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With Halloween less than two weeks away, Wall Street offered up an updated version of The Night of the Living Dead today. First up was small household appliance maker Sunbeam Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SOC)") else Response.Write("(NYSE: SOC)") end if %>, which rose $1 3/16 to $7 11/16 after formally restating its financial results for fiscal 1997 and Q1 of fiscal 1998. The restatement effectively wiped out the "dramatic turnaround" in 1997 often trumpeted by since-ousted Chairman and CEO "Chainsaw-ed" Al Dunlap. However, Sunbeam still has one foot in the grave, considering current CEO Jerry Levin said the firm will incur "significant charges" during the rest of 1998 to adjust its inventories and operations. While the firm may not be headed for a bankruptcy body bag -- given that it also was able to rework its borrowing agreements with its lenders today -- it still seems next to impossible for investors to predict what Sunbeam's near-term future may hold. For more details, see this morning's Breakfast With the Fool.
Another recent stock zombie attempting to join the land of the living today was consumer services giant Cendant <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CD)") else Response.Write("(NYSE: CD)") end if %>, which rose $1/4 to $10 9/16 as Chairman and CEO Henry Silverman tried to breath some life back into the company with some positive comments. In an interview with CNBC, Silverman said he thinks the company can recover from the accounting irregularities plague that sent its shares to the stock market graveyard earlier this year, adding that 20% earnings growth in fiscal 1999 is attainable. "The company is by no means earnings constrained or cash constrained," he said. The statement seemed to prompt Wall Street's grave diggers to drop their shovels and remember that Cendant still has some healthy cash flow blood coursing through its veins, the much reported accounting problems not withstanding.
Electronic design automation (EDA) software and consulting firm Structural Dynamics Research Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SDRC)") else Response.Write("(Nasdaq: SDRC)") end if %> picked up $4 1/4 to $14 1/16 after reporting Q3 EPS of $0.28, which included a $2.7 million gain. Backing out the gain, the company ended up with EPS of $0.23, which is toward the high end of the $0.16 to $0.25 range offered by analysts surveyed by Zacks and $0.02 higher than the mean estimate. Total revenues rose 17% to $102 million from a year ago, led by a 35% sales increase in Asia, of all places. While other U.S. firms are licking their wounds from the negative effects the ongoing Asian economic crisis has brought to bear on their financial performance, Structural Dynamics is sitting pretty in the Far East. By its own estimate, the firm is now the EDA market leader in Japan with a client list including Toshiba, Hitachi, and Matsushita. Merrill Lynch liked the sound of that and raised SDRC's near-term rating to "accumulate" from "neutral."
QUICK TAKES: Fiber optic cable and components maker Corning Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GLW)") else Response.Write("(NYSE: GLW)") end if %> advanced $5 1/8 to $36 1/2 after reporting Q3 EPS of $0.44 versus $0.45 last year, which was $0.06 ahead of the Street's mean estimate... Chase Manhattan Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CMB)") else Response.Write("(NYSE: CMB)") end if %> climbed $1 13/16 to $53 1/16 after reporting fiscal Q3 operating EPS of $0.82, down from the $1.19 earned last year but ahead of the Street's mean estimate of $0.78... Bank holding company Bankers Trust <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BT)") else Response.Write("(NYSE: BT)") end if %> rose $4 3/16 to $58 15/16 on speculation that Germany's Deutsche Bank is holding discussions with the firm about a possible merger... Grocery store operator Kroger Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KR)") else Response.Write("(NYSE: KR)") end if %> rose $3 1/8 to $48 9/16 following an upgrade to "buy" from "outperform" by Lehman Brothers, which believes Kroger's planned merger with Fred Meyer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FMY)") else Response.Write("(NYSE: FMY)") end if %> will boost fiscal 1998 earnings. Fred Meyer gained $2 1/8 to $46 5/16.
