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HEROES

A jury in Muncie, Indiana gave big tobacco a boost today after ruling that a number of the industry's top players weren't liable for the 1991 death of a non-smoking Veterans Administration nurse who died of lung cancer. This was the first lawsuit that actually went to trial in which the plaintiffs attempted to make a causal link between an individual's death and exposure to second-hand smoke. The verdict represents the industry's third court win in the last 12 months and has led to speculation that it may give Congress some incentive to pass the proposed $368.5 billion settlement of health-related tobacco lawsuits. Philip Morris <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MO)") else Response.Write("(NYSE: MO)") end if %> jumped $1 11/16 to $43 1/16, RJR Nabisco <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RN)") else Response.Write("(NYSE: RN)") end if %> tacked on $3/8 to $34 1/16, Brooke Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BGL)") else Response.Write("(NYSE: BGL)") end if %> gained $3/8 to $15 1/8, and Loews Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LTR)") else Response.Write("(NYSE: LTR)") end if %> climbed $3 3/16 to $107 9/16. The battle is far from over. A similar case in Mississippi involving a non-smoking barber who got cancer is slated for trial in June.

Sprint Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FON)") else Response.Write("(NYSE: FON)") end if %> jumped $2 9/16 to $73 9/16 on widespread takeover rumors and news that the nation's third largest long-distance company and its three cable partners in Sprint PCS may spin off part of the digital wireless company through an initial public offering (IPO). Yesterday, British Telecommunications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BTY)") else Response.Write("(NYSE: BTY)") end if %> told investors at a conference that it is in talks with potential U.S. partners, which led to speculation that there may be further industry consolidation and that Sprint may be a potential merger target. Other telecommunications companies also advanced today. Local-access phone company GTE Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GTE)") else Response.Write("(NYSE: GTE)") end if %>, which was raised to a "buy" from "neutral" by PaineWebber, rang up $1 9/16 to $59 1/4. SBC Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SBC)") else Response.Write("(NYSE: SBC)") end if %> rose $2 to $3 7/8, despite the fact that a U.S. appeals court upheld an FCC decision to block the company's entrance into the long-distance market.

QUICK TAKES: Pfizer Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PFE)") else Response.Write("(NYSE: PFE)") end if %> moved up $2 1/4 to $92 1/4 on expectation that the FDA will soon grant the pharmaceutical company U.S. marketing approval for Viagra, a drug for male erectile dysfunction. A decision is expected by March 29... Boeing <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BA)") else Response.Write("(NYSE: BA)") end if %> took off for $2 to $53 7/16 after the world's leading maker of commercial jet aircraft announced plans to cut an additional 8,200 jobs by year 2000, streamline facilities, and eliminate some laboratories, all without taking any special charges... Schlumberger <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLB)") else Response.Write("(NYSE: SLB)") end if %> gained $1 15/16 to $73 9/16 after the oil-services giant signed a five-year, $2 billion contract with Russia's largest oil producer AO Yuksi Oil Co. to provide the company with drilling equipment, geological research, construction, and training.

Kennedy-Wilson Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KWIC)") else Response.Write("(Nasdaq: KWIC)") end if %> shot up 60% or $13 1/2 to $36 after reporting fourth quarter earnings of $1.93 a share, up from $0.13 per share in Q4 1996. The international real-estate marketing and investment company also announced a 200% stock dividend in order to effect a 3-for-1 stock split... Paper producer Crown Vantage <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CVAN)") else Response.Write("(Nasdaq: CVAN)") end if %> surged $2 1/4 to $9 1/4 after announcing that it has entered into an agreement with its former parent company Fort James Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FJ)") else Response.Write("(NYSE: FJ)") end if %> under which Crown Vantage would receive and repurchase certain pay-in-kind notes having a total face value of about $133 million for a fixed price of $80 million... Security systems company Response USA <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RSPN)") else Response.Write("(Nasdaq: RSPN)") end if %> leapt $1 5/16 to $6 7/16 after Business Week reported that some big investors have purchased the company's stock. According to the magazine, Gabelli Mutual Funds has bought some 300,000 shares and New York hedge fund Gabriel Capital some 150,000 shares. Business Week also said that Gruntal analyst Mark Langley expects the stock to hit $9 1/2 in a year.

