Wednesday, December 10, 1997
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Enron Ventures Corp., a wholly owned subsidiary of Enron Corp. (NYSE: ENE), will purchase a 15% interest in the Catalytica Combustion Systems unit of Catalytica Inc. (Nasdaq: CTAL) for $30 million in cash. Catalytica was up $3/4 to $11 1/2 on the news. Enron also received a three-year option to purchase 5% more of Catalytica for $14.4 million in cash, which values the Combustion Systems unit from $190 to $200 million, or about 41% of the market capitalization of the entire company. The price of Catalytica's shares has been stagnant for some people buying over the last year, particularly those who bought after the company's announcements of significant deals such as an agreement from General Electric (NYSE: GE) to market Catalytica's pollution control systems for gas turbines and an agreement to purchase a 1.8 million square foot pharmaceuticals production facility from Glaxo Wellcome (NYSE: GLX). Despite the stagnation in the price of Catalytica shares (due to heavy share issuance in past year), this is a creative management team and a company with excellent potential.

Every independent brokerage still considered an acquisition target except Hambrecht & Quist (NYSE: HQ) had a good day today. Donaldson, Lufkin & Jenrette (NYSE: DLJ) powered ahead $4 1/8 to $87 5/8 on rumors that Chase Manhattan (NYSE: CMB) might be interested in purchasing the firm. As one of major shareholder Equitable Companies' (NYSE: EQ) major profit centers, many consider a DLJ acquisition unlikely. Memphis-based Morgan Keenan (NYSE: MOR) powered ahead $1 11/16 to $25 1/4 and Los Angeles-based Jefferies Group (NYSE: JEF) crept ahead $3 9/16 to $83 1/4. Another factor that may be driving these shares is the excellent third quarter results many of these companies have posted that show momentum in the trading business still continues to grow, confounding expectations of an eventual slowdown in growth.

Although large temporary employment agencies have been getting killed over the past two years, shares of Labor Ready (NYSE: LBOR) have definitely bucked the trend. Up $2 3/4 to $21 today, the stock has come off of its 52-week low of $4 3/8 in April with a vengeance. Today the firm announced it would continue to buy its own stock on the open market as part of its repurchase program and that it was "comfortable" with estimates of $0.34 EPS for calendar 1997, saying it would meet or beat these numbers. Chief Executive Glenn Welstead also said that 1998's $0.56 EPS estimates would be a cinch as well. This is remarkable because unlike many companies in the industry, Labor Ready relies completely on organic growth and not on acquisitions to increase revenues and earnings. As the company does bread and butter "light industry labor," the most commoditized chunk of the temporary service universe, these good results could be considered a sign of strength in the temporary help market beset by overcapacity for the last two years. However, investors should keep in mind that only a month ago Kelly Services (NYSE: KELYA) announced it would produce disappointing results over the next two years.

Montana Power (NYSE: MTP) jumped $15/16 to $28 after announcing that it would sell its Montana electric-power generating facilities. The company will completely focus on marketing and distribution of electric power and natural gas, exiting the power generation business entirely. By selling 13 dams and 4 coal-fired plants, Montana Power sidesteps a number of complicated regulatory issues that make it difficult for a utility to generate power in a region where it also distributes and markets power. The company will put more emphasis on selling power in California and expanding its "Touch America" long-distance service. It is more than likely that a company with the resources of Montana Power will be more successful in the power selling business than a small fringe company like Keystone Energy Services (OTC: KESE), which has received attention from online investors lately.

QUICK TAKES: Multilevel marketer Avon Products (NYSE: AVP) rose $1 5/8 to $62 1/8 after the company was put on the Goldman Sachs "recommended list"... Toymaker Hasbro (NYSE: HAS) jumped $2 7/16 to $33 11/16 after Bear Stearns put a "buy" rating on it with a price target of $46, prompted by yesterday's decision to downsize 20% of its workforce... Positive comments by UBS Securities analyst Joe Dougherty drove biotech LeukoSite (NYSE: LKST) up $1 to $11... Appliance manufacturer Sunbeam Corp. (NYSE: SOC) recovered $1 7/16 to $40 7/16 after CIBC Oppenheimer reiterated a "buy"... Retailer Williams Sonoma (NYSE: WSGC) climbed $1 5/8 to $38 1/8 after BT Alex. Brown analyst Marcia Aaron went to "strong buy."

