DJIA: 7580.42 -222.20 (-2.85%) S&P 500: 927.69 -28.35 (-2.97%) Nasdaq: 1503.22 -52.32 (-3.36%) Wilshire 5000 8875.47 -265.64 (-2.91%) 30-Year Bond 105 20/32 +10/32 5.73% Yield
A number of savings banks dove into the fray today, completing their initial public offerings during a volatile market day as the Dow Jones Industrial Average dropped 222.20 points and the Nasdaq fell 52.32 points. Heritage Financial Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HFWA)") else Response.Write("(Nasdaq: HFWA)") end if %> gained $3 1/4 to $13 1/4 after the company sold 6.6 million shares and Mystic Financial <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MYST)") else Response.Write("(Nasdaq: MYST)") end if %> rose $4 7/16 to $14 7/16 after the holding company for Medford Co-operative Bank sold 2,711,125 shares at $10 per share. Should Mystic's profitability stay in line with past levels of return on equity (ROE), shareholders of Mystic might reasonably expect EPS of $0.85 this year and are looking at a forward P/E of 17. If the company can get its ROE up to industry standards (the current ROE is actually unacceptably low for some investors), shareholders could be looking at a forward P/E of under 10. That assumes average owners equity of 103% the current per-share owners' equity of $12.86 and EPS of $1.59. Today's pop in the share price looks like investors are pricing in better economies of scale for Mystic and a ROE of 12%.
Wireless telecom services provider WinStar Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WCII)") else Response.Write("(Nasdaq: WCII)") end if %> gained $2 7/16 to $29 5/16 after the company announced that it is accelerating its rollout of Competitive Local Exchange Carrier (CLEC) services, which will bring the company to a gross cash flow break-even point by the end of 1999. The company said it will be in 30 markets by the end of this year, one year ahead of schedule. With the faster rollout, the company expects negative cash flow to peak in Q4 1997 and to decline thereafter. WinStar is currently marketing its services in 15 metropolitan areas and will fund the rollout through its recent $175 million preferred stock offering. Salomon Smith Barney initiated coverage on the company with a "buy" rating, and analyst Jack Grubman cited WinStar's ability to deploy its network faster than wireline-based CLECs and its ownership of 38 Ghz licenses covering 125 markets as essential to the rating.
QUICK TAKES: Recent chapter 11 filer Paragon Trade Brands <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PTB)") else Response.Write("(NYSE: PTB)") end if %> rose $7/8 to $6 7/16 after it received a commitment for a $75 million liquidity facility from Chase Manhattan Bank, subject to due diligence, execution of documentation, and approval by the Bankruptcy Court. The funds will be used to meet the diaper company's obligations during its reorganization period... Epitope Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EPTO)") else Response.Write("(Nasdaq: EPTO)") end if %> added $7/16 to $5 5/8 after it announced that it had signed a joint research and development agreement with Analytical Genetic Testing Center to develop DNA testing kits using Epitope's OraSure oral specimen collection device... InterVoice Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTV)") else Response.Write("(Nasdaq: INTV)") end if %> shot $5/8 higher to $8 3/8 after the automated call processing and teleservices company authorized the repurchase of up to 2 million of its shares from time to time in open market and negotiated transactions... ENCAD Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ENCD)") else Response.Write("(Nasdaq: ENCD)") end if %> rose $1 11/16 to $24 13/16 after Piper Jaffray reiterated its "strong buy" rating on the digital imaging technology company.
Computer connectivity products company Adaptec Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ADPT)") else Response.Write("(Nasdaq: ADPT)") end if %> fell $14 3/8 to $21 9/16 today after pre-announcing Q3 EPS of $0.35 to $0.40, below the mean First Call estimate of $0.56. Although the company said SCSI adapter revenues for OEMs (original equipment manufacturer) were higher than expected, sell-through from its distribution channel was lower than expected. Adaptec said sell-through dried up in the last 4-5 months because of lower desktop PC prices, which hurt demand for higher-bandwidth, SCSI-equipped drives. Despite a 6% increase in unit sales of SCSI adapters, revenues for the quarter will come in about 10% below expectations, at $250 to $255 million. The company chose not to recognize $25 to $30 million in revenues for products shipped into the value-added reseller channel because of high inventory levels at Adaptec's distributors. Q4 operating results are expected to remain level with Q3 results, though OEM sales for systems such as RAIDs and servers are strong.
Physician practice management company PhyCor Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PHYC)") else Response.Write("(Nasdaq: PHYC)") end if %> lost $2 1/2 to $22 3/8 after Needham & Co. lowered its rating on the company to "buy" from "strong buy" and Lehman Brothers lowered its rating to "outperform" from "buy." Yesterday, PhyCor announced the break off of merger talks with the much larger MedPartners <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MDM)") else Response.Write("(NYSE: MDM)") end if %>, which was cut in half yesterday and by $1 1/4 to $8 3/4 today because that company pre-announced a substantial quarterly loss. Analysts might be expecting that the same problems that led to MedPartners' loss for the quarter will also hit PhyCor's results. PhyCor's bid for MedPartners was seen by some as an attempt to gain experience with capitation payment plans, which PhyCor now has to approach on a market by market basis. This may slow PhyCor's anticipated growth plans.
