FOOL FEATURES

Boy, what a volatile day! Up a few percent, down a few percent -- but in the end, the markets ended up nearly even. Go figure... Today, the Fool brings you Conference Call reports for Zytec, ITT Corp, PRI Automation, and Mattson Technology. As always, they are accessible from the Earnings Central area in Stock Research.

MF Merlin's Economic News today discusses Fed Chairman Greenspan's presentation yesterday afternoon to the House Banking Subcommittee.. You'll find the Economic News, as well as all our Special Sections, FoolWires, and earnings reports, on either the Evening News or Stock Research screens. In tonight's Fool on the Hill, MF Templar focuses on "The Great Stock Market Debate." Enjoy!

CONFERENCE CALLS

07/24/96 (Wednesday)
Genzyme Tissue Repair (NASDAQ: GENZL)
1-402-220-6029

07/25/96 (Thursday)
Genzyme (NASDAQ: GENZ) &
Genzyme Transgenics (NASDAQ: GZTC)
1-402-220-5190

HEROES

Better-than-expected results from COMPAQ COMPUTER (NYSE: CPQ) caused the shares to perk up $3 3/8 to $48 3/8 today. The company reported earnings of $0.96 per share versus consensus expectations of $0.91 per share, along with sales of $4.0 billion that were up 14% from year-ago figures. The fact that gross margins improved to 23% from 21% in the first quarter while inventories decreased by $400 million also helped shares of the computer manufacturer. Chief Executive Officer (CEO) Eckhard Pfeiffer said after the earnings release, "Our outlook calls for a strong second half... In fact, we believe we are in excellent position to gain market share and achieve improved profitability for the balance of the year."

US SURGICAL (NYSE: USS) surged $3 to $31 3/4 today after beating First Call consensus estimates of $0.31 by seven cents and reporting that it sees full-year 1996 results as "significantly better" than the current estimates of $1.29. After the news was released, Cowen & Co. upgraded the stock to "buy" from "hold," while Salomon Brothers raised its rating from "buy" to "strong buy." Oppenheimer and Prudential were content just to raise their estimates. On the subject of U.S. Surgical, we have one correction from the Lunchtime News thanks to a perceptive reader: Chairman and CEO Leon Hirsch is not in fact retiring (as was reported in today's Lunchtime News), and is instead simply redirecting his activities at the company.

Shares of certain software makers had a pretty good day today. CADENCE DESIGN (NYSE: CDN), which is still a long way from its high, still managed to climb $2 1/8 to $25 1/8 this morning after reporting earnings that were a penny ahead of consensus expectations of $0.30 EPS. RATIONAL SOFTWARE (NASDAQ: RATL) posted earnings of $0.23 EPS, leaps and bounds above the $0.15 EPS that analysts were looking for. The company rose $3 to $42 3/4 and said that it intends to split the stock two-for-one. PEOPLESOFT (NASDAQ: PSFT) drove ahead $7 3/4 to $65 1/2 after beating consensus estimates by more than 15% and getting an upgrade and estimate increase from Morgan Stanley.

QUICK TAKES: HFS (NYSE: HFS) reported record second quarter results today, and saw its stock price increase $4 1/2 to $55 1/2 ... BOSTON BEER (NYSE: SAM) shot up $1 3/4 to $22 1/2 after reporting an earnings increase of 100% over the year-ago period ... AXENT TECHNOLOGIES (NASDAQ: AXNT) stomped on the First Call consensus estimates of $0.04 for the just-completed quarter, reporting net income of $0.16 per share and sending its stock price up $2 1/4 to $14 1/4 ... CARDINAL HEALTH (NYSE: CAH) and PCI SERVICES (NASDAQ: PCIS) agreed to merge today, sending shares of PCI Services up $5 3/8 to $21 1/2 ... Solid earnings from NATIONAL INSTRUMENTS (NASDAQ: NATI) helped to boost the shares $2 to $24 this morning. The company earned $0.28 EPS before a one-time charge this morning ... XYLAN (NASDAQ: XYLN) responded well this morning when Robertson Stephens announced that it had upgraded estimates for the company after the agreement to work with IBM on certain projects was announced, moving up $3 3/4 to $40.

