<% ' AvantGo:MarketClose %>DJIA 8897.96 -77.50 (-0.86%) S&P 500 1130.20 -10.81 (-0.95%) Nasdaq 1861.05 +4.49 (+0.24%) Value Line Index 890.46 -7.31 (-0.81%) 30-Year Bond 99 13/32 +1 11/32 5.29 Yield<% ' AvantGo:End %>
<% ' AvantGo:Heroes %>The shares of Internet companies were on the rise again today following a $40 million vote of confidence from investment firm Softbank Holdings. The parent of Ziff-Davis <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ZD)") else Response.Write("(NYSE: ZD)") end if %> and the largest shareholder in Yahoo! <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YHOO)") else Response.Write("(Nasdaq: YHOO)") end if %> and E*Trade Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EGRP)") else Response.Write("(Nasdaq: EGRP)") end if %> announced on Friday the purchase of an additional 9.9% stake in online computer retailer Buycomp.com. In August, Softbank, which had made more than 70 investments in various Internet companies, paid $20 million for an initial 10.25% interest. The investments essentially value Buycomp.com at $400 million, one of the highest pre-IPO valuations ever for an Internet-related company. Excited by the valuation, investors bid up shares of Yahoo! $11 3/16 to $164 3/4. Excite <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: XCIT)") else Response.Write("(Nasdaq: XCIT)") end if %> soared $7 1/2 to $47 1/2, Lycos <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LCOS)") else Response.Write("(Nasdaq: LCOS)") end if %> leapt $2 1/2 to $51 5/8, Infoseek <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SEEK)") else Response.Write("(Nasdaq: SEEK)") end if %> rose $4 9/16 to $38 9/16, Netscape <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NSCP)") else Response.Write("(Nasdaq: NSCP)") end if %> netted a $3 3/4 gain to $29 1/8, and America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> picked up $4 3/4 to $144 3/4. Egghead.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EGGS)") else Response.Write("(Nasdaq: EGGS)") end if %> was lifted $2 3/8 to $11 7/16, Mindspring Enterprises <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSPG)") else Response.Write("(Nasdaq: MSPG)") end if %> surged $7 3/16 to $52 13/16, NetGravity <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NETG)") else Response.Write("(Nasdaq: NETG)") end if %> added $1 5/16 to $17 5/16, K-tel <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KTEL)") else Response.Write("(Nasdaq: KTEL)") end if %> jumped $1 1/4 to $11 9/16, eBay <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EBAY)") else Response.Write("(Nasdaq: EBAY)") end if %> rocketed up $19 to $103, Earthlink <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ELNK)") else Response.Write("(Nasdaq: ELNK)") end if %> finished up $5 1/4 to $55 1/8, and Spyglass <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SPYG)") else Response.Write("(Nasdaq: SPYG)") end if %> gained $2 7/16 to $17 1/4.
Mainframe re-engineering software developer SEEC Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SEEC)") else Response.Write("(Nasdaq: SEEC)") end if %> jumped $3 1/16, or 52%, to $8 15/16 after winning a master software deal with the New York State Office of General Services that will allow the company to supply tools and services to any state, county, or municipal government department in New York plus some nonprofit organizations. A few departments are already using SEEC's Year 2000 (Y2K) software, Smart Change Factory, which is being used by more than 10 states and federal agencies. Also, a mention in the "Up and Down Wall Street" column in this week's Barron's magazine boosted SEEC's fortunes today. The column said that SEEC "has a real business and some big-name customers, is no stranger abroad and is earning money," yet its shares were trading under $6 compared with a book value of $5.50 a share. Barron's Alan Abelson concluded that "essentially, you're paying chump change for the business."