Seagull Energy Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SGO)") else Response.Write("(NYSE: SGO)") end if %> jumped $1 3/8 to $18 1/2 after Business Week reported that financier Carl Icahn, who in December had filed with regulators that he planned to buy at least 15% of the gas exploration company, is not deterred by the company's poison pill defense. Citing "whispers," the magazine said Icahn might have accumulated some 1 million shares, or 1.6% of Seagull's outstanding shares... Spinal implant devices maker DePuy Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DPU)") else Response.Write("(NYSE: DPU)") end if %> gained $1 13/16 to $30 on announcing that it has agreed to acquire spinal implant company AcroMed Corp. in a transaction valued at around $325 million. Depending on the closing date, DePuy said the merger could add about $50 million to its 1998 sales and will become accretive to earnings in 1999.

Wayne Bancorp <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WYNE)") else Response.Write("(Nasdaq: WYNE)") end if %> jumped $4 1/4 to $28 3/4 after the full-service financial institution that provides banking services throughout Passiac County, N.J., announced that it is seeking a sale or merger of the company... Chemical and refining company Lyondell Petrochemical <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LYO)") else Response.Write("(NYSE: LYO)") end if %> rose $1 11/16 to $29 7/8 after announcing that oil, gas, and chemicals company Occidental Petroleum <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OXY)") else Response.Write("(NYSE: OXY)") end if %> will be joining Equistar Chemicals LP, Lyondell's joint venture with chemical company Millennium Chemicals <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MCH)") else Response.Write("(NYSE: MCH)") end if %>. Occidental's ethylene, propylene, ethylene oxide and derivatives businesses will become part of Equistar, making it the second-largest producer of ethylene in the world. Millennium gained $1 1/16 to $31 today, while Occidental added $1 to $29 1/4.

Marten Transport <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MRTN)") else Response.Write("(Nasdaq: MRTN)") end if %> surged $2 7/8 to $18 3/8 after BT Alex. Brown upgraded its rating on the truckload carrier to "strong buy" from "buy"... Alliance Semiconductor <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ALSC)") else Response.Write("(Nasdaq: ALSC)") end if %> advanced $3/4 to $7 3/4 after the semiconductor manufacturer announced that it has agreed to sell 35 million shares of United Semiconductor Corp. in Taiwan, roughly 18% of the almost 190 million shares it owns, for approximately $32.8 million. That's close to three times what Alliance paid for the stock... Cruise-line operator Carnival Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CCL)") else Response.Write("(NYSE: CCL)") end if %> steamed ahead $1/18 to $66 9/16 after reporting first quarter earnings of $0.37, up from $0.29 for the year-ago period. The First Call mean estimate was $0.33.

South Windsor, Conn.-based Bank of South Windsor <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: BSW)") else Response.Write("(AMEX: BSW)") end if %> added $1 3/4 to $31 1/2 after announcing it has agreed to be acquired by competitor New England Community Bancorp <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NECB)") else Response.Write("(Nasdaq: NECB)") end if %> for $33 million in stock... Barr Laboratories <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: BRL)") else Response.Write("(AMEX: BRL)") end if %> climbed $1 3/8 to $40 15/16 after SBC Warburg Dillon Read initiated coverage of the generic drugmaker with a "buy" rating and a 12 to 18 month price target of $54... Overseas telephone systems operator Cellular Communications International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CCIL)") else Response.Write("(Nasdaq: CCIL)") end if %> tacked on $2 to $59 3/4 on announcing a 3-for-2 stock split... Santa Clara, Calif.-based Silicon Valley Bancshares <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SIVB)") else Response.Write("(Nasdaq: SIVB)") end if %> rose $2 1/2 to $60 after the bank that specializes in the high-tech industry announced a 2-for-1 stock split payable May 1 for shareholders of record on April 17.

