DJIA 8899.95 -70.25 (-0.78%) S&P 500 1090.82 -6.77 (-0.62%) Nasdaq 1778.88 -15.74 (-0.88%) Value Line Index 950.46 -0.78 (-0.08%) 30-Year Bond 104 17/32 +10/32 5.80 Yield
Bothell, Wash.-based biotechnology company ICOS Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ICOS)") else Response.Write("(Nasdaq: ICOS)") end if %> surged $4 13/16 to $21 1/16 after Business Week's "Inside Wall Street" column reported that the company is developing an impotence drug that could be better than Pfizer's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PFE)") else Response.Write("(NYSE: PFE)") end if %> popular new pill Viagra. The magazine hyped the drug as "the son of Viagra" and quoted Jim McCamant, editor of a medical technology newsletter in Berkeley, Calif., as saying that ICOS' IC351 drug ''will be a potentially better product... because it has fewer side effects.'' This was news to the company itself, which has finished one small Phase 2 trial, is continuing with a bigger Phase 2 trial of IC351, and has yet to release any clinical data on the drug. With the rest of the Phase 2 trial, Phase 3, and application for FDA approval still to go, the company told us it doesn't expect to see a product launch until at least 2000 or 2001. Again, as in the case of cancer-drug-seeking EntreMed <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ENMD)") else Response.Write("(Nasdaq: ENMD)") end if %>, this is another instance of the media hyping old news and getting all excited about a drug that won't be available for at least a few years.
Educational software company The Learning Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TLC)") else Response.Write("(NYSE: TLC)") end if %> gained $1 1/2 to $28 1/2 after announcing a strategic partnership with standardized test preparation company The Princeton Review to publish a line of test preparation and teen educational software targeting college-bound high school students. This is the latest in a series of partnership announcements this week. Yesterday the company unveiled a long-term agreement with greeting card company American Greetings <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AM)") else Response.Write("(NYSE: AM)") end if %> under which it will launch software for making print projects. Also, Eastman Kodak <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EK)") else Response.Write("(NYSE: EK)") end if %> and the National Geographic Society renewed their marketing partnership to launch new DVD and CD-ROM versions of "The Complete National Geographic: 109 Years of National Geographic Magazine," which will be marketed and distributed by The Learning Co. On Tuesday, the company also announced that DIC Entertainment will represent the worldwide TV, video distribution, and merchandise licensing for its children's CD-ROM series Reader Rabbit.
QUICK TAKES: Electronic payment processing company BA Merchant Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BPI)") else Response.Write("(NYSE: BPI)") end if %> soared $3 11/16 to $18 1/16 after announcing it will be the principal merchant servicer for the combined operations of BankAmerica <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAC)") else Response.Write("(NYSE: BAC)") end if %> and NationsBank <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NB)") else Response.Write("(NYSE: NB)") end if %> after the banks merge... Managed care provider United HealthCare <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UNH)") else Response.Write("(NYSE: UNH)") end if %> gained $1 1/2 to $64 and Humana Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HUM)") else Response.Write("(NYSE: HUM)") end if %> picked up another $1 3/16 to $31 1/16 a day after they announced plans for United HealthCare to acquire Humana in a stock swap valued at about $6.3 billion... Footwear maker and retailer Nine West Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NIN)") else Response.Write("(NYSE: NIN)") end if %> strode ahead $1 9/16 to $28 3/16 after reporting Q1 EPS of $0.20, which was two cents better than the mean estimate listed by IBES.
Creative Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CREAF)") else Response.Write("(Nasdaq: CREAF)") end if %> jumped $1 7/16 to $19 13/16 after Goldman Sachs raised its rating on the computer sound card maker to "recommend list'' from "trading buy'' with a 12-month price target of $40... Music retailer National Record Mart <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NRMI)") else Response.Write("(Nasdaq: NRMI)") end if %> added $1 1/16 to $12 after Business Week's "Inside Wall Street" column quoted an analyst at Equity Advisory as saying the company's shares were undervalued and would be worth $22 to $24 a share in a buyout... Aerospace, automotive, and engineered materials manufacturer AlliedSignal <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ALD)") else Response.Write("(NYSE: ALD)") end if %> moved up $1 5/8 to $42 3/4 after announcing it will buy back up to $2.2 billion of its shares in the next two years... Business news company Dow Jones & Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DJ)") else Response.Write("(NYSE: DJ)") end if %> rose $1 3/16 to $48 1/8 after announcing it will repurchase up to $300 million of its shares.