QUICK TAKES: Computer networking chip maker Broadcom Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BRCM)") else Response.Write("(Nasdaq: BRCM)") end if %> posted a solid gain of $6 to $92 1/2 after unveiling a single computer chip that will allow seamless integration of scenes from TV, websites, videos, and digital-video-disk (DVD) movies... QVC and E! Entertainment cable network operator and telecommunications company Comcast <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CMCSA)") else Response.Write("(Nasdaq: CMCSA)") end if %> climbed $1 1/2 to $46 1/4 after reporting a 12.5% increase in third quarter revenues and a loss of $0.01 a share (excluding gains), compared with a loss of $0.18 per share in the year-earlier period and analysts' mean estimate of a loss of $0.25... Alcan Aluminum <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AL)") else Response.Write("(NYSE: AL)") end if %> added $7/8 to $28 3/16 after the world's largest automaker, General Motors <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GM)") else Response.Write("(NYSE: GM)") end if %>, announced a 10-year multibillion dollar deal to buy aluminum from the company in an all-out effort to make lighter cars.
Biopharmaceutical company Centocor <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CNTO)") else Response.Write("(Nasdaq: CNTO)") end if %> jumped $4 3/8 to $51 5/8 after saying that a combination of its antiplatelet monoclonal antibody drug ReoPro with the use of stents "significantly" reduced patients' risk of death by 57% compared with patients given stents alone... Integrated voice and data applications maker General Magic <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GMGC)") else Response.Write("(Nasdaq: GMGC)") end if %> jumped $7/8 to $7 1/4 after announcing an exclusive deal in which Intuit <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTU)") else Response.Write("(Nasdaq: INTU)") end if %> will use the company's magicTalk voice platform, giving Quicken.com users voice-command access to financial information... Drug wholesaler Bergen Brunswig <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BBC)") else Response.Write("(NYSE: BBC)") end if %> added $3/4 to $56 1/16 after announcing it will acquire Stadtlander Drug Co. from its Toronto-based parent Counsel Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CXSNF)") else Response.Write("(Nasdaq: CXSNF)") end if %>, which added $5/16 to $8 13/16.
Telecommunications technology company Premisys Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PRMS)") else Response.Write("(Nasdaq: PRMS)") end if %> bumped up $1 to $14 1/4 after announcing a joint partnership agreement with distributor Tein Telecom to service Belgium, the Netherlands, and Luxembourg, or the Benelux region... Harley-Davidson aftermarket parts and accessories supplier Global Motorsport Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSTM)") else Response.Write("(Nasdaq: CSTM)") end if %>, formerly Custom Chrome Inc., powered up $1 7/8 to $18 3/4 after announcing it will be acquired by Stonington Partners for $19.50 per share in cash -- a 15.6% premium to its closing price Friday.
Suiza Foods <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SZA)") else Response.Write("(NYSE: SZA)") end if %> gained another $3 3/4 to $42 after gaining $4 5/16 on Friday following the company's Q3 earnings release. EPS of $0.76 was in-line with the revised estimate of third quarter results that the company released in mid-September. For more details, see today's Fool Plate Special... Online discount broker E*Trade Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EGRP)") else Response.Write("(Nasdaq: EGRP)") end if %> traded up $1 7/8 to $25 after announcing a marketing alliance with Internet-based healthcare network WebMD, giving E*Trade exclusive presence on WebMD's website... Supply-chain management software developer i2 Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ITWO)") else Response.Write("(Nasdaq: ITWO)") end if %> surged $4 11/16 to $26 after two of three mutual fund managers listed it among their favorite stocks in a roundtable interview in the November 9 issue of Barron's.
Disposable food packaging maker EarthShell Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ERTH)") else Response.Write("(Nasdaq: ERTH)") end if %> wrapped up a $2 7/32 gain to $11 21/32 after saying it will team up with privately held Prairie Packaging, a maker of disposable plates, cups, and cutlery, to produce a full range of food service disposables made from EarthShell's new proprietary, environmentally responsible material... Big Flower Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BGF)") else Response.Write("(NYSE: BGF)") end if %> blossomed $2 15/16 to $23 3/4 after Bear Stearns raised its rating on the advertising and marketing services firm to "buy" from "attractive," calling the stock a bargain and saying the company is well-positioned for another year of good earnings growth... Primark Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PMK)") else Response.Write("(NYSE: PMK)") end if %> picked up $1 3/4 to $24 3/8 after the financial information and software development company said it plans to buy back up to another 2 million shares, bringing the total authorized number to about 8.54 million shares.