Cigarettes and food giant Philip Morris <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MO)") else Response.Write("(NYSE: MO)") end if %> moved up $1 3/16 to $49 1/16 after reporting Q3 EPS of $0.84 (excluding charges) versus $0.76 last year, beating analysts' estimates by a penny... Shares of online auction service eBay Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EBAY)") else Response.Write("(Nasdaq: EBAY)") end if %> were bid up $1 1/8 to $46 1/2 after Goldman Sachs placed the company on its "recommended list" and BT Alex. Brown started coverage with a "buy" rating. Both brokerages were underwriters of the company's initial public offering last month... Telecommunications equipment maker Ciena Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CIEN)") else Response.Write("(Nasdaq: CIEN)") end if %> gained another $11/16 to $12 13/16 after rising 30% yesterday following comments from Tellabs <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TLAB)") else Response.Write("(Nasdaq: TLAB)") end if %> CEO Michael Birck, who suggested Tellabs may still be interested in merging with Ciena even though a previous deal fell apart a little over a month ago.
Bandwidth management technologies firm Adaptec <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ADPT)") else Response.Write("(Nasdaq: ADPT)") end if %> rose $1 3/4 to $12 7/16 after adding the title of president to the office door of current COO Bob Stephens... Computing products distributor CHS Electronics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HS)") else Response.Write("(NYSE: HS)") end if %> moved up $2 5/16 to $11 after announcing plans to generate $800 million in new cash by financing accounts payable through asset-backed lenders. The firm also said it is renegotiating certain "earn out" agreements to be paid in cash rather than CHS shares... Real estate lender and commercial finance company Amresco <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMMB)") else Response.Write("(Nasdaq: AMMB)") end if %> gained $17/32 to $6 1/4 after Prudential Securities raised its rating to "accumulate" from "hold."
HMO operator United Wisconsin Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UWZ)") else Response.Write("(NYSE: UWZ)") end if %> added $1 1/2 to $6 11/16 after CS First Boston started coverage of the company with a "buy" rating... Building, aerospace, and industrial control systems designer Honeywell Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HON)") else Response.Write("(NYSE: HON)") end if %> gained $3 3/4 to $72 7/8 after reporting Q3 EPS of $1.14 vs. $0.92 last year, beating the Street's mean estimate of $1.13... Investment bank Donaldson, Lufkin & Jenrette <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DLJ)") else Response.Write("(NYSE: DLJ)") end if %> rose $1 5/8 to $32 1/4 after saying it will lay off 20 employees, or 15%, of its emerging markets unit as the firm cuts down on its proprietary trading operations amid the recent turmoil in global financial markets.
Earnings Movers
Alternative Resources Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ALRC)") else Response.Write("(Nasdaq: ALRC)") end if %> up $1 5/8 to $7 5/8; Q3 EPS: $0.11 (excluding charges) vs. $0.26 last year; Estimate: $0.09
AMC Entertainment <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: AEN)") else Response.Write("(AMEX: AEN)") end if %> up $1 1/2 to $13 5/8; fiscal Q2 EPS: $0.34 vs. $0.33 (before charges) last year; Estimate: $0.27
Ben & Jerry's Homemade <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BJICA)") else Response.Write("(Nasdaq: BJICA)") end if %> up $1 3/4 to $18 1/4; Q3 EPS: $0.39 vs. $0.34 last year; Estimate: $0.33
DM Management Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DMMC)") else Response.Write("(Nasdaq: DMMC)") end if %> up $3 1/4 to $12 3/4; Q3 EPS: $0.14 vs. $0.09 last year; Estimate: $0.11
ESC Medical Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ESCMF)") else Response.Write("(Nasdaq: ESCMF)") end if %> up $11/16 to $8 5/8; Q3 EPS: $0.29 vs. $0.40 last year; Estimate: $0.21
Hexcel Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HXL)") else Response.Write("(NYSE: HXL)") end if %> up $1 to $11 5/16; Q3 EPS: $0.32 (excluding charges) vs. $0.26 last year; Estimate: $0.30
Mallinckrodt Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MKG)") else Response.Write("(NYSE: MKG)") end if %> up $1 to $25 1/16; fiscal Q1 operating EPS: $0.44 vs. $0.37 last year; Estimate: $0.39
