DJIA: 7973.02 +57.55 (+0.73%) S&P 500: 985.49 +8.03 (+0.82%) Nasdaq: 1619.49 +8.67 (+0.54%) Value Line ndx 870.77 +4.23 (+0.49%) 30-Year Bond 104 +1 14/32 5.84% Yield
Enterprise storage company EMC Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EMC)") else Response.Write("(NYSE: EMC)") end if %> gained $3 to $32 3/4 on reporting its best quarter ever last night, coming in with Q4 revenues of $873 million, up 33% from last year. EPS of $0.32 met estimates and rose 27% year-over-year. The thesis on EMC has been simple -- lower-cost disk drives allow the company to lower prices while holding margins constant. EMC benefits from lower disk drive prices so it isn't hurt when it lowers its prices. Lower prices increase utility, or usefulness a customer perceives or actually realizes, and thus increase sales. If EMC can increase unit sales at a rate greater than the inverse of (1 minus the percentage rate of price decline), higher sales and margins result. The formula has worked for EMC so far, and it's not a surprise that one of their best quarters took place during one of the disk drive industry's worst quarters.
JDA Software Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: JDAS)") else Response.Write("(Nasdaq: JDAS)") end if %> climbed $6 13/16 to $40 3/4 after reporting Q4 earnings last night of $0.33 per share versus an estimate of $0.30. Revenues were up 95% to $30.2 million from $15.5 million. JDA makes application software for retail enterprise management. Customers include West Marine <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WMAR)") else Response.Write("(Nasdaq: WMAR)") end if %> and Mini-Mart. The company said it experienced strength in all its divisions. Additionally, and most Foolishly, the company listed a conference call replay in its press release. Those who'd like to listen to the call can dial (800) 475-6701, access code 372906, through Feb 12.
QUICK TAKES: Engineering software firm Summit Design <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SMMT)") else Response.Write("(Nasdaq: SMMT)") end if %> gained $3 1/4 to $13 3/4 after reporting blowout fourth quarter earnings last night. The company earned $0.21 per share on $9.7 million in revenues. The estimate was for $0.13 per share... Truckload Carrier J.B. Hunt <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: JBHT)") else Response.Write("(Nasdaq: JBHT)") end if %> was riding high today, up $2 1/8 to $21 3/4 after Gruntal & Co. raised 1998 EPS estimates to $0.90 from $0.60... Instrumentarium Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INMRY)") else Response.Write("(Nasdaq: INMRY)") end if %> jumped $4 3/4 to $24 3/4 on announcing that it will purchase two medically oriented business units of Box Group plc <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BOX)") else Response.Write("(NYSE: BOX)") end if %> for nearly $494 million... Optoelectronics components manufacturer OSI Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: OSIS)") else Response.Write("(Nasdaq: OSIS)") end if %> gained $2 15/16 to $16 in advance of reporting second quarter earnings after the bell. Q2 EPS of $0.24 came in above the mean estimate of $0.22 and rose 20% over last year's second quarter results.
Machine vision and measurement systems company Zygo Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ZIGO)") else Response.Write("(Nasdaq: ZIGO)") end if %> rose $1 3/8 to $15 1/2 after reporting Q2 EPS of $0.30 on record revenues of $27.7 million. Earnings estimates were for $0.35 per share, but Zigo said it still sees strong demand for its products... Radio frequency power amplifier maker Powerwave Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PWAV)") else Response.Write("(Nasdaq: PWAV)") end if %> added $1 3/4 to $13 15/16 after announcing that it has received a $5 million order for its ultra-linear multicarrier RF power amplifiers from Canadian telecom company Northern Telecom <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NT)") else Response.Write("(NYSE: NT)") end if %>.
