HEROES

JEFFERSON BANKSHARES (Nasdaq: JBNK) jumped $7 3/4 to $37 3/4 after agreeing to merge with WACHOVIA CORP. (NYSE: WB) in a deal valuing each Jefferson share at 0.625 shares of Wachovia, or $38.83 as of last night. The fifth largest Virginia-based bank, Jefferson has 96 offices, 60 ATMs, and total assets of $2.1 billion, which prices the $542 million deal at roughly 25% of assets. That falls at the higher end of recent deals but is only about 2.6 times book value, which is where other regional banks of Jefferson's caliber are currently trading. Deposits at Jefferson have grown 5.5% year-over-year while net loans have grown 13.4%, and 1996 saw a net buyback of shares in the amount of $35 million. With leaner capitalization ratios and little excess capital lying around at Jefferson, 1996 was a year of value enhancement at the company, which now culminates in this deal.

CABLEVISION SYSTEMS (AMEX: CVC) gained another $4 5/8 to $49 after agreeing yesterday to purchase 10 cable systems in the New York City area from TELE-COMMUNICATIONS INC. (Nasdaq: TCOMA) for $1.09 billion in stock. The owner of New York's Madison Square Garden, the Knicks, and the Rangers expands its total system-wide customer count by over 25%. As Cablevision also owns the broadcast rights for Yankees, Mets, and Islanders games through its MSG Network, this deal adds a good number of cable homes in the metro NYC area to which it can market its sports programming. Tele-Communications will take 12.2 million shares of Cablevision, representing a one-third stake in the company.

HEILIG MYERS (NYSE: HMY) rose $2 to $18 5/8 after the furniture retailer reported a 72% increase in May sales, which improves upon last month's 61% increase and March's 54% increase. Certainly, last year's Rhodes Furniture acquisition helps total sales results, but on the whole, same-store sales numbers are more important at this point as the company folds the Rhodes stores into the larger corporation. May same-store sales increased 4.8%, on par with last month's 4.7% increase and well above March's anemic 1/10 of 1% increase, all of which points to a rather robust quarter ending in May. Finally, as Heilig Meyers acts as a specialty finance company for its furniture customers, increased sales leads to better lending results.

QUICK TAKES: In-home eldercare company CARETENDERS HEALTHCORP (Nasdaq: CTND) rose $1 3/8 to $8 1/8 on reporting a 26% increase in Q4 revenues and earnings per share (EPS) of $0.13, which included start-up costs of $0.12 per share... U.K. cable company TELEWEST COMMUNICATION PLC (Nasdaq: TWSTY) gained $1 9/16 to $13 15/16 on the heels of yesterday's $1 billion investment in COMCAST (Nasdaq: CMCSA) by MICROSOFT (Nasdaq: MSFT)...
Cable set-top box and satellite equipment company SCIENTIFIC ATLANTA (NYSE: SFA) benefited again today from investor attention paid to the cable sector, gaining $1 1/4 to $20 3/4... GENERAL CABLE CORP. (NYSE: GCN) rose $1 3/8 to $24 as Merrill Lynch and Dillon Read both started coverage of the cable products manufacturer with "buy" ratings... British coal company and utility ENERGY GROUP PLC (NYSE: TEG) jumped $5 1/8 to $42 after announcing that it is in talks to sell itself to U.S.-based PACIFICORP (NYSE: PPW)... PIPER JAFFRAY COMPANIES (NYSE: PJC) gained $2 3/8 to $22 1/2 after the Wall Street Journal's "Heard on the Street" column mentioned the company in a discussion of mergers involving mid-size investment banks... CYPRESS SEMICONDUCTOR (NYSE: CY) rose $1 3/8 to $14 7/8 on a Morgan Stanley upgrade to "outperform" from "neutral"... SERVICEMASTER L.P. (NYSE: SVM) rose $3 to $35 5/8 after the partnership said it will continue its dividend distribution even after federal tax rules for treatment of the company's income change at the end of the year... Generic drug maker BARR LABORATORIES (AMEX: BRL) gained another $1 5/8 to $34 as the company said that investors are anticipating the company's marketing of the generic version of DuPont Merck's blood-thinning drug Coumadin.

GOATS

PROSOURCE INC. (Nasdaq: PSDS) was demoted to amateur status today, losing $3 7/8 to $8 3/4 after the food service distributor warned that Q2 earnings will be significantly lower year-over-year because of softer sales and higher expense levels. Separately, LongHorn Steakhouse and Bugaboo Creek restaurant operator RARE HOSPITALITY INTERNATIONAL (Nasdaq: RARE) was seared for a $4 1/16 loss to $12 after pre-announcing Q2 earnings of $0.16 to $0.18 per share, below the First Call mean estimate of $0.26 per share.