Silicon Graphics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SGI)") else Response.Write("(NYSE: SGI)") end if %> was marked up $1 5/16 to $13 1/16 after announcing the availability of its media access controller (MAC) chip, a key enabling technology for the Gigabyte System Network (GSN) interconnect standard... Resort and casino operator MGM Grand <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MGG)") else Response.Write("(NYSE: MGG)") end if %> climbed $15/16 to $29 1/16 after announcing it will buy Primadonna Resorts Inc. for about $602 million in stock and assumed debt, gaining full control of its popular New York-New York Casino, which it built jointly with Primadonna. For more on MGM Grand, check out our StockTalk interview with CFO Jim Murren.<% ' AvantGo:End %>
<% ' AvantGo:Goats %>A fleet of airline stocks lost altitude today as Goldman Sachs cut its ratings on three carriers, sliced several airlines' full-year 1999 earnings estimates by an average of 15%, and hinted at even more prolonged weakness. America West Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AWA)") else Response.Write("(NYSE: AWA)") end if %>, the parent of America West Airlines, dove $1 7/8 to $14 7/16 after Goldman downgraded the company to "market perform" from "market outperform." American Airlines operator AMR Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMR)") else Response.Write("(NYSE: AMR)") end if %> fell $4 1/4 to $62 1/2 following Goldman's cut to "market perform" from "trading buy," while US Airways <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: U)") else Response.Write("(NYSE: U)") end if %> was relegated to "market perform" from "market outperform" and fell $2 7/16 to $50 9/16. Analyst Glenn Engel said his key leading indicator of airline revenues has fallen in recent months and warned that U.S. airlines could see further earnings weakness in 2000 unless economic growth accelerates. Other airline companies hitting some turbulence today included Continental Airlines <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:CAI.B)") else Response.Write("(NYSE:CAI.B)") end if %>, which fell $2 1/4 to $40 1/8, Delta Air Lines <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:DAL)") else Response.Write("(NYSE:DAL)") end if %>, down $2 7/8 to $104 1/8, Midwest Express Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:MEH)") else Response.Write("(NYSE:MEH)") end if %>, off $1 7/16 to $30 5/16, and UAL Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:UAL)") else Response.Write("(NYSE:UAL)") end if %>, which lost $1 5/16 to $63.
Earnings news from PharMerica <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DOSE)") else Response.Write("(Nasdaq: DOSE)") end if %> -- Q3 pro forma net income of $0.09 per share, $0.03 below the analysts' consensus and $0.02 lower than last year's mark -- clearly disappointed investors, who watched the pharmacy services provider's stock fall $21/32 to $4 7/16 today. Good things may be on the way, however, as the company believes it is finally poised to benefit from the synergies it hoped for when it was formed through the merger of Capstone Pharmacy Service and Pharmacy Corp. of America in December 1997. PharMerica said it hired Donaldson, Lufkin & Jenrette Securities to advise it while it considers strategic alternatives and added that it has begun a streamlining operation to cut overhead by $10 million annually, halving its long-term care operating regions to two and eliminating more than 45 corporate positions. Stephens Inc. upgraded PharMerica to "outperform" from "neutral" today.