GOATS

Investos in FRITZ COMPANIES (NASDAQ: FRTZ) had an absolute nightmare today, when the company announced that after a number of one-time charges, it was reporting a $0.10 per share loss versus consensus expectations of a profit of $0.35 per share. The charges stem from a 1995 merger with Intertrans Corporation, for which the company has incurred "increased new business expenses." All said, the firm will lose $3.4 million in the fiscal fourth quarter because of these charges and will also restate previously announced third quarter earnings because of $11 million in additional charges that it has decided to take. A downgrade from Alex. Brown from "strong buy" to "neutral" did not help matters, with the stock careening downward $15 1/4 to $12 1/4.

Unfortunately for PENEDERM (NASDAQ: DERM), executives at JOHNSON & JOHNSON (NYSE: JNJ) were in a feisty mood when they woke up today. Shares of Penederm dropped $2 7/16 to $5 9/16 this morning after Johnson & Johnson filed a patent infringement suit against one of the company's four retinoic acid acne formulations, Avita gel. Penederm said it has not yet reviewed the allegations but that based on prior counsel, it doesn't believe that the suit has merit.

Another company reporting disappointing results: ALLIED HEALTHCARE (NASDAQ: AHPI) said today that it will lose $2 million in the first quarter due to some problems in swallowing recent acquisitions. Shares dropped $2 1/8 to $6 7/8 as the company talked about suspending its quarterly dividend. FEI CO. (NASDAQ: FEIC) joined the disappointment parade, stating that it made only $0.09 EPS in the second quarter compared to old expectations of $0.19 EPS -- which it said it would not meet two weeks ago. The stock closed off $1/2 to $8 1/2. MATTSON TECHNOLOGY (NASDAQ: MTSN) dropped $1 3/8 to $8 after reporting lower-than-expected earnings of $0.23 EPS, two cents lighter than expectations, and after PaineWebber slashed its numbers for the company. PRI AUTOMATION (NASDAQ: PRIA) also slipped $5/8 to $24 7/8 after it missed its quarter by a few pennies.

QUICK TAKES: Shares of ZYTEC (NASDAQ: ZTEC) plunged $2 5/8 to $10 3/4 After the firm forecast a soft second half of the year in spite of the 50% revenue growth and 400%-plus EPS increase it reported last evening ... Despite a press release stating that it did not know why its stock had fallen so much recently, CALIBER (NYSE: CBB) fell another $2 to $17 5/8 today ... Recent IPO DONNA KARAN (NYSE: DK) received a "near-term accumulate" or "long-term buy" from Merrill Lynch today, and fell $2 to $21 1/8 ... Shares of INDIVIDUAL (NASDAQ: INDV) fell $3 1/2 to $6 today after the company announced that its CEO had begun an indefinite leave of absence while the board of directors contemplates his future with the company ... MIDLAND (NASDAQ: MDLD) announced today that it had terminated its merger with DANIELSON (AMEX: DHC) and dropped $1 3/4 to $7 as a result ... GLENARYE TECHNOLOGY (NASDAQ: GEMS) only made its quarterly numbers, and got racked for $6 to $39 as a penalty for not exceeding estimates ... AMC ENTERTAINMENT (NYSE: AEN) dropped $2 1/8 to $20 3/4 after it forecast a $0.10 EPS loss in its fiscal first quarter, blaming a lack of decent films and start-up costs at new theaters for its difficulties.

An Investment Perspective
by Randy Befumo (MF Templar)

FOOL ON THE HILL

The Great Stock Market Debate

Intense, acrimonious debates often spring from fundamental differences in how subjects are defined. A disagreement as to whether the Host underwent con-substantiation or trans-subStantiation when a priest said mass is what led to the brutal Thirty Years' War between Catholic and Protestant monarchs in fifteenth century Europe. Unable to come to terms on whether or not the communion wafer was actually the "body of Christ" or was simply a representation, the Catholic Hapsburg monarchies threw themselves relentlessly at the Protestant north over trumped up political differences.