Pet food and Energizer battery maker Ralston Purina <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RAL)") else Response.Write("(NYSE: RAL)") end if %> advanced $2 3/8 to $111 5/16 after announcing a 3-for-1 stock split payable July 15... Peru-based gold and silver mining company Buenaventura <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BVN)") else Response.Write("(NYSE: BVN)") end if %> was lifted $2 5/8 to $15 11/16 on rumors that it had won a key court case over ownership of the largest gold mine in Latin America... Dutch process automation firm Elsag Bailey Process Automation <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EBY)") else Response.Write("(NYSE: EBY)") end if %> added $1 15/16 to $21 15/16 after announcing that controlling owner Finmeccanica S.p.A. plans to sell its interest in the company... Biotechnology firm SIBIA Neurosciences <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SIBI)") else Response.Write("(Nasdaq: SIBI)") end if %> climbed $7/8 to $6 1/2 after announcing that studies on mice have shown that compounds discovered in collaboration with drug company Bristol-Myers Squibb <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BMY)") else Response.Write("(NYSE: BMY)") end if %> reduce the formation of amyloid-beta protein, which is believed to be the main cause of Alzheimer's disease.
Semiconductor optoelectronics, fiber optic transmission, and radio frequency electronics company Ortel Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ORTL)") else Response.Write("(Nasdaq: ORTL)") end if %> jumped $1 1/4 to $14 5/8 after reporting a Q4 loss of $0.09 a share, down from a profit of $0.18 a year ago but better than the mean estimate of a $0.11 loss by analysts polled by IBES... Ballard Power Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BLDPF)") else Response.Write("(Nasdaq: BLDPF)") end if %> tacked on $3 1/2 to $101 5/8 after announcing a $75.5 million deal with GEC Alsthom to build fuel cell power plants in Canada and to jointly market them in Europe... Homebuilder Lennar Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LEN)") else Response.Write("(NYSE: LEN)") end if %> was up $1 3/8 to $26 1/2 after Merrill Lynch, which has an "accumulate" rating on the company, said it is well-positioned to prosper over the next six quarters... Pharmaceutical Product Development <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PPDI)") else Response.Write("(Nasdaq: PPDI)") end if %> gained $1 1/4 to $21 1/4 after Lehman Brothers started coverage of the research and development company with an "outperform" rating.
Earnings Movers
International Manufacturing Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IMSX)") else Response.Write("(Nasdaq: IMSX)") end if %> up $1 to $8; Q4 EPS: $0.15 vs. $0.07 last year; Estimate: $0.15
Multigraphics Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: MTI)") else Response.Write("(AMEX: MTI)") end if %> up $1 to $6; Q3 EPS: $0.19 vs. $0.10 last year; Estimate: $0.17
Quanex Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NX)") else Response.Write("(NYSE: NX)") end if %> up $2 1/16 to $31 1/16; Q2 EPS: $0.51 vs. $0.50 (before unusual items) last year; Estimate: $0.45
Women's clothing manufacturer St. John Knits <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SJK)") else Response.Write("(NYSE: SJK)") end if %> was ripped $5 to $38 7/16 after saying it expects fiscal Q2 EPS of $0.57, which is less than the $0.61 expected by the Street. The firm's CEO blamed the shortfall on a shipments slowdown, inefficient labor, and higher variable overhead costs. Salomon Smith Barney decided it was a good time to lower its rating on the stock to "neutral" from "buy." The company's knitwear, coats, shoes, and accessories are sold through high-end retailers such as Saks Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SKS)") else Response.Write("(NYSE: SKS)") end if %>, Neiman-Marcus Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NMG)") else Response.Write("(NYSE: NMG)") end if %>, and Nordstrom <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NOBE)") else Response.Write("(Nasdaq: NOBE)") end if %>. Combined, those three firms accounted for 47% of St. John's fiscal 1997 net sales. Also, the company operated 18 "boutiques" and seven outlet stores as of January 30.
Semiconductor thin film material supplier ATMI Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ATMI)") else Response.Write("(Nasdaq: ATMI)") end if %> was pounded $5 3/4 to $18 1/8 after Needham & Co. downgraded the company to "buy" from "strong buy." In a report, analyst Theodore O'Neill said the Asian financial crisis will have a negative impact on the firm's revenues in the near term, adding that ATMI's sales may not increase until 1999. The doom and gloom hanging over the entire semiconductor industry is not helping the company either. Novellus Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NVLS)") else Response.Write("(Nasdaq: NVLS)") end if %>, which makes thin film wafer fabrication systems, slid $2 7/16 to $37 13/16 today, while chip equipment maker Applied Materials <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMAT)") else Response.Write("(Nasdaq: AMAT)") end if %> lost $1 to $32. Semiconductor makers fell as well, with Intel <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %> shedding $2 1/16 to $71 7/16, Texas Instruments <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TXN)") else Response.Write("(NYSE: TXN)") end if %> dropping $1 5/16 to $51 7/16, and France's STMicroelectronics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: STM)") else Response.Write("(NYSE: STM)") end if %>, formerly SGS-Thomson, sliding $4 3/8 to $77 3/8.