Network Associates <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NETA)") else Response.Write("(Nasdaq: NETA)") end if %> up $1 3/8 to $36 1/4; Q3 EPS: $0.41 (before charges) vs. $0.27 last year; Estimate: $0.38
OM Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OMP)") else Response.Write("(NYSE: OMP)") end if %> up $2 3/4 to $33 9/16; Q3 EPS: $0.53 vs. $0.45 last year; Estimate: $0.52
Praxair Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PX)") else Response.Write("(NYSE: PX)") end if %> up $1 3/4 to $37 5/16; Q3 EPS: $0.66 vs. $0.65 last year; Estimate: $0.65
Software AG Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AGS)") else Response.Write("(NYSE: AGS)") end if %> up $1 13/16 to $14 1/2; Q3 EPS: $0.21 vs. $0.11 last year; Estimate: $0.20
STMicroelectronics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: STM)") else Response.Write("(NYSE: STM)") end if %> up $6 13/16 to $55 13/16; Q3 EPS: $0.70 vs. $0.70 last year; Estimate: $0.66
V. I. Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VITX)") else Response.Write("(Nasdaq: VITX)") end if %> up $1 3/16 to $6 3/8; Q3 EPS: $0.04 vs. $0.56 loss last year; Estimate: breakeven
Watts Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WTS)") else Response.Write("(NYSE: WTS)") end if %> up $2 5/8 to $20 5/8; fiscal Q1 EPS: $0.46 vs. $0.50 last year; Estimate: $0.44
Networking equipment maker Ascend Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ASND)") else Response.Write("(Nasdaq: ASND)") end if %> tumbled $4 15/16 to $42 15/16 on concern that the company will be offering increased vendor financing to fuel its growth. In a conference call, Ascend said it is extending credit to customers to help them buy its equipment. The Alameda, Calif.-based company will attempt to arrange other financing for its customers, but will extend working capital loans and equipment financing to match competitors in the currently challenging environment. Ascend said it is fully reserving against balance sheet risk, which allays fears somewhat, but if competition is so intense that the company has to compete not just on product strengths but also on financing terms, then people get to worrying about a number of things. According to a Reuters report, Ascend won't recognize revenues from customers needing financing until those customers have paid off their notes, although that would be unusually conservative. We could not confirm that report with the company. Investors' worries overshadowed Ascend's Q3 EPS of $0.32, up from $0.20 a year ago and a penny above analysts' consensus estimate. NationsBanc Montgomery Securities and Warburg Dillon Read both cut the company to "hold" from "buy."
Better-priced women's sportswear, suits, and dresses designer Jones Apparel Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JNY)") else Response.Write("(NYSE: JNY)") end if %> was ripped for a loss of $6 5/16, or 27.8%, to $16 7/16 after saying career wear sales, which make up 40% of the company's revenues, increased a mere 1% in the third quarter. What also concerns analysts and investors is that Jones Apparel said it plans to lower prices next year. The unimpressive growth overshadowed the company's Q3 EPS, which came in at $0.57, up 27% from $0.45 a year ago and $0.02 ahead of estimates. Q3 revenues increased 11% to $500.3 million, slower than revenue growth of 15% for the first nine months of the year. Jones Apparel markets its clothes under such brands as Jones New York, Evan-Picone, Rena Rowan, Saville, Lauren by Ralph Lauren, and Ralph by Ralph Lauren.
Circon Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CCON)") else Response.Write("(Nasdaq: CCON)") end if %> revealed today that its two-year search for a friendly buyer was a bust and effectively took itself off the market, though it left the door cracked for interested parties. The company has been looking for a white knight since U.S. Surgical Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: USS)") else Response.Write("(NYSE: USS)") end if %> made an unsolicited $16.50 per share tender offer in 1996 for the maker of minimally invasive urological and gynecological surgery equipment. U.S. Surgical withdrew its bid in mid-September, driving Circon shares down 25.5% to $9 7/8 on the day of the announcement. Today, Circon dropped $1 3/8 to $8 1/4. One casualty of the company's troubles appears to be longtime Chairman and CEO Richard Auhll, who resigned today after nearly 20 years at the helm. Circon also reported uninspiring Q3 EPS of $0.19, which was double last year's figure, on U.S. sales that were 5% lower than a year ago.
