. Yet because he assumed it was flawed, he was always on the lookout for an "inflection point" where the flaw decisively reared its head and the market would reverse course. It is a boom/bust theory that's quite apt when investing in cyclical stocks or hot technology companies. Good short-sellers are equally paranoid since they want to be sure not just that a company is overvalued, but that market forces will not carry an issue to an even more wildly overvalued level before it retreats.
Investors with a time horizon of three years or more don't need to obsess over market forces in this way, but all investors do need to know the risks that might cause a company's business to falter and stock to fall and to understand which of these potential problems are important given one's investment horizon. A great place to start is with a company's annual 10-K filing with the SEC or with the prospectus for any new stock registration. Investors should study the section outlining risks.
While many of these so-called "boilerplate" warnings are less than helpful (what industry isn't highly competitive?), others will highlight crucial issues, such as the possible impact of government regulation, the company's reliance on a few customers or suppliers, potential currency exposure, liquidity concerns, price pressures that have historically been a part of an industry's cycles, and so on. The public filings should give you some general clues as to what one should explore in more detail when you compare the company to competitors and conduct further research. Of course, an investor's best friend is an articulate, well-informed critic of his company who can highlight the possible flaws in his investment thesis. You know the gods are shining on you when you find such a critic on the Fool message boards.
Of course, all of this is easier said than done -- but sometimes not by much. Food Technology's public filings, for example, depicted a fairly threadbare business that churned out less than $200,000 in trailing sales and had posted substantial losses. As of September 30, the company had merely $4,554 in cash but over $3 million in convertible debt. The filings as much as said that the company's future depended on the FDA's approval of meat irradiation and on the continued largesse of its Canadian sugardaddy, MDS Nordian, which had the right to convert Food Tech's debt into a controlling stake of over four million shares.
Assuming these shares were issued (and they would be if things went well), Food Technology was valued at about $50 million Monday night. The stock had run up from $0.62 a share to a high of $13 1/8 on the Hudson Foods <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HFI)") else Response.Write("(NYSE: HFI)") end if %> bacteria scare and support for irradiation from public officials. It was being barely supported by the expectations that the FDA would act soon. That expectation was at least as reasonable as the short position on valuation because the new Congressional bill on FDA funding had mandated that the agency act on this issue within 60 days. While one can usually handicap FDA decisions, the agency is essentially a black box. At least in hindsight, it's clear that the FDA's possibly imminent approval of meat irradiation should have represented an unappetizing risk for a short-seller. Even if one thought the chances of approval were slim or that the company still faced enormous challenges even if approval came, Tuesday's rally was the likely outcome if the agency said yea.
Foolish readers have many opportunities to get a painfree education in such material risks -- both to a company and to its stock -- by way of the daily Foolish deconstructions of stock collapses, such as the "Goats" of the Evening News, the Daily Trouble, and columns like yesterday's Fool on the Hill on Cabletron Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CS)") else Response.Write("(NYSE: CS)") end if %> or today's Lunchtime News piece on 3Com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COMS)") else Response.Write("(Nasdaq: COMS)") end if %>. Can an overreliance on one customer be risky? Look at what happened to yesterday's "Quick Cuts" disaster National Research Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NRCI)") else Response.Write("(Nasdaq: NRCI)") end if %>.
In theory, a company's stock price discounts the firm's future return to shareholders in the form of earnings/dividends. Because those earnings could be diminished if things go wrong, the stock ought to reflect the danger that they might. The goal of assessing risks isn't to scare you out of the market. Rather, it's to make you cognizant enough of a company's potential troubles and the likelihood of them happening that you put a fair value on its stock price. It's also to help you set up some parameters, based on your own investment time horizon, of what kinds of troubles might alter your decision to own part of a company -- and to be prepared for them should they develop.
Please see the Motley Fool's Conference Calls page for call information and links to synopses.
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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
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