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HEROES

Ascend Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ASND)") else Response.Write("(Nasdaq: ASND)") end if %> gained $1 7/8 to $34 13/16 after Cowen & Co. raised its rating on the datacom equipment maker to "trading buy." According to Cowen, the company's quarter is "tracking to expectations" on the back of strong asynchronous transfer mode (ATM) backbone deployments and good North American demand for dial-up access concentrators. Cowen also believes Ascend will be introducing its Max 6000 concentrator, voice support for the Max TNT, and "one or more" new customer wins announced in coming days.

Global Motorsport Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSTM)") else Response.Write("(Nasdaq: CSTM)") end if %> sped ahead $4 3/8 to $18 5/8 after Golden Cycle LLC announced an unsolicited $18 a share cash bid for the company that sells aftermarket parts and accessories for Harley-Davidson motorcycles. Golden Cycle was formed by Rite Aid <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RAD)") else Response.Write("(NYSE: RAD)") end if %> founder, former chairman, and CEO Alex Grass, and his son Roger, who is chairman of Biker's Depot Inc., a competitor of Global Motorsport. The father and son team now owns a 10.4% stake in Global Motorsport after buying 528,100 shares at a cost of $7.11 million, including commissions, or about $13.46 per share. Golden Cycle bought most of the half million shares between January 27 and March 19.

QUICK TAKES: AnnTaylor Stores <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ANN)") else Response.Write("(NYSE: ANN)") end if %> jumped $1 11/16 to $16 1/4 after reporting fourth quarter earnings of $0.09 a share compared with $0.12 for the year-earlier period and in line with Wall Street estimates. Investors bid up the stock of the women's apparel retailer in anticipation that the company will soon turn around... PC computer maker Compaq Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPQ)") else Response.Write("(NYSE: CPQ)") end if %> added $3/4 to $25 11/16 after announcing that it is delivering its first shipments of Compaq Presario PCs this week to Tandy Corp.'s <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TAN)") else Response.Write("(NYSE: TAN)") end if %> RadioShack stores in the U.S... Electrical contracting and maintenance services provider Integrated Electrical Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IEE)") else Response.Write("(NYSE: IEE)") end if %> advanced $1 3/16 to $17 3/16 after reporting first quarter earnings of $0.17 per share versus $0.15 in the prior-year period. The company said that revenue growth was primarily driven by high demand for both commercial and residential services.

External power conversion products manufacturer Ault Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AULT)") else Response.Write("(Nasdaq: AULT)") end if %> gained $1 5/8 to $8 after saying that its fourth quarter is shaping up as a "significantly stronger period" compared with the third quarter. Orders from cable modem OEMs have been ramping up, and several new products, including uninterruptable power supplies for wireless communications systems, are also expected to account for a significant amount of the company's fiscal 1999 sales volume... CyberShop International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CYSP)") else Response.Write("(Nasdaq: CYSP)") end if %> jumped $1 9/16 to $10 5/16 after its $18.2 million initial public offering of 2.8 million shares yesterday. The online retailer's IPO was priced at $6.50 per share... Networking products company Cisco Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %> gained $3 1/16 to $67 13/16 after company president John Chambers told reporters that the company expects to continue to grow by acquisition and boost the proportion of its revenue from video, voice, and data network equipment services to 50% by 2001, according to Reuters.

America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> gained $2 to $67 7/8 after The New York Times reported that the online services provider is closing The Hub, a Generation-X focused site that AOL jointly created with New Line Television, because "it wasn't worth continuing the investment"... S3 Inc.'s <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SIII)") else Response.Write("(Nasdaq: SIII)") end if %> texture compression algorithm was chosen by Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> as the preferred compression technique for Microsoft DirectX APIs, sending the multimedia acceleration hardware and software company up $11/16 to $7 7/8... Market and sales research company Cognizant Corp.'s <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CZT)") else Response.Write("(NYSE: CZT)") end if %> IMS Health unit will acquire pharmaceutical industry software company Walsh International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WSHI)") else Response.Write("(Nasdaq: WSHI)") end if %> and Pharmaceutical Marketing Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PMRX)") else Response.Write("(Nasdaq: PMRX)") end if %> for a total of $347 million in stock. Cognizant gained $2 11/16 to $55, Walsh added $5/8 to $15 1/4, and Pharmaceutical Marketing jumped $1 1/2 to $14 3/8.