QUICK CUTS: Integrated retail software developer JDA Software Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: JDAS)") else Response.Write("(Nasdaq: JDAS)") end if %> sank $5 1/4, or 40.4%, to $7 3/4 after announcing that its European software license sales were "significantly lower than expected," and that "a substantial number" of its European, Latin American, and Asian customers have delayed buying merchandising systems... The world's largest enterprise software developer SAP AG's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SAP)") else Response.Write("(NYSE: SAP)") end if %> American depositary receipts shed $2 5/8 to $36 7/8 after the company said it expects growth to slow in the fourth quarter due to Asian economic weakness and as customers divert resources to address the Year 2000 problem... Strike-impacted Northwest Airlines <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NWAC)") else Response.Write("(Nasdaq: NWAC)") end if %> lost altitude, falling $2 3/8 to $24 13/16 after reporting a heavier-than-expected Q3 loss of $2.91 per share. Analysts were predicting a loss of $1.12 per share.
Patient records transcription service company MedQuist Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MEDQ)") else Response.Write("(Nasdaq: MEDQ)") end if %> lost $5 7/8 to $29 3/8 after reporting Q3 EPS of $0.14 (before charges), up from $0.10 a year ago and a penny ahead of the consensus estimate... Natural gas, electricity, and monitored alarm security company Western Resources <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WR)") else Response.Write("(NYSE: WR)") end if %> leaked $3 1/8 to $37 3/4 after it said full-year 1999 EPS may come in around $2.20, well short of analysts' mean estimate of $2.81, due to an electricity rate cut in Kansas and higher expenses... Kansas City Power & Light <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KLT)") else Response.Write("(NYSE: KLT)") end if %>, in line to be acquired by Western, had a brownout of its own, losing $1 1/2 to end at $29 3/16 today... SOS Staffing Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SOSS)") else Response.Write("(Nasdaq: SOSS)") end if %> dove $5 7/16 to $7 15/16 after late yesterday's announcement that it expects to report Q3 EPS of $0.26 to $0.27, including $0.02 in income tax credits, when it reports quarterly results tomorrow morning. Analysts were expecting EPS of $0.30.
A 7% drop in Q3 sales at drug maker American Home Products <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AHP)") else Response.Write("(NYSE: AHP)") end if %> held quarterly EPS in line with the Street's $0.46 projection, pulling the company's stock down $3 15/16 to $46 3/16... Digital signal processing cores manufacturer DSP Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DSPG)") else Response.Write("(Nasdaq: DSPG)") end if %> dropped $1 3/4 to $13 1/2 after reporting Q3 EPS of $0.35, compared with $0.32 a year ago and analysts' mean estimate of $0.34. Q3 revenues increased 5% to $17.3 million, a smaller gain than the 10% overall growth DSP achieved in the first nine months of the year... Integrated Circuit Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ICST)") else Response.Write("(Nasdaq: ICST)") end if %> dropped $1 3/8 to $12 3/4 after announcing that it won't pursue a proposed buyout of the company by a group led by the company's management for up to $17.50 a share, saying the offer wouldn't be "fair" to shareholders.
Shared Medical Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SMS)") else Response.Write("(NYSE: SMS)") end if %> slumped $13 5/8 to $41 9/16 as the healthcare systems developer said it expects Q3 EPS to fall between $0.59 and $0.61, well off its target range of $0.68 to $0.71, because of sagging European sales... Titanium Metals <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TIE)") else Response.Write("(NYSE: TIE)") end if %>, which makes titanium mill and sponge products, was down $2 1/8 to $13 11/16 after Morgan Stanley Dean Witter downgraded the company to "neutral" from "outperform." After the close, the company reported Q3 EPS of $0.50, down from $0.64 last year, and warned of lower-than-expected results for the rest of 1998 and 1999... Offshore energy repair and services provider Halter Marine Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: HLX)") else Response.Write("(AMEX: HLX)") end if %> sank $15/16, or 10.9%, to $7 5/8 after reporting Q2 EPS of $0.23, in line with Street estimates but $0.04 off last year's figure.