General Re (NYSE: GRN) rose $3 3/16 to $217 after the board voted to authorize the repurchase of three-quarters of a billion dollars worth of common stock, or 4.4% -- roughly what the reinsurance giant repurchased in 1995 and 1996... Contract manufacturer and venture capital firm EA Industries (NYSE: EA) added $1/2 to $6 1/2 when its contract manufacturing division announced $22 million in new orders. Now if it would only make some money... Box Hill Systems (NYSE: BXH) jumped $9/16 to $11 3/8 after it got a "1-strong buy" rating from relative unknown Barber & Bronson... Stone Energy Corp. (NYSE: SGY) jumped $2 1/16 to $34 1/16 after Mark E. Fischer of CS First Boston put a "strong buy" on the company's stock... Contract manufacturer Plexus (Nasdaq: PLXS) jumped $3 3/8 to $23 after the company was reiterated a "buy" by Schroder & Co.


Recent PepsiCo spin-off Tricon Global Restaurants (NYSE: YUM), which operates Pizza Hut, KFC, and Taco Bell, dropped $1 15/16 to $32 1/4 after the company reported that it will take a fourth quarter after-tax charge (largely non-cash) of roughly $2.79 per share to "refocus" its business. The charge will be used to close its less profitable locations and write down the value of those it plans to sell to franchisees. About 600 restaurants will be closed domestically and 143 will be closed in international markets; 667 stores (roughly split between U.S. and overseas locations) will be sold to franchisees. The company that takes its name from a combination of "three" and "icon" decided to rid itself of a lot of Pizza Hut locations due to the sheer number of marginally productive stores and the competitive pizza environment -- further evidenced by the recent shortfall pre-announcement by NPC International (Nasdaq: NPCI). For the period ended Oct. 21, Tricon reported a 4% decrease in same-store sales at its Pizza Huts units. Tricon hopes that this move will help the company put its best foot (read: stores) forward in 1998.

Shares of Vivus Inc. (Nasdaq: VVUS) dropped $6 5/16 to $13 13/16 after the male impotence products company said that it expects a 25% decline in sequential revenue from its third quarter results of $39.1 million. The company attributed the problems to production delays at its new Lakewood, New Jersey facility stemming from personnel and equipment transfer issues between it and the company's old facility in the same city. These delays will also affect the company's ability to open its second facility, which will be pushed back "several months" due to the fact that it needs to get U.S. and European regulatory approval. Impotence obsessed short-seller Asensio & Co. weighed in on the whole affair, asserting that the expected drop is a result of "poor product performance and early non-recurring sales to undisclosed sources." The combined delays also will cut shipments of the company's products for the first two quarters of 1998. Vivus will be pressured by Pfizer's 1998 release of Viagra as well as Zonagen's Vasomax (still pre-NDA); both are orally administered impotency drugs.

Fastenal (Nasdaq: FAST) dove $9 1/4 to $41 today after the company announced that it would not make fourth quarter earnings estimates. Lower-than-expected margins on industrial maintenance supplies and tool sharpening, lower-than-expected revenues during Thanksgiving week, and higher operating expenses from hiring 1,000 new bodies are all to blame. The company will earn $0.26 to $0.27 per share versus $0.21 per share a year ago. The disappointment is hardly shocking, as it will be the seventh estimate miss in the last eight quarters. Large shareholders like Janus Funds have been selling shares throughout the year as concerns about shrinking margins increased. September marked the first significant sales by the firm's Chief Executive Officer (CEO) since before the stock crashed in 1994. Fastenal sells nuts, bolts, and other stuff to businesses with an emphasis on service and cost control, often delivering hard-to-find fasteners within hours if need be. Fastenal has increased its share price by 47% per year since its 1987 initial public offering.

