DJIA:            7915.47   +100.39      (+1.28%) 
 S&P 500:          977.46     +8.44      (+0.87%) 
 Nasdaq:          1610.82    +31.82      (+2.02%) 
 Value Line ndx    866.54     +8.81      (+1.04%) 
 30-Year Bond   102 17/32     -1/32  5.94% Yield 
 

HEROES

Dynamic random access memory (DRAM), PC, and electronics manufacturer Micron Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MU)") else Response.Write("(NYSE: MU)") end if %> jumped $2 3/8 to $34 3/4 after Montgomery Securities raised its earnings estimates on the company, which also helped digital signal processor (DSP) and DRAM company Texas Instruments <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TXN)") else Response.Write("(NYSE: TXN)") end if %> rise $3 13/16 to $55 5/16. Talk is that DRAM prices are on the rise after a wrenching inventory adjustment from South Korean DRAM manufacturers. Industry people will tell you that it's contract prices that really matter, but like other commodity-driven industries, it's hard to ignore the signals that spot price moves give on the direction of contract pricing. One would think that professional money managers would be acquainted with the dynamics of inventory accumulation and liquidation, which decide spot prices but not contract prices. Judging by the equity value of Micron, the Wise are not as well-acquainted with the industry as many Foolish industry participants who post freely and intelligently on Internet message boards.

Alaska Air <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ALK)") else Response.Write("(NYSE: ALK)") end if %> soared $6 1/8 to $50 after it announced that profits took off in the fourth quarter. The company reported EPS of $0.73 per share on a fully diluted basis, up 170% over last year's $0.27. The company said that the strong numbers were the result of an increased load factor, favorable weather versus the same period last year, and a turnaround at Horizon Air, one of its subsidiaries. Earlier this month, Alaska reported that the December load factor at its Horizon unit (revenue passenger miles divided by available seat miles) had risen from 61.9% a year ago to 65.8% this year. Alaska's December load factor come in at 68.4%. Another reason why earnings increased is this incredible stat from the press release: "The airline's operating revenue per ASM [available seat mile] increased 8.7 percent while operating cost per ASM increased less than one percent."

Intel Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %> rose $1 11/16 to $80 7/8 after the company's chief financial officer (CFO) checked in with investors at the NationsBanc Montgomery Securities Technology conference. The company repeated the same guidance that it issued in its fourth quarter conference call -- that gross margins on flat revenues of 6.5 billion would trend down a few percentage points from the fourth quarter's 59% because of a higher level of purchased components for its Slot 1 cartridge for the Pentium II, and that much of that gross margin decline will be made up by operating expenses dropping 2% to 5% from Q4 levels. At the high end of the operating expense reduction and a three percentage point gross margin reduction, that's $0.05 per share after tax, spot-on with the current mean earnings estimate of $0.93 per share for the quarter. Intel's CFO also endorsed Dataquest's 17% PC unit growth forecast for 1998.

QUICK TAKES: Coca-Cola <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KO)") else Response.Write("(NYSE: KO)") end if %> rose $7/8 to $64 1/8 on reporting Q4 EPS of $0.33, below the mean estimate of $0.34. The company's earnings numbers are loaded down with asset sales, as has been the case for a number of quarters, so Q4 global unit case volume growth of 10% and operating earnings growth of 12% might be more instructive performance numbers for Coke... Database management software leader Oracle Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ORCL)") else Response.Write("(Nasdaq: ORCL)") end if %> gained $2 3/16 to $21 3/16 on the heels of comments from CEO Larry Ellison that he sees database growth of about 25% in the current quarter... Telecom equipment company Tellabs <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TLAB)") else Response.Write("(Nasdaq: TLAB)") end if %> rose $5 1/8 to $50 15/16 after the company's CEO appeared on CNBC's Squawk Box with words of assurance on the growth of telecom capital spending.

Semiconductor company Maxim Integrated Products <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MXIM)") else Response.Write("(Nasdaq: MXIM)") end if %> added $2 1/16 to $36 7/8 after Tuesday's report of a 23% increase in Q2 EPS and a 29% increase in revenues... Integrated steel producer Bethlehem Steel <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BS)") else Response.Write("(NYSE: BS)") end if %> jumped $15/16 to $9 7/16 after reporting Q4 EPS of $0.28 on revenues of $1.12 billion. Bethlehem now sells at 4.43 times 1997 EPS of $2.12... Fool Port holding 3D graphics chip and card maker 3Dfx <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TDFX)") else Response.Write("(Nasdaq: TDFX)") end if %> accelerated $4 7/8 higher to $27 1/4 after reporting better-than-expected earnings of $0.15 per share in its Q4. Revenues of $22.3 million, which included the holiday season, rose 122% on a sequential basis.