After selling 3 million shares at $22 in a $66 million initial public offering (IPO) yesterday, ISS Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ISSX)") else Response.Write("(Nasdaq: ISSX)") end if %> surged $18 3/8 to $40 3/8, or 83.5%, today, reflecting continuing investor fervor for Internet-related IPOs. The company makes software for monitoring and protecting computer network security.

3Com Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COMS)") else Response.Write("(Nasdaq: COMS)") end if %> rose $2 1/8 to $37 1/4 in anticipation of earnings that were released late this afternoon. After the bell, 3Com reported third quarter earnings of $0.02 a share (excluding extraordinary items) on sales of $1.25 billion versus $0.50 on sales of $1.46 billion for the year-earlier period... Apple Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AAPL)") else Response.Write("(Nasdaq: AAPL)") end if %> added $1 7/8 to $28 after The Wall Street Journal reported that the computer maker's board would pressure interim CEO Steve Jobs to stay in the position permanently... AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %> gained $1 9/16 to $67 1/2 after Telecom Italia SpA said its talks with the U.S. long-distance company regarding forming an international alliance are proceeding without difficulties.

Oil and gas driller Dailey International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DALY)") else Response.Write("(Nasdaq: DALY)") end if %> gained $7/8 to $9 3/4 after announcing late yesterday that it has acquired Integrated Drilling Services Ltd., a private Scottish company, for about 1 million shares of Dailey Class A common shares and $9.4 million in cash. Dailey also assumed or repaid IDS debt totaling approximately $10 million... CellPro <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CPRO)") else Response.Write("(Nasdaq: CPRO)") end if %> rose $1 7/8 to $5 1/8 after the biotechnology company won the support of a panel of advisers to the FDA to expand use of its cell-filtering device to help cancer patients rebuild immune systems destroyed by chemotherapy... IDT Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IDTC)") else Response.Write("(Nasdaq: IDTC)") end if %> moved up $2 3/16 to $37 3/16 after the global telecommunications company announced plans to acquire a 50% stake in privately held Union Distribution Co., the parent of IDT's pre-paid calling card distributor... Railroad, truck, and trailer equipment maker Varlen Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VRLN)") else Response.Write("(Nasdaq: VRLN)") end if %> gained $4 1/8 to $34 1/8 after announcing that it expects first quarter earnings to be "well above" analysts' estimates of $0.61 per share.

GOATS

Interactive entertainment software developer Activision Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ATVI)") else Response.Write("(Nasdaq: ATVI)") end if %> dropped $1 to $10 1/2 after saying its fiscal Q4 earnings will be breakeven on revenues between $55 and $58 million. The Street had been expecting earnings of $0.29 per share for the quarter. The company blamed unexpected weakness in new product sales and catalog re-orders, lower-than-expected sales to original equipment manufacturers, and lower margins for the shortfall. The company, which makes games for PCs as well as the Sony PlayStation system, introduced a slew of new titles during its fiscal Q3, including Quake II and Zork's Grand Inquisitor. Game buyers are a fickle lot, though, forcing the company to constantly push updated and/or brand-new titles out the door. The strenuous pace of the business seems to be getting to Activision, where one title accounted for 49% of fiscal 1996 revenues. In fiscal 1997, two titles represented 39% of sales. Under this scenario, a small launch delay for one key title can have a large adverse effect on revenues.

Specialty direct mail retailer Coldwater Creek <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CWTR)") else Response.Write("(Nasdaq: CWTR)") end if %> was dammed for a $11 1/8 loss to $27 1/8 after reporting Q4 EPS of $0.45, beating the Street estimate by a penny. However, increased sales of marked down merchandise pulled down gross profit margins to 51.3% from 53.6% a year ago. The company also said demand is possibly softening for its upscale women's fashions, sold through its Spirit of the West catalog. Throughout the decade Coldwater has ramped up its apparel offerings, which contributed strongly to the firm's 48% compound revenue growth since 1995, while jewelry and accessories have commanded a smaller and smaller portion of revenues (roughly 50% at last count, with the ratio set to go down once year-end numbers are tallied). In the cutthroat retail business, Coldwater's pricey women's catalog fashions may be bumping up against the natural limits imposed by a "tactile-impaired" market.