Bay Networks (NYSE: BAY) continued to get hosed today, dropping $2 3/8 to $25 3/16. Yesterday a downgrade from the Donaldson, Lufkin and Jenrette analyst after a company visit spooked most investors. The skinny is that Bay is seeing product transition issues and will be unable to turn routers into a growth area, which it previously had believed was possible. As the stock valuation hinged on the company executing a credible turnaround from years of underperformance and mismanagement, it is no wonder the shares are compressing today. Estimates for fiscal 1998 and 1999 will probably be revised downward in light of the bad news on routers, and analysts are again seeing router-king Cisco Systems (Nasdaq: CSCO) prove its resiliency. Since December of 1993, Bay has delivered a whopping 9.0% average annual return to investors while the S&P 500 would have netted investors 23.0% over the same period.

QUICK CUTS: Freeport-McMoRan Copper & Gold (NYSE: FCX) announced that it has reduced its regular cash dividend on its Class A and Class B common shares to $0.20 per share annually from the current annual dividend of $0.90 per share. The stock fell $2 7/8 to $16 3/4... The fifth largest long-distance company in the U.S., Excel Communications (NYSE: ECI), dropped $2 9/16 to $16 11/16 after it announced last night that earnings will fall below analysts' expectations for the fourth quarter. The company expects to earn between $0.17 and $0.22 per share versus estimates of $0.33... Multiple computer vendors and retailers were down significantly today, including Compaq Computer Corp. (NYSE: CPQ), which dropped $3 3/8 to $60; Dell Computer Corp. (NYSE: DELL), which fell $2 13/16 to $91 1/8; and CompUSA (NYSE: CPU), which slid $3 13/16 to $31 7/8. Most reports cited Oracle's weakness and the continuing crisis in South Korea as reasons for the decline.

Salomon Smith Barney lowered its rating on shares of healthcare provider Humana Inc. (NYSE: HUM) to "outperform" from "buy," which slashed the share price $2 3/8 to $21 3/8... Vimpel-Communications (NYSE: VIP) sank $3 9/16 to $33 9/16 as the Russian cellular telecommunications posted Q3 earnings of $0.74 per share versus $1.02 in the prior year quarter... The Wall Street Journal's Heard on the Street column this morning stated that takeover talks between Merrill Lynch (NYSE: MER) and investment banker Hambrecht & Quist (NYSE: HQ) had been put on hold because of "the sharp rise in Hambrecht's stock price," which helped cut H&Q shares $3 13/16 to $38 3/4... Green Tree Financial (NYSE: GNT) dropped $2 1/8 to $27 today as the company filed a registration statement for $500 million in lease-backed notes.

Robertson Stephens analyst Tony Robertson cut his rating on Finnish telecom equipment maker Nokia Group (NYSE: NOK.A) to "market underperformer" from "market performer," which hit shares for $5 3/8 to $71 7/8... Forest products company Willamette Industries (NYSE: WLL) slipped $2 1/8 to $30 1/8 on announcing that fourth quarter earnings will not meet analysts' estimates of $0.28 a share... Global manufacturing company Tenneco (NYSE: TEN) lost $2 7/8 to $41 7/16 after saying that it expects to post fourth quarter earnings from continuing operations between $0.40 and $0.45 cents a share, well below estimates of $0.62 per share... Computer products distributor MicroAge Inc. (Nasdaq: MICA) dropped $4 15/16 to $16 3/4 after posting Q4 EPS of $0.40 versus estimates of $0.43.