Electronic components and metallurgical products company Technitrol Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: TNL)") else Response.Write("(AMEX: TNL)") end if %> added $2 to $32 7/8 after reporting a 48% increase in Q4 earnings. The company earned $0.48 per share in the quarter, dwarfing estimates of $0.41... Aspen Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AZPN)") else Response.Write("(Nasdaq: AZPN)") end if %>, a maker of simulation and automation software for process-heavy industries like the chemical industry, rose $8 1/16 to $34 3/8 on reporting strong Q2 earnings of $0.31 per share, topping First Call estimates of $0.29... Computer security products company Raptor Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RAPT)") else Response.Write("(Nasdaq: RAPT)") end if %> jumped $2 3/4 to $14 3/4 after reporting a 24% increase in Q4 earnings of $0.11 per share.

Amresco Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMMB)") else Response.Write("(Nasdaq: AMMB)") end if %> gained $3 7/8 to $27 7/8 after the financial services company said it expects fourth quarter EPS to exceed estimates of $0.50... Sun Coast Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SN)") else Response.Write("(NYSE: SN)") end if %> rose $3 9/16 to $10 7/16 after the plastic products company agreed to be acquired by an affiliate of California investment firm Kerr Group Inc. for $10.75 per share in cash... Human resources services company Administaff <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ASF)") else Response.Write("(NYSE: ASF)") end if %> jumped $5 3/16 to $29 13/16 after entering into a marketing alliance with American Express <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AXP)") else Response.Write("(NYSE: AXP)") end if %>. AmEx will also purchase about 5% of Administaff.

EARNINGS MOVERS

SPS Transaction Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PAY)") else Response.Write("(NYSE: PAY)") end if %> up $2 3/8 to $22 5/8; Q4 EPS: $0.45; Estimate: $0.35

AlliedSignal <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ALD)") else Response.Write("(NYSE: ALD)") end if %> up $2 1/2 to $39 5/16; Q4 EPS: $0.55; Estimate: $0.55

DuPont <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DD)") else Response.Write("(NYSE: DD)") end if %> up $1 7/8 to $57 7/8; Q4 EPS: $0.84; Estimate: $0.84

ECI Telecom <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ECILF)") else Response.Write("(Nasdaq: ECILF)") end if %> up $2 to $26 7/8; Q4 EPS: $0.51; Estimate: $0.48

AXENT Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AXNT)") else Response.Write("(Nasdaq: AXNT)") end if %> up $3 5/8 to $19; Q4 EPS: $0.31; Estimate: $0.18

Zoran Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ZRAN)") else Response.Write("(Nasdaq: ZRAN)") end if %> up $2 5/16 to $15 1/2; Q4 EPS: $0.15; Estimate: $0.11

GOATS

Egghead Software <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EGGS)") else Response.Write("(Nasdaq: EGGS)") end if %> cracked today, falling $1 3/8 to $6 3/8 on announcing a loss of $0.29 per share in its third quarter. Over the past three months, Egghead shares have fallen from a high around $11. The company also expects fat losses over the next two years as it leaves behind its bricks-and-mortar retail distribution market, closes all of its stores, and concentrates on the Internet. The company will change its name to Egghead.com and focus on its core brand and its www.surplusdirect.com and www.surplusauction.com closeout retail operations. It plans to raise capital in the coming year to finance the changes. Expect to see the company hammer home the same growth numbers that other online retailers emphasize in their presentations to investors. Online closeout retailer OnSale Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ONSL)") else Response.Write("(Nasdaq: ONSL)") end if %> has an equity value of $484 million while Egghead's equity value sits at $151 million. Once Egghead starts to lose money online and builds an awareness of its online brand name in the minds of its investors, losses will suddenly become understandable and even expected, at which point Egghead might aspire to the equity value of other online brands. (We'll take our tongue out of cheek now.)