QUICK CUTS: Database software developer Oracle Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ORCL)") else Response.Write("(Nasdaq: ORCL)") end if %> slid $1 to $23 5/8 as the firm said its Oracle8 database will be available free of charge on a 60-day trial basis from IBM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %> on Big Blue's PC-server line of computers... Cisco Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %> dropped $1 7/8 to $75 5/8 after the networking giant's CEO, John Chambers, said the firm's revenues will grow by an average of 30% over the next three years only if the Asian financial crisis subsides or a new market for its products emerges... PC, server, and printer maker Hewlett-Packard <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HWP)") else Response.Write("(NYSE: HWP)") end if %> slipped $1 9/16 to $62 5/16 after suing Xerox Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: XRX)") else Response.Write("(NYSE: XRX)") end if %> yesterday for patent infringement. At issue is the interface technology Xerox uses in some of its touch control copiers.
Computer networking products maker Bay Networks <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAY)") else Response.Write("(NYSE: BAY)") end if %> slid $11/16 to $27 11/16 after saying it will restructure its business units in an effort to reduce costs... Health care management tool developer Access Health <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ACCS)") else Response.Write("(Nasdaq: ACCS)") end if %> slipped $1 1/4 to $25 5/8 after yesterday's announcement of a merger between managed care providers United HealthCare <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UNH)") else Response.Write("(NYSE: UNH)") end if %> and Humana <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HUM)") else Response.Write("(NYSE: HUM)") end if %>, which may put Access's large contract with Humana at risk... Union Pacific <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UNP)") else Response.Write("(NYSE: UNP)") end if %> slumped $1 1/4 to $48 3/8 after saying it would report a loss for the third consecutive quarter in Q2. The railroad operator was downgraded by Merrill Lynch, Deutsche Morgan Grenfell, and J.P. Morgan.
FORE Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FORE)") else Response.Write("(Nasdaq: FORE)") end if %> lost $13/16 to $22 after UBS Securities started coverage of the maker of asynchronous transfer mode (ATM) networking products with a "hold" rating... Physician practice management firm PhyCor Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PHYC)") else Response.Write("(Nasdaq: PHYC)") end if %> stumbled $11/16 to $16 7/8 after Standard & Poor's revised its outlook for the company to "stable" from "positive"... Recovery Engineering <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: REIN)") else Response.Write("(Nasdaq: REIN)") end if %> tumbled $4 7/8 to $26 1/8 on reports that the maker of PUR water treatment systems told a Deutsche Morgan Grenfell analyst that it has fallen behind schedule in launching three new products... Hologic Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HOLX)") else Response.Write("(Nasdaq: HOLX)") end if %> slid $1 1/2 to $21 after Adams, Harkness & Hill downgraded the marketer of x-ray systems to "market perform" from "attractive."
Mixed signal chip maker Integrated Circuit Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ICST)") else Response.Write("(Nasdaq: ICST)") end if %> fell $2 11/32 to $13 25/32 after reporting that previously reported talks with an unnamed but "listed" suitor have been suspended... REMEC Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: REMC)") else Response.Write("(Nasdaq: REMC)") end if %>, a maker of microwave modules used in wireless communications products, slid $6 1/2 to $14 3/8 after reporting Q1 EPS of $0.19, which was in line with the Street estimate. According to Bloomberg News, the company told analysts that revenues from customers Digital Microwave <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DMIC)") else Response.Write("(Nasdaq: DMIC)") end if %> and Innova Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INVA)") else Response.Write("(Nasdaq: INVA)") end if %> are slowing... Youth Services International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YSII)") else Response.Write("(Nasdaq: YSII)") end if %> lost another $19/32 to $7 3/16 after the reform schools operator warned investors yesterday that its fiscal Q2 earnings will be "substantially less" than expectations.
Online retailer CyberShop International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CYSP)") else Response.Write("(Nasdaq: CYSP)") end if %> gave back $1 5/16 to $12 7/16 this morning after rising 36% yesterday on news that it had signed marketing and advertising deals with Microsoft's <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> Microsoft Plaza, @Home Network <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ATHM)") else Response.Write("(Nasdaq: ATHM)") end if %>, and privately held PointCast Network... Three-Five Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TFS)") else Response.Write("(NYSE: TFS)") end if %> fell $1 1/16 to $16 13/16 after the maker of liquid crystal display (LCD) components said delays for "several major programs" for one client will result in fiscal Q2 revenues and earnings below the analysts' expectations. The mean estimate for the quarter called for earnings of $0.15 per share... Airgas Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ARG)") else Response.Write("(NYSE: ARG)") end if %> slumped $1 1/16 to $15 3/16 after the distributor of specialty gases and welding equipment was downgraded to "neutral" from "strong buy" at Morgan Stanley Dean Witter.