InterVoice, Inc. (Nasdaq: INTV), a provider of call processing equipment for inbound and outbound call-centers, fell $1 5/8 to $8 after the company stated that Q3 earnings would fall between $0.01 and $0.04 per share, below expectations of $0.11 per share... Oxford Health Plans (Nasdaq: OXHP) continued its recent slide today, dropping another $2 15/16 to $17 1/8 after the company said it will post a fourth quarter loss of $120 million as well as a loss for the year. State regulators ordered Oxford to boost its reserves for doctor's bills by $164 million... Ascend Communications (Nasdaq: ASND) helped Newbridge Networks (NYSE: NN) lose $3 to $36 5/8 today after releasing its new B-STDX Multiservice Frame Relay 8000/9000 WAN switches that compete directly with Newbridge's products... British biotech company Cortecs International Ltd. (Nasdaq: DLVRY) added $1 3/4 to $14 3/4 after it said that trial data showed its oral capsule form of insulin was effective in Type II diabetic patients.

Commonwealth Industries (Nasdaq: CMIN) was cut $1 1/8 to $16 1/4 after the aluminum sheet maker was reduced to "near-term neutral" from "near-term accumulate" by Merrill Lynch... Corning Inc. (NYSE: GLW) dipped $2 3/8 to $39 15/16 after its was revealed that the glass materials company dropped plans to sell its customer housewares unit for $825 million... Information processing concern DST Systems (NYSE: DST) fell $1 15/16 to $42 5/8 after a downgrade from AG Edwards to "maintain position" from "accumulate"... Satellite cellular company Iridium World Communications (Nasdaq: IRIDF) fell $1 7/8 to $37 1/8 after new coverage from CIBC Oppenheimer was initiated with a "hold"... Foundation Health (NYSE: FHS) dropped $1 7/16 to $25 3/8 after a downgrade from SBC Warburg Dillon Read to "neutral" from "outperform."

Corrections and Clarifications: In yesterday's Quick Cuts, the item on Protein Design Labs (Nasdaq: PDLI) should have read: "Protein Design added that this will open new partnering activities and will not affect near-tern financial results..."

In Thursday's (12/4) Quick Takes, we wrote that InVision Technologies (Nasdaq: INVN) received an $11 million contract from the federal government to develop landmine detection equipment. This contract was actually for $4.5 million, which brings the company's total R&D contracts to approximately $11 million.

An Investment Opinion by Louis Corrigan

Penny Stocks and Root Canals

Norman is my dental hygienist. He cleans my teeth. But last week, before he got down to the business of scraping off the plaque and adding a revivifying sheen, we talked shop. Some vague mention six months ago about a possible root canal had given me intimations of mortality and thus inspired me to start flossing daily. But in checking my gums, Norman noticed some trauma. In my vigorous effort to ensure my teeth a brighter future, I was actually tearing into my gum line, worsening some receding that it was my goal to prevent. Somehow, it had never exactly occurred to me that I might not know what I was doing. How complicated can flossing be, right?

Happily, I found I could return the favor. Norman's about 30 years old, with a wife and two children. He works six days a week cleaning teeth. He has also started his own modest used car business, fixing up European imports. He's a likeable guy who clearly enjoys working, but he's started to think about ensuring his family a brighter financial future and himself some more leisure. He pulled out the local stock pages and told me he wanted to start investing. His first question was about how to decipher those abbreviated company names printed in the paper. The second question was about penny stocks. Some of his buddies seemed to think you could make huge profits on these things.

As one of the writers of the Fool's Daily Double/Trouble, I frequently receive e-mails from readers suggesting I look into some terrific growth story, say EZ Environment, a small company with a cure for America's waste disposal problems. I check the quote on AOL and see that it trades for $1.25 per share on the "OTC," which means the Over-the-Counter Bulletin Board quote system run through Nasdaq's computer systems. From there, I look for a recent filing with the Securities and Exchange Commission (SEC). Nada. At that point, I write the reader back asking how he can feel comfortable investing in a penny stock that provides no basic information to the public about its business. I ask if he realizes how easy it is to manipulate these stocks. I ask whether he'd really rather be a speculator than a Fool and whether he's prepared to lose all his money. I'm tough.

Educating people about how to invest, as the Fool attempts to do, is no doubt the best way to prevent Norman, his buddies, my correspondents, and the widow next door from recklessly or naively throwing away their money. But it's not enough. Just as I expect my dental hygienist to keep me from screwing up my gums if he wants my business, so too should individual investors expect the stock exchanges to prevent the neophyte flossers of the investment world from tearing into the root of their financial future. Sometimes we all need to be saved from ourselves. And sometimes that's simply good business for everyone involved.