A similar vociferous debate now rages between adherents of what is called "fundamental analysis" and "technical analysis." This antagonism springs forth from a crucial disparity between how the actual subject of the analysis, the equity, is viewed, as well as what assumptions are made about the level of knowledge of market participants. The so-called "fundamental" analyst looks to the actual business and attempts to gauge whether its stock is statistically cheap when compared with the intrinsic, economic value of the firm. This approach, while consistently verified by academic exploration over long periods of time, is not one that can consistently command short-term performance. Disparities between real value and perceived value can take years, if not decades, to sort out.

What is called "technical" analysis is an outgrowth of the wave of the entire modernist movement in philosophy, literature and the so-called "social" sciences in the first half of this century. Exiting the nineteenth century, many thinkers who had been influenced by positivists like Comte were convinced that everything could be measured and predicted with mathematical precision. The attraction of some implicit, mathematical order was powerful and every field of intellectual endeavor flirted with varying degrees to massive "systems" that could be fine-tuned into being perfectly predictive. Whether Whitehead's Principia in philosophy, Skinner's behaviorialism as articulated in Walden Two or the early work done in "technical" analysis with various number series and sophisticated charting methodologies, they all shared a common philosophical origin -- they sprang out of the desire to predict the future with numerical certainty.

Just as ardent proponents of concepts like free will viewed behaviorialism with deep antipathy, a similar gap has sprung up between those who practice the "arts" of technical analysis and fundamental analysis. Did I say art? The fact is that all academic studies of basic technical analysis chart patterns have failed to confirm any consistent predictive value. (We highlighted some of this research in Alex Schay's article About the Random Walk in Fool's Gold this weekend, which focused on Malkiel's work a "Random Walk Down Wall Street".) In practice, the subjective component behind technical analysis makes it an imperfect system, despite the allure of mathematical sophistication. Fundamental analysis is not immune from the wiles of numerology either -- fields like quantitative analysis and little statistical gadgets like the PEG are ultimately deceptive in the precision they appear to offer and perform inconsistently as well.

Beneath the fascination with numbers, what are the other differing core assumptions? Practice of technical analysis assumes hard efficient market theory, meaning that the only way to outperform is to see where the big money is going because all known, public information is discounted into the stock. The core of technical analysis is looking at price action coincident with volume to determine the exact nature of the cash flowing into or out of the stock, index or other financial instrument. The price movements themselves are not predictive, rather it is these movements in conjunction with volume that let devotees know whether the stock is being "accumulated" or liquidated by the large holders that have the informational edge.

Where fundamental analysis differs is that it completely discards the hard form of efficient market theory, either believing that it is completely bankrupt or simply less efficient than pedantic practitioners propose. Because of the multitude of players involved in the dance of pricing, short-term holes crop up where a stock is either overvalued or undervalued relative to its intrinsic economic value, derived from publicly available information. As time horizons and perception of key point of information are dissonant, a patient investor can theoretically exploit these gaps and earn above market returns for their trouble. The entire pace and time horizon of fundamental analysis thus diverges from technical analysis because of this key difference in assumption about the nature of the market.

All this philosophical underpinning is fine, but the reality is very few practitioners of either school really ever dedicate themselves to exploring their core assumptions. Rather, they are swallowed up in the actual practice and rhythms of the approach, with technical analysis used by those trying to intermittently predict the short term whereas fundamental analysis used to accumulate positions over the long haul. When investors keep getting scared because their chosen approach goes against them, they start to try to hedge their bets by flipping to the other side of the intellectual debate to get their bearings again -- which is why you'll find a lot of investors who practice both contradictory approaches to varying degrees.

In the end, the position we take in this forum is fairly straightforward -- our target market is the much-belittled individual investor who lacks the capital and the time to trade frequently. We don't necessarily mind if other people want to come and hang out, but the editorial viewpoint is focused at the person who wants to purchase securities over periods measured in years. Though this debate between fundamental approach and technical approach (which I believe is misnamed, as it connotates a degree of mathematical certainty that is not possible) will probably rage on forever, I think both sides of the debate can learn quite a bit from examining their own sets of assumptions and seeing how these basic assumptions about what a stock is and whether or not one should follow institutions affect their worldview.


Randy Befumo (MF Templar), a Fool
Fool On the Hill

Selena Maranjian (MF Selena), a Fool
Heroes & Goats & Editing

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