With today's fall in Adaptec, investors fear that inventory levels of electronics components in the contract manufacturing and circuit board food chain are higher than desirable. Contract manufacturer Jabil Circuit <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: JBIL)") else Response.Write("(Nasdaq: JBIL)") end if %> slipped $4 1/2 to $34 1/2; circuit board maker Sanmina <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SANM)") else Response.Write("(Nasdaq: SANM)") end if %> lost $4 5/8 to $53 3/8; circuit board design company Praegitzer Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PGTZ)") else Response.Write("(Nasdaq: PGTZ)") end if %> slid $1 to $10; Solectron <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLR)") else Response.Write("(NYSE: SLR)") end if %> fell $1 1/2 to $39; and circuit board company Hadco <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HDCO)") else Response.Write("(Nasdaq: HDCO)") end if %> declined $6 3/16 to $37 31/32. A sell-off in these shares may be a conflation of the issues driving the individual companies. Hadco might have a very different set of revenue drivers than Jabil, for instance, even though they both share Hewlett-Packard <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HWP)") else Response.Write("(NYSE: HWP)") end if %> as a large customer. H-P's PC sales may not be going well, but Hadco might not even deal with that line of H-P products, instead manufacturing circuit boards for H-P's medical products division. When the market throws out everything in the sector based on a few pieces of anecdotal evidence, the well-prepared value-sensitive investor is in his or her element.
Apparently momentum investors aren't totally washed out of some of the oil services stocks, while other investors in the sector may be hurting from the slow water torture treatment of a daily backslide in oil and gas spot and futures prices. Driller Ensco International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ESV)") else Response.Write("(NYSE: ESV)") end if %> fell $2 3/4 to $25 1/8; contract, jackup, and deepwater driller Global Marine <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GLM)") else Response.Write("(NYSE: GLM)") end if %> dropped $1 9/16 to $19 11/16; and rig equipment company National Oilwell <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NOI)") else Response.Write("(NYSE: NOI)") end if %> lost $1 1/8 to $29 7/8. Pipeline and infrastructure construction company Global Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GLBL)") else Response.Write("(Nasdaq: GLBL)") end if %> fell $1 13/16 to $12 5/16 and marine construction firm J. Ray McDermott <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JRM)") else Response.Write("(NYSE: JRM)") end if %> was drilled for a $3 13/16 loss to $34 3/16. Picking a bad day to do so, Goldman Sachs took seismology equipment manufacturer Input/Output <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IO)") else Response.Write("(NYSE: IO)") end if %> off its recommended list, rating the company "market outperform." That move pounded I/O for a $6 3/8 loss to $19 1/2.
QUICK CUTS: Nanocrystalline materials company Nanophase Technologies Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NANX)") else Response.Write("(Nasdaq: NANX)") end if %> was atomized for a $5 1/2 loss to $6 1/8 after announcing that it expects to report Q4 revenues of $1.5 million, which includes licensing revenues of $1.4 million... Wireless communications gear manufacturer LCC International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LCCI)") else Response.Write("(Nasdaq: LCCI)") end if %> crumbled $5 3/16 to $8 13/16 after the company's CEO resigned, or was forced out, without an explanation from the company. This morning, BT Alex. Brown lowered its rating on the company's shares to "market perform" from "buy"... GameTech International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GMTC)") else Response.Write("(Nasdaq: GMTC)") end if %> fell $4 11/16 to $5 after the developer of interactive bingo systems announced 1997 revenues of $12.6 million and pro forma EPS of $0.27, up from last year's EPS of $0.08. Although the company said core operations were strong, progress in the rollout of its Satellite Bingo Network was not a swift as expected.
Adaptec's news had further implications today, taking the shares of connectivity products company QLogic Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: QLGC)") else Response.Write("(Nasdaq: QLGC)") end if %> down $4 11/16 to $5. High-end storage systems company Box Hill Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BXH)") else Response.Write("(NYSE: BXH)") end if %> also fell $2 13/16 to $10 7/8, even after the company said it is comfortable with Q4 EPS estimates of $0.14... Power generation management company CalEnergy Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CE)") else Response.Write("(NYSE: CE)") end if %> lost $3 3/16 to $23 1/4 after CS First Boston changed its 1998 Focus List (hey, we're only nine days into 1998), taking the shares of CalEnergy off that list... Flowers and tobacco company Dimon Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DMN)") else Response.Write("(NYSE: DMN)") end if %> was burned for a $2 13/16 loss to $22 3/16 after the company said it expects to miss Q2 EPS estimates of $0.51 due to pricing pressures.
Glassware products maker Libbey Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LBY)") else Response.Write("(NYSE: LBY)") end if %> fell $3 1/4 to $32 7/8 after announcing that it expects to report net income of $0.55 to $0.60 per share for the fourth quarter of 1997 versus expectations of $0.70. The company blamed disappointing sales to "retail customers late in the Christmas selling season"... Glass fiber composites and building materials company Owens Corning <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OWC)") else Response.Write("(NYSE: OWC)") end if %> cracked $1 5/8 to $32 after announcing that due to continued pricing pressures in its Insulating Systems business, it has lowered its 1997 EPS estimate to about $3.00, excluding restructuring and other charges (down from $3.73). A pre-tax restructuring charge of $250 million will be taken to reduce overhead, close manufacturing facilities, and enhance manufacturing productivity.