Chemical mechanical planarization (CMP) equipment manufacturer Integrated Process Equipment Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IPEC)") else Response.Write("(Nasdaq: IPEC)") end if %> was planarized down $1 11/16 to $13 15/16 after telling investors that it expects poor economic conditions in South Korea and Asia will bring about a decline in revenues over the coming half year as compared with $109 million in revenues recorded over the last six months. The company still expects revenues for the coming two quarters to grow from last year's level of $79.6 million. Integrated Process also reported Q2 EPS of $0.26, in line with the First Call mean estimate. The company's cash horde of $106 million is now equal to 40% of the company's market cap and working capital is equal to 74% of its market cap. CMP equipment is vital to the development of smaller semiconductor features on larger wafers. Integrated front-end equipment companies like Applied Materials <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMAT)") else Response.Write("(Nasdaq: AMAT)") end if %>, even though it already has CMP products, might start sniffing around Integrated Process at these levels, especially in light of Lam Research's <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LRCX)") else Response.Write("(Nasdaq: LRCX)") end if %> merger with CMP company OnTrak Systems.

QUICK CUTS: Sunbeam Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SOC)") else Response.Write("(NYSE: SOC)") end if %> was dimmed $3 15/16 to $37 5/8 after the consumer products company reported 26% Q4 revenue growth and EPS of $0.47, slightly below the median earnings estimate of $0.48. The highest estimate of $0.55 skewed the mean estimate upward to $0.50... Y2K software company Viasoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VIAS)") else Response.Write("(Nasdaq: VIAS)") end if %> slid $2 3/32 to $34 after reporting Q2 EPS of $0.25, ahead of the mean estimate of $0.24. Though software license fees were up strongly, revenues from services fell 23% sequentially and 33% year-over-year... CollaGenex Pharmaceuticals <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CGPI)") else Response.Write("(Nasdaq: CGPI)") end if %> slid $1 3/8 to $8 5/8 after the FDA turned down another new drug application for the company's periodontal disease treatment.

Corning Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GLW)") else Response.Write("(NYSE: GLW)") end if %>, maker of optical cable and specialty materials, was shredded for $3 9/16 to $32 5/16 after providing a dismal forecast for the coming quarter and reporting earnings. Excluding charges, the company reported $0.46 per share. Blaming Asian economic problems for its woes, Corning estimates that Q1 earnings will fall 30% below results reported for the Q1 in 1997... Life science equipment maker Perkin-Elmer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PKN)") else Response.Write("(NYSE: PKN)") end if %> dropped $5 15/16 to $58 1/4 after reporting that merger costs and currency fluctuations hurt Q2 results. Earnings of $0.82 per share (before charges) were slightly below the $0.85 investors were expecting.

Nonstandard auto insurance underwriter Progressive Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PGR)") else Response.Write("(NYSE: PGR)") end if %> cracked up for a $9 9/16 loss to $107 1/8 after reporting Q4 EPS (before realized investment gains) of $1.13, down from $1.18 last year and below the $1.22 mean estimate... Shoe designer and retailer Nine West Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NIN)") else Response.Write("(NYSE: NIN)") end if %> was stomped for $1 3/8 to $26 after the company's CEO resigned. Nine West has been under investigation by the U.S. Customs Service and the Securities and Exchange Commission. The company also announced further staff cuts at headquarters.

EARNING MOVERS

General Dynamics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GD)") else Response.Write("(NYSE: GD)") end if %> down $1 11/16 to $85 1/16; Q4 EPS: $1.31; Estimate: $1.31

Olicom A/S <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: OLCMF)") else Response.Write("(Nasdaq: OLCMF)") end if %> down $3 7/8 to $26 7/8; Q4 EPS: $0.36; Estimate: $0.35

Vista Medical <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VMTI)") else Response.Write("(Nasdaq: VMTI)") end if %> down $1 5/8 to $10 1/4; Q4 EPS: ($0.36); Estimate: ($0.38)

Cerus Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CERS)") else Response.Write("(Nasdaq: CERS)") end if %> down $1 9/16 to $16 3/8; Q4 EPS: ($0.50); Estimate: ($0.37)

FOOL ON THE HILL
An Investment Opinion
by Randy Befumo

Security Analysis, Part 4 -- Depth of Knowledge: The Circle of Competence

Rule 8: Buy what you really understand.

Rule 9: Don't buy what you marginally understand or what just floats your boat -- you will intermittently lose enough money to make this ultimately lead to below market returns.