GOATS

Semiconductor makers in a number of diverse arenas were knocked down today on negative news announcements. Complementary metal oxide semiconductor manufacturer Dallas Semiconductor <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DS)") else Response.Write("(NYSE: DS)") end if %> dropped $4 1/4 to $34 11/16 after saying its fiscal Q1 earnings will be flat to slightly below the $0.50 per share earned a year ago due to lower orders from Asia. The Street had been expecting earnings of $0.62 per share. Meanwhile, chip superpower Intel Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %> slipped $1 9/16 to $75 3/4 on announcing that it will cut the price of its top-of-the-line 333 megahertz Pentium II processor by 19% to $583 in order to spur demand. In addition, Texas Instruments <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TXN)") else Response.Write("(NYSE: TXN)") end if %> slipped $2 1/16 to $53 11/16, Micron Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MU)") else Response.Write("(NYSE: MU)") end if %> slid $1 1/2 to $30 1/2, Advanced Micro Devices <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMD)") else Response.Write("(NYSE: AMD)") end if %> slumped $1 9/16 to $22 3/8, and SGS Thomson N.V. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: STM)") else Response.Write("(NYSE: STM)") end if %> sagged $1 11/16 to $70.

Sun Microsystems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SUNW)") else Response.Write("(Nasdaq: SUNW)") end if %> was burned for a $2 3/16 loss to $42 15/16 after it was reported that PC, server, printer, and calculator maker Hewlett-Packard <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HWP)") else Response.Write("(NYSE: HWP)") end if %> is planning to offer its own version of Sun's popular Java software to run on various devices, including computer printers. Reportedly, software giant Microsoft Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> has already agreed to use HP's version of Java with its Windows CE operating system. While the development seems to be a blow to Sun's strategy of leveraging its Java platform to fuel its own growth, the company is playing it cool. "Our copyrights say they can build a clone," Sun vice president Jon Kannegaard told Reuters. "If they are building something that isn't a clone, that's stupid." Stated more diplomatically, Sun doesn't have a problem with HP building its own version of Java -- as long as it jibes with Sun's original version. If not, Sun will likely sue HP for copyright infringement, a la its existing lawsuit against Microsoft.

Caller ID maker CIDCO Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CDCO)") else Response.Write("(Nasdaq: CDCO)") end if %> was disconnected for a $2 11/16 loss to $10 1/16 after saying it expects to report a small fiscal Q1 operating loss on lower-than-expected revenues due to market "maturation" for its Caller ID products. The Street had been expecting earnings of $0.29 per share for the quarter. The news prompted both BT Alex. Brown and BancAmerica Robertson Stephens to lower their ratings on the stock. The firm's second-largest customer in terms of fiscal 1996 sales, Ameritech Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AIT)") else Response.Write("(NYSE: AIT)") end if %>, discontinued selling CIDCO's products in the second quarter of 1997. Moreover, CIDCO said a "substantial majority" of its revenues comes from its Caller ID products, which are dependent on the promotional efforts of its clients (mostly independent telecommunications providers and regional Bell operating companies). Unfortunately, relying on your customers to market your sole product carries a "substantial" amount of risk, as CIDCO is starting to find out.