QUICK CUTS: Bristol Hotel Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BH)") else Response.Write("(NYSE: BH)") end if %> fell $1 3/8 to $26 1/4 after agreeing to merge with fellow hotel operator FelCor Suites Hotels <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FCH)") else Response.Write("(NYSE: FCH)") end if %> in a deal valued at $1.9 billion, including $700 million in assumed debt. Under the agreement, each Bristol share will be converted into 0.685 of a share of FelCor stock, with FelCor owning 60% of the combined company... Floorcovering, textile, and apparel firm Dixie Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DXYN)") else Response.Write("(Nasdaq: DXYN)") end if %> sank $13/16 to $11 5/8 after Schroder & Co. lowered its earnings estimate for fiscal Q1 to $0.21 per share from $0.26 per share due to lower demand for the company's textiles... Consumer finance company AutoBond Acceptance Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: ABD)") else Response.Write("(AMEX: ABD)") end if %> lost $9/16 to $7 13/16 after Moody's Investors Service downgraded eight series of the company's asset-backed securities because of a sustained increase in delinquencies experienced by the AutoBond trusts issuing the securities.

BJ Services Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BJS)") else Response.Write("(NYSE: BJS)") end if %> slid $1 15/16 to $38 5/8 after SBC Warburg Dillon Read downgraded the provider of pressure pumping and other oilfield services to "outperform" from "buy"... Information technology and business consulting firm Technology Solutions Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TSCC)") else Response.Write("(Nasdaq: TSCC)") end if %> slid $3 to $27 1/8 on reporting fiscal Q3 EPS of $0.21, which was ahead of the First Call mean estimate of $0.19. The company warned, however, that its expansion plan may squeeze operating margins in fiscal Q4... Steel scrap recycler Schnitzer Steel Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SCHN)") else Response.Write("(Nasdaq: SCHN)") end if %> was tossed for a $2 1/16 loss to $24 5/8 after reporting fiscal Q2 EPS of $0.37, which was below the Street's estimate of $0.57. The company said lower prices and weaker demand for scrap in Asia will reduce margins on export sales to the region in the near term.

Computer products direct marketer Creative Computers <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MALL)") else Response.Write("(Nasdaq: MALL)") end if %> lost another $7/8 to $7 1/2 after saying yesterday that slower Macintosh-related sales will cause a fiscal Q1 loss on sales of over $160 million... Laser vision correction system maker VISX Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VISX)") else Response.Write("(Nasdaq: VISX)") end if %> slipped $6 1/2 to $22 1/2 after The Wall Street Journal reported that antitrust authorities may bring anti-competitive charges against the company and fellow laser eye-surgery firm Summit Technology Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BEAM)") else Response.Write("(Nasdaq: BEAM)") end if %>. Summit was also down on the news, losing $5/8 to $5 5/16... Knit fleece and stretch fabrics maker Dyersburg Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DBG)") else Response.Write("(NYSE: DBG)") end if %> was ripped for a $1 1/2 loss to $8 3/4 after saying it expects fiscal Q2 earnings between $0.08 and $0.10 per share due to problems integrating its Alamac division, which was acquired last August. The Street had been expecting earnings of $0.19 per share. Prudential Securities cut its rating on the stock to "hold" from "buy."

Oilfield and chemical products company Baker Hughes <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BHI)") else Response.Write("(NYSE: BHI)") end if %> dropped $2 7/16 to $40 3/16 after saying that lower oil prices and reduced demand will cause its fiscal Q2 earnings to come in below the Street estimate of $0.48 per share. Yesterday, Prudential Securities downgraded the company to "hold" from "buy"... Wireless communications services provider Western Wireless Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WWCA)") else Response.Write("(Nasdaq: WWCA)") end if %> lost $7/8 to $22 after Bear Stearns downgraded the stock to "attractive" from "buy"... Young Broadcasting <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YBTVA)") else Response.Write("(Nasdaq: YBTVA)") end if %> slid $1 3/4 to $49 7/8 after J.P. Morgan reduced its rating on the operator of TV stations to "market performer" from "buy."

FOOL ON THE HILL
An Investment Opinion
by Dale Wettlaufer

"Light" Business

The idea of the "light" business model has captured investor interest in the 1990s, but are we truly aware of what "light" means when we speak of business models? There are many ways to describe in shorthand what we mean by a light business, but we have to look comprehensively at a potential investment to get to heart of the matter.