TST/Impresso Inc. (Nasdaq TSTI) ran up $1 3/8 to $11 1/2 before being halted for news that the paper products company is considering an offer from a major foreign paper company that wants to make an equity investment in TST... Cable companies moved up today, with Tele-Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TCOMA)") else Response.Write("(Nasdaq: TCOMA)") end if %> gaining $2 to $28 1/2 and Pennsylvania-based Adelphia Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ADLAC)") else Response.Write("(Nasdaq: ADLAC)") end if %> rising $2 7/16 to $20 9/16... Data processing company First Data Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FDC)") else Response.Write("(NYSE: FDC)") end if %> picked up $2 15/16 to $29 5/16 after reporting Q4 EPS from continuing operations of $0.45, up 2% over the fourth quarter last year. The company issued a positive outlook and detailed further restructuring moves.
Human resources services company Administaff <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ASF)") else Response.Write("(NYSE: ASF)") end if %> gained another $6 1/4 to $36 1/16 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... Direct marketing company Harte-Hanks Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HHS)") else Response.Write("(NYSE: HHS)") end if %> delivered a $4 1/4 gain to $39 7/16 for its shareholders after reporting a 62% increase in EPS from continuing operations of $0.47, a good 17.5% ahead of expectations... Oil drillers and services companies gained today not because the fundamentals of the industry changed that much (1999 oil futures were flattish to down, but gas futures were strong) but because Wall Street's opinion moved up a bit. Shipbuilder Halter Marine <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: HLX)") else Response.Write("(AMEX: HLX)") end if %> steamed $1 15/16 higher to $21 7/16 and driller Diamond Offshore <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DO)") else Response.Write("(NYSE: DO)") end if %> added $3 1/16 to $46 1/16.
EARNINGS MOVERS
Hexcel Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HXL)") else Response.Write("(NYSE: HXL)") end if %> up $2 5/16 to $24 5/16; Q4 EPS: $0.30; Estimate: $0.27
Southern Pacific Funding <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SFC)") else Response.Write("(NYSE: SFC)") end if %> up $1 3/16 to $13 1/16; Q4 EPS: $0.58; Estimate: $0.57
Procom Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PRCM)") else Response.Write("(Nasdaq: PRCM)") end if %> was jolted for $3 5/16 to $7 13/16 after the data storage systems company warned investors that it would not meet estimates for the current second fiscal quarter. The company said it should report revenues in the range of $23 million to $24 million, down as much as 26% from last quarter, and EPS between $0.14 and $0.17. Estimates were for $0.22. Echoing some of what happened to Adaptec <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ADPT)") else Response.Write("(Nasdaq: ADPT)") end if %> earlier this month, SCCI and RAID controller manufacturer Mylex Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MYLX)") else Response.Write("(Nasdaq: MYLX)") end if %> dropped $1 to $9 3/8 after reporting disappointing results for its fourth quarter. EPS was a loss of $0.03, compared with estimates of a loss per share of $0.02. In the prior-year period, the company reported EPS of $0.14. Last quarter, Mylex reported a loss per share of $0.05.
Callaway Golf <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ELY)") else Response.Write("(NYSE: ELY)") end if %> double-bogied today, falling $3 3/16 to $27 1/ 8 after reporting a 5.6% decrease in Q4 EPS of $0.34. Investors had already been expecting flattish EPS of $0.37. Though sales increased 18% year-over-year, gross margin fell four percentage points to 50%. Operating margin was a respectable 23%, reflecting the ability of the company to differentiate its products long after some thought the company would lose its product edge. The trend in operating margins is what's disturbing investors, though, as operating margin fell nearly five full percentage points from Q4 1996. Golf-happy Asia is to blame. The excuse may fall on deaf ears for investors who have heard this across the board, but in countries where land is at a premium and golf club memberships and greens fees make the sport affordable only to the elite, more golfers are willing to spend bigger bucks on their clubs. With that falloff in demand as well as a start-up golf ball operation to worry about, near-term uncertainties exist with Callaway -- which scared off to downgrade-land some of the analysts following the company.