FOOL
ON THE HILL
An Investment Opinion by
Randy Befumo
Index Funds vs. Mutual Funds
The poor performance of the average mutual fund relative to the S&P 500 on a pre-tax basis has been highly publicized over the past few years. A story that has been told a lot less is that on an after-tax basis, the returns get even worse. Index funds outperform money managers not only through minimizing expenses, but by staying invested and not changing those investments very often. Simply looking at the capital gains distributions in an index fund relative to other professionally managed money provides an object lesson about how low turnover and low cash balances can provide solid returns.
Because the Standard & Poor's 500 is an index constructed by the editorial board of Standard & Poor's, index fund managers have an advantage most professional money managers do not. Other than the cash they might need for redemptions in the fund, the question of what stocks to buy is just a matter of looking at the weightings in the S&P 500 and distributing the money. The question of what to sell is even more elementary, as the index fund only needs to sell when the index is changed. On average, due to mergers, acquisitions, bankruptcies, and general corporate distress, the S&P 500 can have anywhere from five to fifteen changes during a given year. Compared to the average mutual fund, however, five to fifteen "sells" is an extraordinarily low number.
Looking at the capital distributions in the Vanguard Index Trust 500 for 1997, every share saw 14.5 cents of short-term capital gains and 40.5 cents worth of long-term capital gains. Given that the Vanguard Index Trust 500 closed the year with a net asset value of $90.07 per share, you can see that this meager 55 cents in taxes barely reduced the returns in either fund. Of course, if an investor had sold shares of the fund, they would have to recognize tax consequences beyond the distributions. However, for individual investors creating wealth over long periods of time through the magic of compounding, on an after-tax basis the more money you can keep invested, the more value you can create. Just as every dollar in fees you fork over to invest hurts your returns, every dollar you give to the tax man does just the same.
By way of comparison, Vanguard's Windsor fund saw a short-term gain distribution of 86 cents and a long-term distribution of $2.02. With a net asset value of $16.98 at the end of 1997, Windsor generated 6.4 times the tax burden per share but had a net asset value that was 81% lower. Not only did Windsor only return 21.98% in 1997 versus 33.35% for the S&P 500, but much of what it did return was automatically taxed through capital gains distributions, shaving 15% to 36% of those returns off the top depending on the investor's tax bracket. Although most mutual fund companies say that they do not stress after-tax returns because each individual tax situation is different, if after-tax returns were reported the performance gap between the average mutual fund and the S&P 500 would increase substantially.
An ancillary benefit of not selling very often and having a preset investment plan is that you can keep the amount of money you have in low-yielding cash to a minimum. An index fund can keep 98% to 99% of its money invested, whereas the cash position of the average mutual fund is much higher. With only 90% to 95% of your money invested, you actually need to beat the index return with the money that has been invested to match the return of the index in your fund. So to match the return of the index, money managers not only need to outperform in order to make up for higher expenses, but they also have to outperform because they cannot be 100% invested. On top of that, even if they do breakeven or beat the market on a pre-tax basis, they can destroy this value for individual investors through capital gains distributions that make most of the gains taxable.
The lesson here for individual investors who want to go it on their own is pretty simple, but pretty powerful. Tax efficiency and maximizing money in the market that is compounding value is a key part of generating long-term, excess returns. In fact, when you calculate the effect of taxes, the margin of outperformance that many short-term oriented investors say they enjoy is whittled down. Although the standard defense is that you have to sell sometime, the reality is that if the money compounds over long periods of time and you capture lower tax rates for being a longer-term holder, on an after-tax basis the difference can be quite profound. That does not even include the possibility if you own a dividend yielding stock that you could just capture the rising income generated by the stock to live on and leave the equity untouched -- and untaxed -- to pass on the higher cost basis to your heirs. This is what the S&P 500 Index is essentially doing, and why it is such tough competition for professionally managed money.
By understanding why the S&P 500 index fund can be a superior investment vehicle, you can gain insight on how to invest in order to be a superior investor. By keeping expenses low, minimizing your tax burden, and maximizing the amount of money in the market, the average S&P 500 index fund kicks the pants off professionally managed money. Everything you can do as an investor to replicate this and create powerful returns on an after-tax basis is something that will create excess returns for you -- returns above and beyond what the market average. In the end, it is these after-tax, excess returns that are the object of the investing. Anything that does not produce similar results has to be questioned.
Please see the Motley Fool's Conference Calls page for call information and links to synopses.
WE
DELIVER - Get The Evening News delivered
to your e-mailbox every evening!
ANOTHER FOOLISH THING
See something moving a stock that we didn't cover?
E-mail the
Fool
News Team
and we will start working on the story.
Unfortunately, we cannot answer every e-mail
or respond to individual questions.
Have You Given? The Fool Charity Fund
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