The light business is not defined by huge margins, earnings growth, or measures such as small capital expenditures to revenues. Margins are great, but margins are meaningless when looked at outside the corresponding descriptors of inventory or asset turnover. Inventory turnover is cost of goods sold for a period divided by the average inventory on hand during that period. When looking at inventory turnover for a full year, you divide the year's cost of goods sold into the average of beginning inventory and ending inventory. Can I sell something at a 90% gross margin and still operate a business that is decidedly not "light"? Let's see.

Say I am an art dealer with a great eye for up-and-coming artists. I buy a bunch of beautiful paintings and am able to sell them for $90,000 apiece, $89,000 higher than my original purchase price. My gross margin on these paintings, therefore, is revenues minus cost of goods sold divided by revenues, or $90,000 minus $1,000 divided by $90,000 = 98.9%. Wow! Look out Intel! The problem is that I bought the paintings on a trip to Paris in 1927, and I am selling them at auction in 1986. Therefore, my average inventory over the inventory holding period, marking the inventory to market each year, is cost of goods sold of $1,000 divided by (beginning inventory of $1,000 + ending inventory of $90,000 divided by 59 years) = 0.64834. The garden-variety manufacturer generally wants to turn its inventory every 45 to 60 days, or 6 to 8 times per year. Distributors, which in general have lower margins, want to turn inventory 12 times per year or more, or every 30 days or less.

In the case of our high-margin art dealer, we can look at the return on inventory as we measure return on investment. That is, we look at total return -- $90,000 -- divided by $1,000, or 8,900%. Then we look at the 59th root of the total return for our compounded annual return on investment. That works out to be 7.9% per year. We know the S&P 500 has returned 11% per year over the course of the last sixty years. Taking that as our opportunity cost of capital, or the opportunity we have foregone to take advantage of another opportunity, we haven't done very well over the course of the art investment. Our pre-tax return of 7.9% is 3.1 percentage points below our cost of capital.

We have therefore destroyed value by passing up the opportunity to invest in something, the S&P 500, that at least matches the cost of capital (which, again, is the return on the S&P 500). $1,000 invested at 11% over the course of 59 years turns into $472,124, pre-tax. That's $382,124 more than the return on our paintings. While S&P 500 investors may not have generated an excess return over their cost of capital, they didn't destroy value either. (By the way, I count the utility of looking at the art every day to be equal to the utility that the S&P 500 investor feels at knowing they're thinking rationally about capital allocation. Therefore, there is no excess utility that accrues to the art dealer that gets to enjoy the art every day for 59 years).

Anytime companies engage in projects that do not meet (in the long run) their cost of capital, value is similarly destroyed, or foregone, for equity investors. If a company can't generate a return on debt capital that meets the cost of debt capital, its lenders will take control. Equity holders without significant power to rectify a situation where cost of capital requirements are not met just stumble along with a sub-par return on their investment.

The ultimate arbiter of building value for shareholders and of the light business model is the combination of cost of capital and the productivity of that capital. Those companies that can find capital that is substantially cheaper to employ than the capital their competitors have at their disposal -- General Electric Capital Corp., a unit of General Electric <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GE)") else Response.Write("(NYSE: GE)") end if %>, is a great example here -- and those that make much more productive use of that capital -- Dell <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %>, Philip Morris <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MO)") else Response.Write("(NYSE: MO)") end if %>, and Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> are good examples -- are in an entirely different league than the competition.

The quality of such companies is on a different wavelength than the rest of the great majority of publicly traded enterprises, and thus qualifies them as "light businesses" worthy of higher multiples than the rest of the market. Anytime such companies trade at a discount to the rest of the market, the possibility opens up for excess returns while seeming overvaluation brings them down to the level of returns equal to the broader indexes.

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Yi-Hsin Chang (TMF Puck), a Fool
Brian Graney (TMF Panic), Fool Two
Alex Schay (TMF Nexus6), Fool, too
Dale Wettlaufer (TMF Ralegh), Final Fool
Contributing Writers

Brian Bauer (TMF Hoops), another Fool
Jennifer Silber (TMF Amused), Fool at last
Editing