Wednesday, December 17, 1997
DJIA:           7957.41   -18.90       (-0.24%)
S&P 500:         965.54    -2.50       (-0.26%)
Nasdaq:         1547.37    -5.63       (-0.36%)
Wilshire 5000   9211.27    -8.24       (-0.09%)
30-Year Bond  101 21/32   -20/32   6.00% Yield


Green Tree Financial (NYSE: GNT) continued its rebound, rising $2 1/2 to $24 5/8 after Morgan Stanley Dean Witter reiterated a "strong buy" rating for the second time since Green Tree declared its "non-cash" addition to valuation reserves in November. Fans of the company say the asset valuation write-down is just a one-time thing due to the compression (flattening) of the yield curve. Critics of the company who pay attention to the banking world would counter that banks do not see manufactured homes as sub-par collateral, that manufactured home buyers aren't de facto sub-par borrowers, and that margins are being squeezed in the home equity lending and mortgage business with improvements in retail banking distribution channels. Analysts concentrating on the yield curve and ignoring the strategic/competitive implications of Green Tree's write-downs may be missing the boat.

Electronics contract manufacturer (ECM) Jabil Circuit (Nasdaq: JBIL) followed up on Solectron's (NYSE: SLR) performance yesterday and topped it. Jabil gained $4 3/8 to $41 1/2 on reporting record Q1 EPS of $0.49, beating the mean analyst estimate of $0.48 a share. Revenues grew 5% sequentially and 57% year-over-year, while EPS grew 4.3% sequentially and 116% year-over-year. Company President Thomas Sanson reiterated guidance that Jabil sees compounded annual growth in EPS of 30%, or 7% sequentially, going forward. Sanson also said, "We think the fear in financial markets is overstated and is painting the electronics industry with too broad a brush," explaining that very little of the company's end-user demand comes from eastern Asia. That also could be said for many so-called "tech stocks," but the question is more one of supply than demand. As long as Jabil can keep ahead of the supply curve (producing at prices that meet the market with a minimum of invested capital), it will continue to keep its place as the Dell of the contract manufacturing sector. (For a spreadsheet on the electronics contract manufacturing sector, hit this link or pop on over to

Multi-line insurance company Cincinnati Financial (Nasdaq: CINF) jumped $25 3/8 to $140 1/4 after Standard & Poor's announced that it will include the company in its S&P 500 index as of Thursday morning. The company will replace CUC International (NYSE: CU) and HFS International (NYSE: HFS), which are merging and will be re-named Cendant Corp. and traded under the symbol "CD" on the New York Stock Exchange. Food distributor Fleming Companies (NYSE: FLM) dropped $1 9/16 to $13 11/16 after the firm was bounced out of the S&P 500 Index and tossed all the way down to the S&P 600 SmallCap Index. The fact that the shares have lost 9.8% a year, including reinvested dividends, since December of 1990 probably has quite a bit to do with the decision, as the company has been one of the biggest underperformers in the index during this decade. Advertising agency Omnicom Group (NYSE: OMC) was promoted from the S&P MidCap 400 Index to replace Fleming and rose $3 13/16 to $77 1/16 on the good news.

QUICK TAKES: Digital animation and illustration software company Macromedia Inc. (Nasdaq: MACR) rose $1 7/16 to $8 11/16 after Piper Jaffray raised its rating on the company to "strong buy" from "buy"... BEA Systems (Nasdaq: BEAS) gained $1 13/16 to $17 as BT Alex. Brown upped its rating on the middleware software company to "strong buy" from "buy"... Snyder Communications (NYSE: SNC) moved $2 higher to $35 after it announced that it has entered into a three-year contract "targeting" $200 million in revenue with GTE Corp. (NYSE: GTE). Snyder will provide a number of "turn-key" marketing services... Brooktrout Technology (Nasdaq: BRKT) rose $2 5/8 to $12 1/2 after Prudential upgraded the supplier of telecom hardware and software to "buy" from "hold"... Digital printing plate and consumables company Presstek Inc. (Nasdaq: PRST) jumped $5 1/2 to $32 3/4 on announcing a supplier and product development relationship with Fuji Photo Film Ltd. (Nasdaq: FUJIY), whose shares were also up $2 to $41 3/8, reflecting last night's buoyant trading in Tokyo.