Pharmaceuticals development company COR Therapeutics <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CORR)") else Response.Write("(Nasdaq: CORR)") end if %> plummeted $10 9/16 to $9 7/16 after the company's INTEGRILIN drug received recommendation for FDA approval for "use in the setting of coronary angioplasty." The FDA panel said, though, that it did not have enough data to recommend for approval the use of INTEGRILIN for treatment of acute coronary syndromes such as angina. CIBC Oppenheimer lowered its rating on the company to "hold" from "strong buy" and Lehman Brothers now rates the company at "outperform," down from "buy." One analyst told Reuters today that he estimates a yearly market potential of only $20 million for the drug, commenting "[INTEGRILIN is] going to be a marginal product because the FDA panel is recommending a sub-optimal dose and people won't want to use it."
QUICK CUTS: Loral Space & Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LOR)") else Response.Write("(NYSE: LOR)") end if %> fell $1 7/16 to $22 1/8 as subsidiary Space Systems/Loral said it will be eliminating 300 jobs because the company has suspended three satellite jobs in Asia and Indonesia. The losses bring the backlog to about $1.8 billion... French drug manufacturer Rhone-Poulenc <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RP)") else Response.Write("(NYSE: RP)") end if %> closed down $4 to $45 3/8 after reporting a loss of $1.3 billion due to restructuring charges. The company said that charges were larger than expected and will carry into 1998... Vans Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VANS)") else Response.Write("(Nasdaq: VANS)") end if %> traded off $3 23/32 to $8 17/32 after Donaldson, Lufkin & Jenrette and Gruntal both lowered their ratings on the stock after seeing an Asian slowdown in Vans' business.
Billing Information Concepts <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BILL)") else Response.Write("(Nasdaq: BILL)") end if %> backslid $9 3/8 to $46 after being downgraded by Jefferies & Co. No reason was given for the downgrade... BioTechnology General Corp, <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BTGC)") else Response.Write("(Nasdaq: BTGC)") end if %> dropped $1 3/4 to $9 1/2 after being informed by the FDA that its data for Androtab-SL wasn't sufficient for regulatory approval... Year 2000 company Peritus Software <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PTUS)") else Response.Write("(Nasdaq: PTUS)") end if %> was off $2 7/16 to $18 1/8 after the company announced that it would concentrate more of its R&D budget on non-Year 2000 projects... Warrantec Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WTEC)") else Response.Write("(Nasdaq: WTEC)") end if %> got creamed, losing $4 1/8 to $5 1/2 after missing Q3 earnings estimates of $0.14. The company earned $0.08 per share and credited the shortfall to increased infrastructure investments. Apparently there was no warranty on the stock price.
EARNINGS MOVERS
Network Computing Devices <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NCDI)") else Response.Write("(NYSE: NCDI)") end if %> down $1 3/8 to $9 3/8; Q4 EPS: $0.06; Estimate: $0.06
EZCORP Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EZPW)") else Response.Write("(Nasdaq: EZPW)") end if %> down $1 3/4 to $10; Q1 EPS: $0.19
Amerilink Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ALNK)") else Response.Write("(Nasdaq: ALNK)") end if %> down $4 5/8 to $28 15/16; Q3 EPS: $0.32; Estimate: $0.29
FOOL
ON THE HILL
An Investment Opinion
by
Randy Befumo
Security Analysis, Part 5 -- Time:
The Ultimate Arbiter of Returns
Rule 10. Cite all past and future investment returns in a consistent unit of measure.
Rule 11. Time heals many, but not all, self-inflicted valuation wounds.
Concentrating on valuation, quality, and depth of knowledge allows the investor to pick companies that are most likely to appreciate significantly in value. The returns an investor earns by owning the shares of a publicly traded company are as much dependent on the time the security is held as any of these other factors. The amount of time over which a price change occurs makes the difference between a stunning investment and a sub-par investment. In order to invest successfully, individuals must understand the critical role that time plays in determining returns and they must develop reasonable expectations about what sort of returns to expect over a given period of time.
Say you have done your homework and bought shares of XYZ Corp. After some interval, you discover to your delight that the shares have doubled in price. A real home run, right? Not necessarily. Depending on how long it takes to earn them, 100% returns can be either market trouncing or embarrassing. Just as in physics, you want to be careful to keep all of the units of measure in a problem the same or else you will get bizarre results. Thinking about all of your investment returns in one unit of measure -- annualized returns -- is critical to making informed decisions about which investments have been and will be the most attractive.