The air got out of Tupperware Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TUP)") else Response.Write("(NYSE: TUP)") end if %>, which fell $1 9/16 to $15 5/8 after saying it expects Q4 earnings to fall between 20% and 25% from last year's levels as overseas sales have lagged badly... Energy and communications products company Williams Cos. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WMB)") else Response.Write("(NYSE: WMB)") end if %> slipped $1 1/2 to $27 3/8 after Chairman Keith Bailey said to expect pre-tax charges and writedowns of $70 million, or $0.10 per share, when the company reports Q3 earnings tomorrow... Eye care product maker Allergan Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AGN)") else Response.Write("(NYSE: AGN)") end if %> lost $5 1/8 to close at $57 1/4 after the FDA sent the company a warning letter saying its Irish plant, where it makes a botulism toxin used in muscle relaxants, failed a sanitation test... Despite revealing talks with companies interesting in buying the company, point-of-sale network developer Transaction Network Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TNSI)") else Response.Write("(Nasdaq: TNSI)") end if %> checked out $3 15/16 to close at $26 1/2 after reporting Q3 EPS of $0.16, $0.02 lower than last year and a penny less than expected.
Morgan Stanley Dean Witter downgraded a set of real estate investment trusts (REITs) today, pulling all of their stocks down. Burnham Pacific Properties <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BPP)") else Response.Write("(NYSE: BPP)") end if %> was off $5/8 to $12 9/16 after being cut to "outperform" from "strong buy." Westfield America <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WEA)") else Response.Write("(NYSE: WEA)") end if %> lost $1 to $16 1/4 after being moved to "neutral" from "outperform," while Patriot American Hospitality <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PAH)") else Response.Write("(NYSE: PAH)") end if %> fell $9/16 to $9 7/16 after being designated a "neutral" from "strong buy"... Geriatric care provider Genesis Health Ventures <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GHV)") else Response.Write("(NYSE: GHV)") end if %> gave back $1 1/4 to close at $13 1/4 after Advest Inc. lowered its rating on the company to "market underperform" from "buy."
Earnings Movers
Avery Dennison <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AVY)") else Response.Write("(NYSE: AVY)") end if %>, down $2 7/8 to $41 15/16; Q3 EPS: $0.54 vs. $0.50 last year; Estimate: $0.54
Ballard Medical Products <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BMP)") else Response.Write("(NYSE: BMP)") end if %> down $5/16 to $20; fiscal Q4 EPS: $0.30 vs. $0.28 last year; Estimate: $0.30
Brio Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BRYO)") else Response.Write("(Nasdaq: BRYO)") end if %> down $3/4 to $9 11/16; fiscal Q2 EPS: breakeven vs. loss of $0.42; Estimate: loss of $0.03
Western Digital Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WDC)") else Response.Write("(NYSE: WDC)") end if %> down $3/16 to $7 15/16; fiscal Q1 EPS: loss of $1.24 (before charges) vs. $0.67 last year; Estimate: loss of $1.24
FOOL
ON THE HILL
An Investment Opinion
by
Dale Wettlaufer
Thoughts on an NAIC Conference
Having just returned from a few days at a National Association of Investors Corp. (NAIC) conference in San Jose, I wanted to share a few observations. These are somewhat random and are not ordered by importance.
1. Individual investors are generally smart people.
Take out the people who expect 25% market growth until Judgment Day (and this is a remediable thought, anyway) and the couple of odd balls who talk your ear off about their latest trading system and you've got a pretty intelligent group of people who attend these conferences. First, the decision to invest excess personal earnings (I refuse to call it savings, because that confuses the terms "saving" and "investing") is a smart one to begin with. It's a heck of a lot smarter to plug retirement money into good common stocks rather than Treasury obligations any day of the week. Even when the market is frothy, it's a smarter decision to make. That is, provided you don't extend logic too far and believe that any company at any price is a good investment just because you're a buy-and-hold investor.