BDM INTERNATIONAL (Nasdaq: BDMI) dropped $6 3/4 to $20 3/4 after the systems integrator said Q2 revenues will come in lower than expected at $275 million to $280 million due to contract delays and foreign exchange effects and that EPS will be in the $0.14 to $0.16 range, below analysts' estimates of $0.25. The other pre-announcement today came from networker XYLAN CORP. (Nasdaq: XYLN), which declined $3 to $14 1/4. The company said it expects a possible sequential decline in second quarter EPS and revenues due to lower-than-expected orders from a large OEM customer and lower-than-planned shipments of ethernet products. Its guidance for EPS is below current estimates of $0.14 per share for the quarter.

Supply chain management software company I2 TECHNOLOGIES (Nasdaq: ITWO) lost $8 3/4 to $34 3/8 after Goldman Sachs analyst Rick Sherlund took the shares off that firm's "recommended list," saying that earnings visibility for the quarter was not as strong as previous quarters. Sherlund carries a big stick, evidently, because this wasn't a pre-announcement from the company, just an analyst rating change based on what the company had said about its earnings visibility earlier in the quarter. We'll see what happens at earnings time, but the company did tell Dow Jones in April that it is concentrating more on sales growth than on earnings growth: ''There will come a point where competition comes in and makes it harder to sell, and then you can't price the stuff so well... Then we intend to slow down, not invest so much, and bring the operating margins back up.''

Semiconductor equipment companies felt a jolt today as Hambrecht & Quist analyst Gus Richard lowered ratings on a number of companies he follows to "hold" from "buy," telling Dow Jones, ''I will say that demand in the current quarter is good, but going into the summer, I expect bookings momentum to slow.... We're already at peak multiples.'' The objects of his downgrades all lost ground today -- yield management equipment maker KLA-TENCOR CORP. (Nasdaq: KLAC) lost $4 13/16 to $43 1/4; PRI AUTOMATION (Nasdaq: PRIA) fell $3 5/16 to $35 5/8; and wafer fabrication systems company APPLIED MATERIALS (Nasdaq: AMAT) lost $3 5/8 to $60 3/4.

QUICK CUTS: SYMMETRICOM INC. (Nasdaq: SYMM) lost $2 1/2 to $15 after Morgan Keegan lowered its rating on the telecom equipment and semiconductor maker to "hold" from "buy," reasoning that orders from SCB Communications and AT&T are coming to a scheduled end... Telecom and networking equipment company ASCEND COMMUNICATIONS (Nasdaq: ASND) declined $6 1/4 to $41 3/8 as investors worried about the quarter's back-end loaded results, due to 56 Kbps modem software issues seen this quarter. Merger partner CASCADE COMMUNICATIONS (Nasdaq: CSCC) came down $4 5/16 to $28 9/16... Polyethylene film maker AEP INDUSTRIES (Nasdaq: AEPI) lost $6 to $40 after reporting a nearly 50% decline in second quarter EPS due to lower average selling prices and higher interest expenses... LSI LOGIC (NYSE: LSI) was clipped for a $5 1/2 loss to $33 5/8 after Montgomery Securities expressed concerns over the specialty semiconductor maker's third quarter, saying sequential growth in the September quarter may be softer than the 9% Montgomery has been forecasting, according to Reuters. Chip maker ZILOG INC. (NYSE: ZLG) also fell $1 1/2 to $19 3/4... Chip testing equipment company TERADYNE INC. (NYSE: TER) lost $2 7/8 to $38 3/4 along with its industry cohorts... CONTINENTAL AIRLINES (NYSE: CAI.B) descended $2 to $33 1/2 and AMR CORP. (NYSE: AMR) lost $4 5/8 to $94 1/2, brought down by DELTA AIRLINES (NYSE: DAL), which said yesterday that pricing is being hurt by a higher mix of leisure travelers and that the 10% ticket tax re-instituted in March brought about weaker May results... VINTAGE PETROLEUM (NYSE: VPI) softened $1 7/8 to $32 5/8 after Smith Barney downgraded the shares to "outperform" from "buy"... A mention on CNBC from Mario Gabelli, mutual fund maven and casino and telecom investor, was all it took to lift Fool Portfolio short TRUMP HOTELS & CASINO RESORTS (NYSE: DJT) $1 3/4 to $11 7/8 today... Gas pipeline and fiber-optic transport company WILLIAMS COMPANIES (NYSE: WMB) slid $2 1/8 to $40 1/2 after PaineWebber said it expects to see Q2 EPS closer to $0.40 than to the current mean estimate of $0.50.