FOOL
ON THE HILL
An Investment Opinion
by
Dale Wettlaufer
Good and Good & Cheap
Last week, I wrote about Wharton Professor Jeremy Siegel's Stocks for the Long Run, in which Siegel revisits the performance of the Nifty Fifty stocks from 1972 to 1997. The gist of the piece was that one could have paid nearly 100 times earnings for Coca-Cola <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KO)") else Response.Write("(NYSE: KO)") end if %> and nearly as sizable multiples for other cash machines like Philip Morris <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MO)") else Response.Write("(NYSE: MO)") end if %> in 1972 and still outperformed the benchmark S&P 500 over the ensuing quarter century. I noted in the piece that the measurement of performance was made peak-to-peak, not trough-to-peak to pump up the return figures. Therein lies an interesting point that might elude a less-experienced investor but that is vitally important to understanding stock market returns.
"Why do stocks go up" is the "why is the sky blue" question for new investors. Earnings growth is a vital component to most investors. Less obvious to newer investors is the part that valuation differences play in shareholder returns. The price-to-earnings ratio that an investor pays today can loom large in determining return going forward, especially if one only holds a stock for a short time. The longer the holding period, the more important earnings growth becomes while the initial valuation at which a stock is bought loses importance.
A simple example of this: A (non-dividend paying) stock is bought in 1972 at $40 per share and at 40 times EPS of $1.00. Over the ensuing eight years, its per-share earnings grow at 10% per year, but at the end of that time, it is only valued at 15 times earnings. Disgusted, the shareholder sells out, vowing never to return to common stock investing and vowing to stick to short-term CDs. The return the shareholder would have achieved is a function of two things: The terminal earnings per share and the terminal valuation. The terminal EPS would have been $2.14 and the terminal valuation of 15 times earnings would have yielded a terminal value of $32.15 per share. The total return over the eight-year holding period would have been negative 2.7% per year. That's a horribly bad return considering: 1) The company's earnings performance was excellent; 2) inflation would have eroded the real purchasing power of the dollars invested in the stock by more than just the apparent loss in capital; and 3) you would not have lost money holding a basket of S&P 500 stocks over that time, especially considering the effect of reinvesting dividends.
This is where the "value" people are getting so bummed out in 1998. They believe that there is just too much danger in current valuations and that they could get hammered by depressed valuations a few years down the line. This is a highly legitimate concern for anyone entering into an investment decision today. Things can look pretty rosy when you're on the breakaway, skating in alone on the goalie -- before a backchecker comes in and slams you to the ice. The trick is to get up after that hit and score on the penalty shot (apologies for the metaphor to non-hockey fans).
The penalty shot in this case is the extreme undervaluations that the market affords you when things fall apart. The perma-bears and those who are supposedly "looking out for" the individual investor almost always assume that the "little guy" will freak out during periods of extremely poor market performance and sell at the lows the stock that they bought at their highs. It's funny how so many Wise people project their own shortcomings and lack of foresight on the straw man "little guy." The intelligent individual investor who has a source of liquidity during severe bear markets would deploy cash the same as whether the market is at a high or a low. In other words, whatever the market at large is doing, one should spend one's time looking for winning companies that have great products and that know how to generate earnings and free cash flow that can be employed for the benefit of their owners. Taking a look back at the above example, let's see how an intelligent investor might have handled things.
Say it's two and a half years after the initial purchase. The stock market is in the dumps and the investor's shares are selling at 8 times earnings, or $10.15 per share. The investor who held the shares is hopefully blessed with excess cash to invest at this time and has come up with a well thought-out hypothesis on why this company will continue to grow EPS at 10% per year. Recognizing this, the investor not only increases his holdings by double, by increases the position by a factor of three. Instead of holding 100 shares with a cost basis of $40, this investor now hold 300 shares with an average cost basis of $20.10.
Fast-forward to the end of 1980. The investor sells his shares at $32.15 per share. The total return on the shares purchased in 1972 would not have changed from the negative number illustrated above. However, the investment made while the stock market was scraping bottom would have been world-class. Selling those shares at 3.17 times their cost basis, the investor would have realized a yearly return of 23% (all of this is before taxes).
Deploying capital where you have a well-developed hypothesis on why the company will do well is always the first step in investing in common stocks. If you can also catch something when it's incredibly cheap, your returns will be magnified, too. But the intelligent investor doesn't have to start with one lump sum of money and then never devote any more capital to the stock market after that initial investment. Sure, it's not fun if the market falls apart, and sure, you can get creamed when you buy something at a high multiple only to sell it a few years later at a much lower multiple. Stock market returns vary quite a bit according to valuation multiples. The idea, though, is to learn over a period of time how to identify things that are good and things that are good and cheap, and to have the discipline to act upon that skill.
Please see the Motley Fool's Conference Calls page for call information and links to synopses.
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Contributing Writers 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
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