QUICK CUTS: Scientific products manufacturer Fisher Scientific International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FSH)") else Response.Write("(NYSE: FSH)") end if %> finally fell back to Earth today, losing $5 1/16 to $69 after rising 36% since announcing a five-for-one stock split on March 10... Ingram Micro <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IM)") else Response.Write("(NYSE: IM)") end if %> slipped $2 5/16 to $36 5/8 after Donaldson, Lufkin & Jenrette downgraded the distributor of microcomputer products to "market perform" from "buy"... DLJ also cut technology management services company InaCom Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ICO)") else Response.Write("(NYSE: ICO)") end if %> and computer products distributor Tech Data Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TECD)") else Response.Write("(Nasdaq: TECD)") end if %> to "market perform" from "buy." InaCom slid $1 15/16 to $28 1/16 while Tech Data lost $3 3/8 to $38 3/8... Year 2000 problem solver Peritus Software Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PTUS)") else Response.Write("(Nasdaq: PTUS)") end if %> tumbled $4 3/8 to $9 15/16 as NationsBanc Montgomery Securities downgraded the stock to "hold" from "buy."

Shares of software developer SCM Microsystems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SCMM)") else Response.Write("(Nasdaq: SCMM)") end if %> skidded $12 1/16 to $66 on news that Cowen & Co. would possibly sell 600,000 shares left over, or "locked up," from the company's initial public offering last October... Information technology products distributor MicroAge Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MICA)") else Response.Write("(Nasdaq: MICA)") end if %> sank $1 1/8 to $12 3/8 after Deutsche Morgan Grenfell lowered its rating on the company to "hold" from "accumulate"... STB Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: STBI)") else Response.Write("(Nasdaq: STBI)") end if %> was off $1 15/32 to $20 17/32. The company, which manufacturers multimedia subsystems for desktop PCs, sold a total of 3 million shares in a public offering today at a price of $22 per share... Aquapenn Spring Water Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: APN)") else Response.Write("(NYSE: APN)") end if %> fell $1 3/4 to $9 7/16 after the bottled water company said its fiscal Q2 earnings will be hurt by adverse weather in California and lower-then-expected sales from recent acquisition Dunsmuir Bottling Co.

Magainin Pharmaceuticals <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MAGN)") else Response.Write("(Nasdaq: MAGN)") end if %> dropped $5/8 to $5 3/4 after Cowen & Co. downgraded the drugmaker to "buy" from "strong buy"... Monsanto Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MTC)") else Response.Write("(NYSE: MTC)") end if %> was thrown for a $1 7/8 loss to $50 1/4 on reports that a jury awarded Mycogen <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MYCO)") else Response.Write("(Nasdaq: MYCO)") end if %> $174.9 million in future damages in its lawsuit against the firm. The Church of England also sold its $2.1 million stake in the chemical and pharmaceuticals company on worries that Monsanto's genetic engineering efforts conflicted with the church's beliefs... Network security and management products maker Network Associates <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NETA)") else Response.Write("(Nasdaq: NETA)") end if %> lost $4 3/4 to $64 1/2. A Commerce Department official said the Feds have not determined whether the company violated U.S. laws by selling its Pretty Good Privacy encryption product internationally without providing a key to U.S. law enforcement authorities... Global satellite communications system operator PanAmSat Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SPOT)") else Response.Write("(Nasdaq: SPOT)") end if %> dropped $5 1/8 to $52 1/2 after Bear Stearns downgraded the stock to "neutral" from "attractive."

Diesel engine maker Cummins Engine Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CUM)") else Response.Write("(NYSE: CUM)") end if %> ran out of gas today, sinking $5 9/16 to $56 1/8 after saying it does not expect to report a profit in fiscal Q1 due to a charge of about $30 million to cover higher-than-anticipated costs to repair certain engines produced in the past. Slower sales in Asia and an ongoing restructuring effort will also drag down earnings in the quarter... X-Rite Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: XRIT)") else Response.Write("(Nasdaq: XRIT)") end if %> was cut $2 1/8 to $13 3/8 after the maker of color and photographic density measurement instruments said it expects Q1 EPS between $0.13 and $0.16, below the I/B/E/S mean estimate of $0.21. The company said the shortfall is due to a decline in demand for its private labeled digital imaging products... Anti-virus software developer Dr. Solomon's Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SOLLY)") else Response.Write("(Nasdaq: SOLLY)") end if %> dropped $3 1/8 to $36 after receiving yet another downgrade. Yesterday, Goldman Sachs downgraded the stock. This morning, Hambrecht & Quist lowered its rating to "hold" from "buy."

