FOOL PLATE SPECIAL
An Investment Opinion by MF Templar

Banking on State Street

A move yesterday by the BANK OF NEW YORK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BK)") else Response.Write("(NYSE: BK)") end if %> to increase its investment in STATE STREET BANK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: STT)") else Response.Write("(NYSE: STT)") end if %> to 9.9% from 4.99% had shares of State Street hopping this morning, up $7 to $70 on a potential takeover. This all was revealed to the Street in publicly disclosed filings to the Federal Reserve Board and the Massachusetts Board of Banks. State Street has long been a favorite of institutional money managers because of the bank's heavy involvement in the mutual fund back office business, something that has allowed the bank to grow earnings at a 15.9% average annual rate over the past five years -- not too shabby for a bank.

What is mutual fund back office business? Well, when a mutual fund decides to buy and sell shares in a particular stock, there are all kinds of forms that need to be filled out. As well, when investors decide to buy and sell shares of the mutual fund itself, there are even more documents to keep track of relating to cost basis, tax withholding, and various tax-deferred investment vehicles sponsored by the U.S. government. Although a large fund family like Fidelity Management & Research or American Century Investments can handle its own paperwork, a lot of smaller fund groups have found it much easier to outsource this kind of business. State Street is one of the primary beneficiaries of this trend, second to the BISYS GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BSYS)") else Response.Write("(Nasdaq: BSYS)") end if %> after its acquisition of Concord EFS last year. State Street is also big into providing services worldwide, offering banking in 70 countries.

Although the Bank of New York stressed that its holding was for "investment purposes only," when it listed its six basic businesses, "Securities and Other Processing" was the first thing it mentioned. State Street is committed to ''remaining independent and pursuing its strategic plan,'' which management believes will allow it to ''continue to deliver strong performance for its shareholders in the years to come.'' Here at 20 times trailing earnings, a 1.2% yield and 3.5 times book value, it would appear that a lot of the value in State Street over the next 12 months or so has been recognized. However, there is no question of the firm's ability to continue to grow earnings in the high teens, and it might make more sense to view the company as a financial services growth vehicle rather than a traditional bank, something that might allow it some slight further multiple expansion. If it can simply maintain the multiple going forward, investors should see 15% to 20% annual appreciation based on earnings growth alone, including the dividend.

UPS

Networker CASCADE COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCC)") else Response.Write("(Nasdaq: CSCC)") end if %> gained $2 1/8 to $58 1/8 after announcing the acquisition of privately-held Sahara Networks, adding depth to its telco central office products.

BURLINGTON COAT FACTORY WAREHOUSE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BCF)") else Response.Write("(NYSE: BCF)") end if %> gained $1 to $13 5/8 on announcing a 10.2% increase in second quarter same-store sales.

DRAM manufacturer MICRON TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MU)") else Response.Write("(NYSE: MU)") end if %> was boosted $1 3/8 to $31 1/8 after Merrill Lynch made positive comments on the company and semiconductors in general.

LSI LOGIC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LSI)") else Response.Write("(NYSE: LSI)") end if %> blipped up $1 5/8 to $28 1/4 on the same comments.

Direct marketing information company ABACUS DIRECT CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ABDR)") else Response.Write("(Nasdaq: ABDR)") end if %> gained $2 3/8 to $23 7/8 after Robertson, Stephens & Co. upped its rating on the company to "buy," pointing to the company's valuation and profitability.

ARQULE INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ARQL)") else Response.Write("(Nasdaq: ARQL)") end if %> rose $1 3/4 to $17 1/4 after Lehman Brothers started coverage of the chemical/technology company with an "outperform" rating and a 12-month price target of $29.

Salomon Brothers analyst Erika Klauer got off the fence and upgraded her rating on INTEL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %> to "buy" and set a 1998 earnings estimate of $11 per share. Intel shares were up $4 at $134 3/8.

HEALTHSOUTH CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HRC)") else Response.Write("(NYSE: HRC)") end if %> gained $3 1/4 to $40 1/8 after the acute care provider was selected by Standard & Poors to be included in the S&P 500 Index.

VIVUS INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VVUS)") else Response.Write("(Nasdaq: VVUS)") end if %> gained another $4 3/4 to $43 3/4 after the New England Journal of Medicine reported positive clinical results on the company's impotence drug.

Ice-cream maker BEN & JERRY'S <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BJICA)") else Response.Write("(Nasdaq: BJICA)") end if %> rose $1 3/8 to $13 1/8 after the company named journeyman marketing executive Perry D. Odak to its chief executive officer spot.

STARBUCKS CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SBUX)") else Response.Write("(Nasdaq: SBUX)") end if %> gained $1 7/8 to $29 5/8 after reporting a 2% increase in December same-store sales.

 HELD

Steakhouse/Italian restaurant operator MORTON'S RESTAURANT GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MRG)") else Response.Write("(NYSE: MRG)") end if %> announced that it will sell its Mick's and Peasant restaurants for cash and notes.

DOWNS

Document management software company FILENET CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FILE)") else Response.Write("(Nasdaq: FILE)") end if %> was crunched for a $8 3/8 loss to $23 3/8 after saying Q4 earnings will come in at $0.20 per share, down substantially from last year and below estimates of $0.50.

CYBERCASH INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CYCH)") else Response.Write("(Nasdaq: CYCH)") end if %> lost $5 to $18 1/4 after Hambrecht & Quist cut its rating on the company to "hold" from "buy."

Container company ACX TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ACX)") else Response.Write("(NYSE: ACX)") end if %> fell $2 1/8 to $17 3/4 after Goldman Sachs removed the shares from its recommended list.

NAUTICA ENTERPRISES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NAUT)") else Response.Write("(Nasdaq: NAUT)") end if %> sank $1 1/4 to $25 3/4 after reporting Q3 earnings of $0.37 per share, two cents ahead of estimates.

FOOL PORTFOLIO STOCKS

FOOL PORTFOLIO                BORING PORTFOLIO
ATCT up $1/16 at $13 11/16    BGP unch. at $35 1/8
AOL up $1 1/8 at $33 7/8      CSL up $3/4 at $59 5/8
CHV up $3/4 at $66 5/8        CSCO up $1 1/4 at $64 1/8
COMS up $5/16 at $72 11/16    GNT unch. at $36 7/8
GM down $1/2 at $58           ORCL up $1 3/8 at $43 3/8
IOM down $1/8 at $17 1/4      OXHP up $2 3/4 at $58 7/8
KLAC up $1 5/16 at $35 1/2    PMSI up $1/2 at $12
LU up $1/4 at $46 1/8         SLR up $1 1/8 at $52 7/8
MMM down $2 1/4 at $84        TDW up $1/4 at $44 3/4
T down $1/4 at $41 5/8