2. Individual investors are smarter than the Vice-Chairman of Merrill Lynch believes.
I still haven't received a reply to my open letter to Merrill Lynch, by the way. To bring people up to speed, Merrill Lynch Vice-Chairman John Steffens thinks that individuals who use discount online brokerages are endangering themselves by doing so. No doubt Mr. Steffens thinks that a Merrill broker can do better for people. What's so funny and just totally absurd about his statement is that Merrill Lynch's equity mutual funds don't do any better than a random sample of individual investors surveyed by University of California (Davis) professors Brad M. Barber and Terrance Odean. We're talking about gross return here. Now add in expenses. Both individuals and funds have them, whether it's in explicit expenses for subscriptions or implicit expenses for soft dollars that mutual funds pay. The soft dollars show up in the turnover of the professionally run portfolio. Now add in Merrill's fat 5% load and John Steffens's top pros actually lose to a random set of individuals.
Even more interesting, if you educate a group of people about investing, these "average Americans" start to whip the pros. The average holding period among NAIC investors is seven years -- which translates into a yearly portfolio turnover of roughly 14%. Your average mutual fund turns over the portfolio about 77% per year, which works out to an average holding period of 1.3 years. The same conclusion that the UC Davis professors come to, that "the well-documented tendency for human beings to be overconfident can best explain the high trading levels and the resulting poor performance of individual investors" probably extends to the suits on Wall Street.
Also, and this is just a repeat of earlier arguments on this point, guys like John Steffens should wake up and realize that "average Americans" with experience running a tire distributorship, running their own or their spouse's medical practice, running the books of a charity organization, balancing a family's finances, or myriad other small businesses are not bozos. You don't survive running a couple of tire shops that do 3% pre-tax by being a dummy, and you probably have a hell of a lot more horse-trading sense about business than some newly minted MBA. I met a lot of very savvy people at the NAIC conference that probably can't do a discounted cash flow spreadsheet, but who could tell you what it takes to actually run a company.
3. Young people should realize the value of investing sooner in their lives.
I heard from a number of parents and grandparents at the show that they wish there were a way to make their kids understand the value of investing earlier in life. I didn't have an easy answer to that one, but I believe as many people here believe that schools should have a better curriculum for educating kids about personal finance. Currently, most curricula take the form of short-term stock picking contests that start and wrap up in the course of a half-year, which is anywhere from being marginally useful to harmful to kids' perceptions about what the stock market is. It's not a game to determine who can rack up the biggest short-term gains. You might as well take the kids to the casino on a field trip, because teachers who design courses like this are reinforcing the notion that the stock market is for speculation and not for rational long-term decision-making.
4. Companies have to wake up.
Don't lock individuals out of your conference call replays. Could someone please email me and tell me the logic of locking out an owner of the company from one of four quarterly updates while letting someone in on the conference call who doesn't own the stock, who may not represent anyone owning the stock, or who even might be short the stock? That's not logical. If educated individuals are far more apt to hold a stock than a mutual fund, then it's common sense that that's the type of investor you want. If you believe in the capital asset pricing model, too, that sort of investor is also going to lower your cost of equity, all else being equal.
Some companies have told me that they want the investors on the line that are going to buy the stock. Great, but what happens when the company misses quarterly earnings estimates or experiences a temporary blip in results? A rational investor is MUCH less likely to push the sell button than the mutual fund manager who wants to lock in his or her year or is looking for every "performance" edge.
Overall, I was extremely impressed by people at the NAIC convention. These are investors who aren't the amphetamine-driven SOES traders that people like John Steffens must imagine them to be. They're rational Moms and Dads, business owners, retirees, and genuinely hard-working Americans that are doing the most intelligent and businesslike thing with their excess earnings. Commission-driven brokers and hyperactive fund managers should take note and maybe get out and learn something from these people.
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
Editing |