Safeguarding investors from seriously dubious companies is indeed good for the exchanges and good for American business. It ensures that companies that can meet at least some basic quality requirements and that are in need of capital won't find that that capital has been squandered by investors on crappy outfits being promoted by suspect brokers using cold-calling hype. As a result, good companies will be around longer, paying fees to the exchanges and attracting new investors. That in turn will attract more companies to the markets, which will generate more listing fees. Thankfully, Nasdaq has finally come to understand this virtuous circle.

According to a report Tuesday in The Wall Street Journal, this would-be "market for the next 100 years" may cut its ties to some 3,400 of the 6,800 microcap companies that now trade on the OTC Bulletin Board. This is excellent news. Though associated with Nasdaq, the Bulletin Board (BB) is really just an electronic link allowing professional dealers to share quotes and trading data on microcap stocks. These are not "Nasdaq stocks."

Both the Nasdaq National Market System, home to the likes of Intel and Microsoft, and the Nasdaq SmallCap market have newly beefed up listing requirements that include stronger minimum price, capitalization, and net tangible asset standards, as well as some basic corporate governance strictures. Companies listed on these two Nasdaq markets are not necessarily good investments, but for the most part, they do meet some bare bones standards that every investor should demand. For example, they all file regular quarterly and annual reports with the SEC, which are available online through the SEC's Edgar database or one of the commercial Edgar vendors.

By contrast, Bulletin Board issues currently don't need to meet any significant requirements. Indeed, the firms that might be ousted don't make regular filings with the SEC, meaning an investor may not be able to find out diddley about the business. As might be expected, the Bulletin Board is the cesspool of American finance, rife with scams and charlatans, as a recent Business Week cover story reminds us. That's why the Fool will not open message boards for BB companies. To put it bluntly, these firms are so small and so risky that one could make a strong case for why they should not be permitted to trade publicly at all. At the minimum, it's proper to make it difficult for investors to find and invest in these companies, to educate investors about the risks involved, and to ensure that the brokers who deal in these securities have some integrity.

According to the Journal, that's what's in the works. Led by chair Frank Zarb, the board of Nasdaq's parent, the National Association of Securities Dealer (NASD), is reportedly planning on Thursday to approve a proposal that would require companies to file regular financial statements with the SEC in order to remain on the BB. Companies that don't meet this new standard would not stop trading, but they would no longer do so over Nasdaq's computer systems. These stocks would become significantly less accessible to investors as all trades would be handled through phone calls with brokers, with prices reported in the so-called "Pink Sheets" owned by the National Quotation Bureau.

The proposal would also place some new burdens on broker-dealers. First, brokerage firms couldn't quote a price on a security unless they had reliable financial information on the company. Second, brokers who recommended BB stocks to clients would be required to review the financial statements before doing so, something that might make it easier for swindled customers to come back later and sue their brokers. Third, brokers would have to send investors a detailed statement disclosing differences between the Bulletin Board and other markets. Though it's safe to say the latter will stop short of saying the obvious -- that BB companies are high-risk rubbish that investors should avoid -- at least it's a start.

Since the Justice Department brought its collusion case against Nasdaq's market makers two years ago, the NASD and Nasdaq have made a number of moves to scrape off the plaque and present a respectable face to the world. These moves are necessary for Nasdaq to remain competitive, particularly with the New York Stock Exchange, which has successfully stolen away some prize Nasdaq jewels in the last year or so. One could still argue that companies that can't make the Nasdaq SmallCap market's minimum requirements (as most BB companies cannot) don't even deserve the exposure afforded them by the OTC Bulletin Board. Nonetheless, itv is smart for Nasdaq to clean up its ties to these speculative microcaps. And any step that makes it tougher for novice investors like Norman to inadvertently screw up their financial dentin should be applauded.


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