In our example of the 100% returns, if this 100% was earned over the course of a year it is a staggering return. However, if it took you ten years to double your money, you have only earned 7.1% annualized returns over the whole period. Although 7.1% ain't exactly shabby, with the S&P 500 doing about 17% per year with dividends reinvested since 1980, you can see why 7.1% might seem a little anemic by comparison. Whether you are quoting past returns in your portfolio or you are looking at what you might earn two years out should a company trade at your conservative valuation, you have to convert these numbers back into annualized returns in order to compare and contrast efficiently. Simply learning to take nth roots by using the "^" function in your computer's built-in calculator or spreadsheet would do the job. Find a co-worker, a friend, or perhaps even a student who is savvy with math and they will have you annualizing returns in no time flat.
Beyond the necessity of using a consistent unit of measure when discussing returns, time also has a much more powerful and salutary effect on the investment process. You see, time heals many investment errors that are related to valuation. While certainly time does not heal all of the damage, nor does time matter a fig if an investor loses patience, the amount of time you hold an asset does decrease the valuation risk inherent when you purchased the asset. What that means in English is that if you bought a great company but paid too dear a price, over time that valuation mistake is going to be overcome by the compounded earnings growth that the company delivers. This is why focusing on quality during the investment process is so critical -- if you buy quality, then time is your friend. If you buy crap, time doesn't matter a whit.
Citing exaggerated lengths of time over which to invest your money has actually become quite faddish of late, with 20 or 30 year time frames often cited. Although investing in companies with this kind of time frame is perfectly reasonable, the assumption that even this length of time wipes out all valuation risk is not. Even the highest quality company purchased at an excessive price can deliver sub-market returns over 20 or 30 year time frames. This is particularly true if the company in question experiences a decelerating rate of earnings per share growth, as is typical of large companies growing larger.
While small companies grow earnings by 10% or 20% much of the time, in a non-inflationary environment, many large companies that have already gone through years of process reengineering to enhance productivity may find that they have reached their zenith. If EPS grows 10% per year along with sales and you purchased the stock at 10 times sales, the resulting shareholder return over the next 20 years stands a chance of being sub-optimal. Someone might not take the shares off your hands at 10 times sales and 50 times earnings 20 years out. If the P/E multiple contracts to something more like 15 times earnings, the 20-year return would be minimal.
Time decreases the chance of making a valuation mistake, but it does not remove it all together. The principal reason that Valuation came before Quality, Knowledge, and Time was because in the end -- even considering Time -- it is the primary determinant of investment returns. If you buy a great company that you know a lot about and hold for decades, you can still underperform the market if the great company experiences decelerating earnings growth and you bought it at a super-premium valuation. Although the majority of the so-called Nifty Fifty stocks have done fine over the past two decades, investors who bought names like Avon Products will probably never reach breakeven with their original investment. While in retrospect Avon may seem like one of the bad ideas of the bunch, keep in mind that in the early '70s when network marketing was young, Avon was considered a vibrant, consumer-oriented, slyly managed empire with an excellent balance sheet and plenty of cash on hand.
To conclude, the investor who purchases low- to medium-valued companies of medium to high quality where they actually have some kind of knowledge about the company and who have reasonable expectations about annualized returns will probably do quite well, regardless of the market environment. In the Buy & Hold Apocalypse, we saw that with longer and longer time frames, stocks had a better and better chance of outperforming any other asset class. What is true of the flock is true of a single bird.
The more you concentrate on becoming a long-term owner in a quality business that you purchased at a low valuation and know quite a bit about, the more likely you are to tell your friends about the shares of a $50 or $60 stock you own where your cost basis is measured in pennies. Although much attention is placed on the stocks that double or triple in a year, going up 10 or 20 times in a decade is where they really create wealth. By following the 11 fairly simple rules laid out in this series, I think investors heartily increase their odds of doing just that.
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
Contributing Writers
Brian Bauer (TMF Hoops), Fool Four
Editor