QUICK CUTS: Investment bank J.P. Morgan <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JPM)") else Response.Write("(NYSE: JPM)") end if %> slid $4 to $99 3/4 following reports in The Wall Street Journal that it will cut 740 positions, or about 5% of its staff, by the end of the year as the bank tries to cut costs following losses associated with the recent turmoil in international financial markets... Financial services giant Citigroup <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CCI)") else Response.Write("(NYSE: CCI)") end if %> withdrew $1 1/4 to $44 7/8 despite announcing a $2 billion stock buyback program. Stephen Black, global head of equities, quit Friday... BB&T Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BBK)") else Response.Write("(NYSE: BBK)") end if %> fell $1 3/4 to $37 11/16 after the bank holding company was downgraded by three brokerages today. Other banks losing ground included Chase Manhattan Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CMB)") else Response.Write("(NYSE: CMB)") end if %>, off $2 11/16 to $58 5/16; Bank One Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ONE)") else Response.Write("(NYSE: ONE)") end if %>, down $2 1/8 to $51 13/16; and BankAmerica Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAC)") else Response.Write("(NYSE: BAC)") end if %>, which lost $2 5/16 to close at $60 1/8.
Biotechnology firm Geron Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GERN)") else Response.Write("(Nasdaq: GERN)") end if %> burned off $3 7/16 to $13 3/4 today, having blasted ahead 74% Friday after research funded and licensed by the company successfully derived human embryonic stem cells, which may be used to supply human cells of virtually any tissue type and lead to new transplantation techniques... X-ray systems marketer Hologic Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HOLX)") else Response.Write("(Nasdaq: HOLX)") end if %> was zapped $2 3/16 to $13 5/8 after it reported fiscal Q4 EPS of $0.10, well shy of last year's $0.29 mark and $0.20 below Wall Street's projection. Hologic blamed a seasonal sales slowdown, as well as the move to its new Sahara clinical bone sonometer, for the disappointing Q4... LeCroy Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LCRY)") else Response.Write("(Nasdaq: LCRY)") end if %>, a maker of digital oscilloscopes, spiraled down $1 1/2 to $18 1/4 after Prudential Securities downgraded it to "hold" from "accumulate." LeCroy adopted a shareholder rights plan, a common takeover defense, last week... Kidney dialysis services provider Total Renal Care <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TRL)") else Response.Write("(NYSE: TRL)") end if %> shed $2 3/4 to $27 7/16 following its announcement of plans to privately place up to $300 million of convertible subordinated notes.
Telecommunications equipment maker Motorola <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MOT)") else Response.Write("(NYSE: MOT)") end if %> bleeped slightly, falling $1 1/8 to $53 3/8 on reports that it lost its contract to supply network switches, base stations, and controllers for wireless communications services provider AirTouch Communications' <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ATI)") else Response.Write("(NYSE: ATI)") end if %> network expansion in Southern California. For a closer look, dial up this morning's Breakfast With the Fool... Jaco Electronics <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: JACO)") else Response.Write("(Nasdaq: JACO)") end if %>, which makes passive and active electronic components for original equipment manufacturers (OEMs), lost $7/8 to $6 after it said fiscal Q1 losses were $0.06 per share, compared with EPS of $0.10 last year and the market's $0.02 per share profit estimate... Beringer Wine Estates <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BERW)") else Response.Write("(Nasdaq: BERW)") end if %> dripped $2 9/16 to $39 15/16 after Goldman Sachs downgraded the winemaker to "market outperform" from its "recommended list."
Assisted living services provider ARV Assisted Living <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: SRS)") else Response.Write("(AMEX: SRS)") end if %> coughed $3/8 to $6 3/8 after it announced that CFO Victor Streuffert will resign due to "personal reasons." Streuffert was CFO for only two weeks... Hotel real estate investment trust (REIT) Patriot American Hospitality <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PAH)") else Response.Write("(NYSE: PAH)") end if %> shed $1 9/16 to $9 3/8 after it reported Q3 funds from operations of $0.36 per share, down from $0.44 last year. Wall Street's consensus was $0.39 per share, while Patriot hoped to turn in a $0.40 mark. Patriot also announced the sale of two hotel properties for $206.5 million... Hotel operator Red Roof Inns <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RRI)") else Response.Write("(NYSE: RRI)") end if %> gave back $1 5/16 to $19 1/8 today after it reported Q3 EPS of $0.61, beating the year-ago $0.58 figure and flat with Street estimates. Red Roof grabbed $2 5/8 on Friday after Business Week's unreliable "Inside Wall Street" column circulated buyout rumors.