FOOL ON THE HILL
An Investment Opinion by Randy Befumo

Chasing Efficiency

Many times arguments are supported by the thread of one assumption. Take, for example, the most radical formulation of the efficient market theory (EMT), which maintains that securities are efficiently priced relative to the existing body of public information about them at all times. A creature of economics professors, EMT makes the same key assumption that the vast majority of classical economics principles are derived from: namely, that all agents in the system being examined act "rationally" given the information they have at their disposal. For securities markets, this means all agents, i.e. investors, receive information at the same time and perceive the information in the same manner.

Should we assume that all investors perceive the same information in the same manner? When INTEL CORP. (Nasdaq: INTC) pre-announced that revenues for the upcoming second quarter would be 5% to 10% lower than originally forecast relative to the prior quarter, initially there was pandemonium. However, very quickly a consensus interpretation emerged of what the news would mean for both Intel and companies that are somehow related to Intel's sales and product cycle. Although there were some wild fluctuations while the market digested the information, by the end of the day Intel's price had been adjusted by roughly the same amount that forward estimates of its earnings would have to be reduced to account for the new information. Investors across the country took Intel's very precise guidance, plugged it into spreadsheets, and adjusted Intel's perceived future value by the roughly the same amount.

For each instance where investors as a group appear to react very rationally to new information, there is another instance where things are not quite as clear cut. Intel gives a neat example of information that would probably be interpreted by most investors in the exact same manner -- numbers. Intel said revenues would be down by a certain amount, costs would be up by another amount, interest income would be so much, and it became child's play to run these numbers through the income statement to see what the possible earnings per share numbers might be going forward.

Something much subtler occurs when the new information is not quantified, leaving a much wider range of possible rational interpretations as a result. Rather than ruthlessly enforcing efficiency in a relatively short period of time, shares quickly become discounted to reflect the higher level of uncertainty created by the perception of new information.

What is efficient pricing? Economists argue that a stock is efficiently priced when rational agents have looked over the current body of known, public knowledge and assessed the possible value of the future cash flows. How can something be priced efficiently if people cannot agree on what is known? Take the example of AMERICA ONLINE (NYSE: AOL), a company valued at about $25 per share six months ago. Overnight the company changed the pricing on what had been until then its most significant product, access to proprietary and non-proprietary online information. The company further argued that over time the value of this product would be replaced by another product -- namely, selling its burgeoning customer base to advertisers by the click. It would shift its accounting as a result and begin aggressively spending money on its infrastructure in order to prepare for the wave of new sign-ups.

Talk about taking your financial model and throwing it out the window. At the time, America Online had never reported a quarter under the flat-fee pricing system. Because of the scale of the company, comparing its potential financial model to that of other flat-fee providers like NETCOM ON-LINE (Nasdaq: NETC), which lacked the ability to generate advertising numbers, had limited value. Although everyone had an opinion about what might happen next, anyone with any degree of intellectual honesty would have concluded that the future was very uncertain at best. There was no compelling evidence to support or refute the new economic model, no matter how often America Online executives showed investors the chart of MTV's advertising growth or how much those short the stock scoffed at the idea of anyone buying advertising on a "chintzy" online service.

After the much-publicized access problems began, another layer of uncertainty was added. If you believed the media, America Online subscribers were quitting in droves and the company probably would not be able to maintain the subscriber base it had reported last quarter. With the subscribers went the potential advertising dollars, many concluded, and thus increased the level of risk in the company. Shares plummeted and many individual investors brazenly declared opening short positions with the stock in the $20s.

How can six months and two quarterly reports explain the stock's current perch close to $60 a share? Can pricing truly be called efficient when a stock nearly triples over the course of six months? Was the information that was known six months ago merely an intricately woven set of assumptions and not really information at all? One of the key problems with explaining the stock market in terms of efficient pricing as a result of known information is that the difference between what is known and what is only assumed or surmised can be quite difficult to figure out. Rather than efficiently pricing companies based on forward prospects, stocks seem to always be chasing efficiency, attempting to capture the most important aspects of the last piece of data and assuming that the next bunch of data points will conform. Still somehow ruthlessly efficient over long periods of time, short term instances where perceptions and reality fail to meet create ample opportunity for the bloodless analysts who are willing to explore the current pricing paradigm and explain to themselves in an analytical fashion why this pricing is not efficient.

Correction: In yesterday's Fool on the Hill, we wrote that Comcast's Series B convertible shares to be held by Microsoft will convert into Class B common shares. We were mistaken. That class of preferred shares converts into Class A Special common stock (Nasdaq: CMCSK). We apologize for the error.

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Randy Befumo (TMF Templr), a Fool
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