Auto parts retailer Pep Boys - Manny, Moe & Jack <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PBY)") else Response.Write("(NYSE: PBY)") end if %> was beat up for a $1 5/16 loss to $23 7/8 after reporting a Q4 loss of $0.45 per share compared to earnings of $0.36 per share a year ago. The company said the loss was due to $28 million in charges to cover the closing of nine stores, the reduction of its store expansion program, the conversion of all PartsUSA stores to Pep Boys Express outlets, severance, and other expenses... Children's safety helmets and bicycle accessories firm PTI Holding <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PTII)") else Response.Write("(Nasdaq: PTII)") end if %> took a spill, falling $1 to $8 1/2 on reporting Q4 EPS of $0.10. Earnings were unchanged from a year ago but below the Street estimate of $0.12... Ocwen Asset Investment Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: OAIC)") else Response.Write("(Nasdaq: OAIC)") end if %> slipped $1 9/16 to $18 3/16 after the real estate investment trust (REIT) cut its quarterly dividend 56% to $0.25 due to faster prepayment of interest-only and inverse interest-only securities held in its portfolio.

FOOL ON THE HILL
An Investment Opinion
by Louis Corrigan

Iomega's Downside Risk

Ben Graham, the father of fundamental analysis and value investing, understood that the safest way to make money in the stock market was to avoid losing it. Graham was thus attracted to stocks that traded very close to their net tangible asset or book value because, in his famous phrase, these issues provided a "margin of safety." But with the Dow hitting new highs, value investors today appear to be a persnickety lot who can't find much to choose from among large-cap stocks.

Commentators have suggested that investors may be throwing money at well-known names with little pause regarding the risks. While that may be the case, investors were emboldened this week after multi-billionaire investor Warren Buffett made some relatively sanguine comments about valuations (with certain caveats). Buffett is Graham's great protege and completely embraced the concept of a "margin of safety," but Buffet's departure from Graham's intellectual roots was marked by stricter qualifications for what constitutes a quality business. Nevertheless, if this touchstone of avuncular wisdom now thinks "there is no reason to think of stocks as generally overvalued" in light of the interest rate environment and strong returns on equity, then maybe the kids don't have to end the party yet.

Even so, investors need a methodology for thinking about downside risk, in part because it's so tempting not to. Check your own investment fantasies. You may have thought a lot about how much you could make on a stock and perhaps very little about how much you might lose. The dangers of such wishful thinking hit home this week around the Motley Fool as removable disk drive maker and Fool Portfolio stalwart Iomega <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IOM)") else Response.Write("(NYSE: IOM)") end if %> zipped up an era of rising sales and burgeoning earnings with a chilling announcement. The company now expects that flat sales and a pricey ad campaign will lead to a first quarter loss of $10 to $25 million. This week's 17% drop to $7 1/8 completes a stunning 57% slide since last December and leaves Iomega trading near its lowest levels since the shares went parabolic in the late spring of 1996.

How low can it go? Based on book value alone, the potential drop looks perilous. At the end of the fourth quarter, Iomega's balance sheet showed shareholders' equity of $459 million. Shareholders' equity is often used as an easy proxy for book value, but they can differ. The former is simply total assets minus total liabilities while the latter is total assets minus intangible assets (such as goodwill or patents) minus total liabilities. In Iomega's case, shareholders' equity equals book value. Divide it by Iomega's 283 million fully diluted shares, and you see the book value is just $1.62 per share.