Oil rig equipment company National-Oilwell <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NOI)") else Response.Write("(NYSE: NOI)") end if %> slid $1 7/16 to $15 15/16 after it announced an agreement to buy privately owned DOSCO, a Canadian oilfield distribution business, from Westburne Inc. National-Oilwell will issue 3 million shares of stock and a short-term note for CDN$10 million in connection with the deal... Oil and gas producer Talisman Energy <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TLM)") else Response.Write("(NYSE: TLM)") end if %> ended down $1 15/16 at $20 5/8 after saying late last week that its Q3 losses were $0.30 per share, compared with Wall Street's projected $0.18 per share loss... Property and casualty insurer Vesta Insurance Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VTA)") else Response.Write("(NYSE: VTA)") end if %> shuddered $2 13/16 to $6 11/16 after it said it expects a Q3 loss of about $30 million and that it will be in default of its loan covenants as a result. Wall Street expected a $0.29 per share loss... Auto insurance holding company Mercury General <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MCY)") else Response.Write("(NYSE: MCY)") end if %> braked $2 to $43 5/8 following its announcement that Q3 EPS was $0.74, $0.03 above last year's mark but significantly below the market's $0.82 consensus estimate. Mercury said an advertising campaign launched in April "has not met expectations" but will be continued.<% ' AvantGo:End %>
FOOL
ON THE HILL
An Investment Opinion
by
Warren Gump
Averaging Into Downtrodden Leaders
<% ' AvantGo:FOTH %>Last Friday, we discussed some of the problems facing companies in the vitamin business and began to look at a way to benefit from such industrywide turmoil (click here to review those thoughts). When an industry "loses favor," the "wise" professional money managers immediately bail out of all stocks related to the industry, without regard for the underlying quality of the companies.
Why do these wise folks bail? They're evaluated on quarterly (sometimes even monthly) performance and are afraid to stick around in a stock that may stumble in the near term, even if the company offers terrific long-term prospects. Hmmm... might this provide an opportunity for Fools who are investing for the long term? While it's not the most pleasant experience to see a stock you own stagnate (or even decline) for a period of time, it can be worthwhile if it is a leading company in a growth industry selling at a significant discount to its future value.
The interesting thing about the destruction of an industry in the stock market (as long as you aren't already invested in it) is that the great companies get hammered along with the weaker ones. As demonstrated by the declines that have occurred over the past four months among stocks in the vitamin-related world, every stock in the industry was hit even though only two of them have reported problems. If you can find one of the industry's leading players that you believe will likely retain its dominant position, take advantage of the overreaction in its stock price and start buying into it.
Going back to vitamin-related stocks, I consider Whole Foods Markets <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WFMI)") else Response.Write("(Nasdaq: WFMI)") end if %> and General Nutrition <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GNCI)") else Response.Write("(Nasdaq: GNCI)") end if %> to be the respective leaders in their niches.
General Nutrition is basically the vitamin, herb, and sports nutrition convenience store to the nation. Its stores seem omnipresent to me, yet the company has only about 14.2% of the domestic retail supplement market. The company operates 2,566 stores (accounting for 57% of 1997 profits), franchises 1,332 stores (22%), and has a manufacturing operation (21%). The late August warning that the company was going to lower prices initiated the industrywide stock price free fall. While earnings per share at the company rose an average 36% per year between 1993 and 1997, that growth slowed down in the first two quarters of 1998, and the third quarter saw a 13% decline in profits, primarily caused by a slowdown in sales and the company's own price cuts. Nonetheless, analysts look for profits to grow 13% next year and about 20% over the next five years.