Valuation and quality form the length and width of the investment world. These two dimensions indicate in the end what the size of the investment return will be. Like everything else in life, our ability to use these tools successfully has finite limits. In fact, our ability to measure valuation or quality is actually fairly limited, despite the seeming precision that the numbers offer us. Although we always have the option of leaving an extra "margin of safety" in a purchase by being conservative in our assessments of the valuation and underlying quality to try to offset our human limitations, properly assessing another dimension of the investment process -- depth of knowledge -- is probably even more vital to avoiding mistakes.

Depth of knowledge is a straightforward concept despite the fact that it is erratically employed. Simply put, it is a measure of how well you understand the company's economic model -- the way it interacts with customers, suppliers, distributors, and investors as part of its daily operations. The reason true depth of knowledge is erratically employed is because of the capacity most investors have for self-delusion. This is particularly true among investors who attempt to expand their idiosyncratic experience as a customer beyond its logical limits, allowing this impressionistic vantage point to color their perception of the company's overall economic model.

Understanding a business can be as complicated as the business itself, mitigated by our own personal knowledge and experience. The basic manufacturing model is probably the simplest business going. A company makes something, distributes it to the customer through set channels, and collects money from the customer in return. Another fairly simple model is the retailer, which receives manufactured goods from other companies and sells them directly to consumers. Or you can mix it up and have the hybrid manufacturer that not only makes products but also markets and sells them. With the exception of natural resources, financial, and real estate companies, almost all companies involve some combination of the manufacturing or retailing format.

Digging down deeper than this simple understanding of how sales dollars are converted into cash is essential. Who are the company's customers? Who are the company's suppliers? What factors affect end-user demand for the company's products or services? What is management's strategy for growing the business and creating shareholder value (not always one and the same)? The maxim, "Buy what you know," is insufficient -- it should really be "Buy what you understand." Heraclitus probably said it best when he quipped, "Much learning teaches little understanding." Actual concrete understanding of what a business is is fairly rare. More often than not, it degenerates into a superficial sense of what the products are and how exciting they might be, or a idiosyncratic consumer familiarity with the product inflated into a purported understanding of the company's economic model.

Understanding goes beyond just reading the federal filings. Routine, boilerplate warnings about potential pricing irrationality in a market just don't have the same power as the concrete and real experience of seeing the price for hard disk drives dive in the spot market. Many times true understanding comes from months, or even years, of following a company before making your purchase. The first few times you look at a company's financial statements over the course of a year or two might be better conceived of as a "getting to know you" sort of engagement rather than a "Hey, let's go out" kind of thing. While just twiddling around with preliminaries can be boring, many investors will tell you that their best investments were not necessarily their first investments, but the companies that they bought after years of watching them closely.

For me personally, this true of my early 1996 purchase of America Online and my early 1997 purchase of Dell Computer. In fact, many expressed surprise that I had not owned either company until then, given the amount I had written on both companies. The simple reality is that while I had an idea Dell might be cheap way back in the first quarter of 1996 after it had been pounded by 33%, it took months for me to really understand the mechanics of asset management and how Dell had used these to juice up its return on invested capital. While you can argue that buying the stock on the first inclination that it might be cheap would have been better in that situation, I can think of a dozen other situations where having patience and trying to learn more about a company through trade magazines, analyst reports, and a variety of other online and offline sources would have created a big enough picture to make buying as risk-free as possible from an information standpoint.

The fact that there is no set number that measures your knowledge of a company is probably the main reason why many investors fail to consider this important variable before investing. While you can assess the relative strength of a stock by glancing at a copy of Investor's Business Daily, assessing your own knowledge level is a much more introspective, difficult, and sometimes brutally honest process. However psychologically painful this self-assessment might be, if you really think about it, probably 50% of your major investment boo-boos come down to knowledge risk, with the remainder evenly split between valuation (buying too high) or quality (buying a lousy company).

While knowledge is important, it should not be taken out of context with valuation and intrinsic business quality. The appearance of detailed knowledge about a company without a genuine understanding of how much cash the company will generate in the future can be as catastrophic an investment scenario as looking at valuation only and ignoring the company's underlying economic model. It is depth of knowledge combined with low valuation and high quality that make for outstanding investments. Any deviation from these three dimensions involves taking on the distasteful risk of losing money. This is not the end, however. When you combine this fully functional, three-dimensional investment model with an appropriate philosophical framework and add the concept of time, you can engage in full-fledged security analysis. Tomorrow, we will look at time and its impact on the investment process.

CONFERENCE CALLS

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.

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