Barring some major disaster, not even the Iomega bears think the stock will fall that far. Few computer-related high-technology companies with any semblance of brand cachet, market strength, proprietary technology, or value-added manufacturing will trade down to their book value. Their tangible assets are simply tiny compared to the intangible ones. Iomega has a well-known brand, patents, and a dominant market position. International Data Corporation reports that Iomega has 87% of the low-end removable data storage market thanks to the 100 megabyte Zip drive and 62% of the high-end thanks to the 1 gigabyte Jaz drive. So book value alone won't cut it. So what might?

Michael Murphy, longtime editor of the California Technology Stock Letter, has proposed a three-part metric for valuing high-tech stocks that he calls the Downside Risk Value (DRV). Murphy's methods should be of special interest to Iomega investors since he's also editor of the Overpriced Stock Service. He says he shorted Iomega near its split-adjusted May 1996 peak of $27 and covered at around $10 in September 1996.

Designed to produce lowball estimates, Murphy's DRV is the average of three measurements. The first is sales per share, which for Iomega is $1,740 divided by 283, or $6.14. For the second, he takes the book value per share and multiplies by 1.5. The theory is that since so much of a technology company's value is not captured in tangible assets, its stock would be a real bargain if it traded even close to its book value. For Iomega, that gets us $2.42 per share ($459 million/283 equals $1.62 times 1.5).

For the third measurement, Murphy takes the sales growth rate over the last three years times the trailing 12-month earnings, and then divides by three. The PEG ratio assumes that a company is fairly valued when its price/earnings ratio is equal to its short-term growth rate. So Murphy assumes a stock trading at a third of its recent growth is cheap. To get a more conservative number for Iomega, Murphy would take last year's $0.42 in EPS and multiply by about 14.5 (a third of FY97's 43.5% sales growth) to get $6.09 per share.

Add up these figures ($6.14 + $2.42 + $6.09) and divide by three, and you get a downside risk value of $4.88. (In a phone interview at the end of a long day, Murphy came up with a DRV of $4.45 due mainly to a $4.53 per share value on the sales metric, which looks wrong.)

Murphy is willing to pay up for what he calls great "Growth Flow" companies, those that show strong after-tax earnings plus research & development spending per share. Buying a Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %>, for example, at just a 25% risk to the DRV would be a steal, whereas you're more likely to have to pay 50% or more above the DRV. Yet in turnaround situations, a stock may actually trade below its DRV, a level that implies Murphy's version of Graham's margin of safety.

Does this formula work? Murphy ran the numbers last year for Apple Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AAPL)") else Response.Write("(Nasdaq: AAPL)") end if %> when the shares traded at $17. He came up with a DRV of $31. The market was so discounting Apple's troubles that the stock actually needed to rise 85% to get to its DRV. Though it fell even lower in the interim, Apple shares have since borne fruit, stretching to $26, up 53%.

Three cautions are in order here. First, this example shows there's certainly no magic to the DRV -- the true downside risk may be much lower! Second, a company's DRV is apt to fall if it's suffering declining sales and increasing losses. Apple's DRV has now dropped to $20 even as the stock has flourished. If Iomega ends up reporting a string of losses, its shareholder equity and EPS will contract, cutting its DRV.

Finally, unlike book value, Murphy's formulation remains unavoidably messy, a reasonable attempt to offer a shorthand, black box means for thinking about value among high-tech growth stocks. In practice, assessing real risk involves making judgment calls about issues such as the quality of management, the momentum of competitors, and the impact of shifts in the underlying industry. All are relevant to Iomega's present troubles.

For his part, Murphy thinks it's unrealistic to expect Iomega will fall to his DRV target of $4.45. "I just don't see there's a lot of risk in the stock [today]." But Murphy thinks that the rapid pace at which hard drive capacity has expanded has caught the company by surprise. For Iomega to retain a broad market for its products among consumers looking for backup solutions, he thinks the company must drive its technology faster. Of course, Iomega's plan to boost demand through increased ad spending doesn't at all address this critique.

CONFERENCE CALLS

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