Whole Foods Markets is the nation's leading natural foods supermarket chain, operating 87 stores domestically. For those of you who haven't been into one of its stores, I would classify them as gourmet food stores with an emphasis on natural products. One leading trade publication stated that sales in the natural foods segment were $11.5 billion in 1996, having experienced 29% annual growth during the preceding five years. Unfortunately, a good breakout of sales and profits from just vitamins is not available. In addition, quarterly results have not been released since General Nutrition initiated its price cuts (they are due in the week or two), so it's hard to tell what kind of impact that action will have. That said, Whole Foods is a full-service supermarket with many departments outside of vitamins and herbal remedies. Analysts still expect earnings to grow 20%-25% over the next five years.
The two companies highlighted here are in different situations. General Nutrition is one of the instigators of the industry woes, while Whole Foods is an ancillary player that has been deflated by concerns about fallout from General Nutrition and slight delays in new store openings. The current valuations show the different woes affecting the respective companies. Whole Foods is trading at 20x earnings estimates for its fiscal year ending next September, while General Nutrition is trading at 11x estimates for the year ended in January 1999. Both companies were considered good growth companies at the beginning of the year, but now, due to what could very likely be short-term potholes, General Nutrition is trading as if it will not grow any more and Whole Foods is treated as if it will grow about the same rate as the overall market.
From my perspective, both of these companies provide interesting investment opportunities. I would not, however, recommend jumping feet first into either of these situations. Patience is usually a virtue when dealing with beaten down stocks. If you find one of these beaten down stocks worthy of investment, purchase only a portion of the position you ultimately want to own. This way, more substantial losses are avoided if the stock deteriorates further (which could provide an opportunity to pick up more of the stock if the long-term story is intact). If the stock rises, you get to enjoy the gains and have additional time to confirm that the company will remain an industry leader.
Why should you be cautious about jumping full force into an apparently beaten down, cheap stocks? For one very good reason: Mr. Market is often willing to take an unloved stock out to the woodshed for even more punishment. There are numerous examples of beaten down stocks that continue to fall further, whether deserved or not. Sunterra Resorts <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OWN)") else Response.Write("(NYSE: OWN)") end if %>, a leading timeshare (vacation ownership) company fell from $29 last November to $3 3/8 last month, while earnings estimates stayed above $1.20 per share. This just on fear of a recession. I thought the stock looked cheap at 10x (to be honest, even 15x) earnings, given that it is expected to have 20%-30% growth. Fortunately, though, I didn't back up the truck when it was at $12 on the way down. If I had, I would have been even more bummed last month when the stock was under $4! Ending with a happy footnote, Sunterra has now rebounded to about $13.
So what's the point of all this? Growth industries with problems that are temporary can present great investment opportunities. In such situations, buy into the best companies that can withstand short-term problems (that means cruisin' the balance sheet and cash flow statement!) and resume growing its earnings over the long haul. While it may be tempting to "load up" on a stalwart when you see it fall, a better strategy may be to take only a modest initial position, with the intent to pick up more (1) if the stock price falls further (and the long-term fundamental story has not changed) or (2) when some of the uncertainty has been removed from company and the industry.
If you really like the company and believe its growth prospects over the next decade or more are excellent, you may find that a pummeling by the market provides an excellent time to initiate participation in the company's Dividend Reinvestment Plan. This way, you can invest money slowly over time, utilize dollar cost averaging, and minimize transaction costs. What a deal!
One big WARNING before you try this type of investing: You need to have patience. Returns likely won't be immediate. You may trail the S&P 500 Index for a period of time. If, however, you are able to buy into great growth companies at low valuations because they are facing short-term problems, you will beat the Index over longer periods of time.<% ' AvantGo:End %>
Please see the Motley Fool's Conference Calls page for call information and links to synopses.
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