Franklin Bancorporation (Nasdaq: FNBC) shot up $3 1/8 to $21 5/8 after agreeing to be acquired by North Carolina-based BB&T Corp. (NYSE: BBK) in a stock swap that valued Franklin at $22.28 per share as of last night's close. The acquisition is BB&T's first foray into the Washington, D.C. market... Pharmacyclics Inc. (Nasdaq: PCYC) rose $3 1/4 to $24 1/4 on announcing an agreement under which Alcon Pharmaceuticals Ltd. will market on a global basis the company's Lu-Tex photosensitizer for "ophthalmology indications including age-related macular degeneration"... International Network Services (Nasdaq: INSS) gained $3 9/16 to $22 7/16 after Morgan Stanley Dean Witter raised its rating on the data network caretaker company to "strong buy" from "neutral"... Following Jabil Circuit (Nasdaq: JBIL) higher after that company reported strong earnings growth, printed circuit board manufacturer and electronics contract manufacturer Sanmina Corp. (Nasdaq: SANM) gained $3 9/16 to $64 3/4 and Plexus Corp. (Nasdaq: PLXS) jumped $1 1/2 to $25.

Above ground storage tank supplier Matrix Service (Nasdaq: MTRX) moved $1 1/4 higher to $9 7/16 after agreeing to be acquired by ITEQ Inc. (Nasdaq: ITEQ) for either $10 in cash or 0.83 shares of ITEQ for each Matrix share... NextLevel Systems (NYSE: NLV) gained $2 11/16 to $17 11/16 after the once and future General Instrument Corp. announced that it will exchange 10% of its equity for Tele-Communications Inc.'s (Nasdaq: TCOMA) Headend in the Sky package of digital cable channels. The company also announced that it has reached agreements to supply $4.5 billion worth of digital set-top cable boxes to a number of companies under the industry's Open Cable specifications... South African closed-end gold mining fund ASA Ltd. (NYSE: ASA) gained $1 15/16 to $21 7/8 and Barrick Gold Corp. (NYSE: ABX) climbed $1 1/2 to $18 9/16 as the spot price of gold jumped 2% amid strong seasonal inventory replacement as futures prices showed encouraging firmness above the cash production price of low-cost producers but still below the cash production price of marginal mines.

Sulzer Medica Ltd. (NYSE: SM) added $2 1/4 to $22 9/16 a day after announcing an agreement to acquire medical device maker Spine-Tech Inc. (Nasdaq: SPYN), which is a leader in the spinal fusion cage devices and procedures market... Oilfield products manufacturer EVI Corp. (NYSE: EVI) moved up $3 1/2 to $48 after yesterday announcing a merger with Christiana Corp. (NYSE: CST), a logistics company and holder of EVI stock. For the issuance of its shares to merge with Christiana, EVI gets back an equal amount of its common stock that Christiana already holds... Real estate title insurance underwriter and financial services company Alleghany Corp. (NYSE: Y) gained $17 to $288 on news reports that it will spin off its Chicago Title & Trust Co. to shareholders... Georgia Pacific Corp. (NYSE: GP) gained $3 to $63 after shareholders approved the creation of a separate class of stock (traded under the symbol "TGP") to reflect the performance of the company's timber business. Morgan Stanley Dean Witter restarted coverage of Georgia Pacific today with a "strong buy" rating and initiated coverage of the tracking stock with a "strong buy."


Economic turmoil in Japan, Asia, and Brazil has hit diversified industrial powerhouse Minnesota Mining and Manufacturing (NYSE: MMM) below the belt. The Dow Jones Industrial Average component tumbled $8 7/8 to $85 after warning that fourth quarter earnings would be at least 10% below prior expectations because of the "large, negative impact" currency exchange rates had on the company during the quarter. Fourth quarter earnings last year were $375 million, or $0.90 a share, and 3M was expected to make Q4 EPS of $1.01 this year. Overseas 3M generates 18% of its revenue in Asia, 25% in Europe and the Middle East, and about 10% in Latin America, Africa, and Canada. To recap 3M's woes: Japanese revenues from adhesive tape (sold in yen) translated into fewer dollars as the yen fell about 10% against the dollar during the course of the year. In addition, overall demand in Japan was lower than expected (unit volume is expected to be up less than 5%) and Brazilian unit volume is anticipated to be flat sequentially. Finally, in the U.S. revenues are forecast to be up 5-7%, which is less than the 9% experienced in the third quarter.

Oasis Residential (Nasdaq: OAS), a residential real estate investment trust (REIT), picked up $1/2 to $22 11/16 on agreeing to merge with Camden Property Trust (NYSE: CPT). The merger is a strategic diversification move for Camden, which has real estate properties concentrated in Texas and will pick up real estate assets in the once ultra-hot Las Vegas apartment market as well as Colorado and California. The merger terms call for Oasis shareholders to receive 0.759 shares of Camden for each Oasis share they hold. The shares were valued at $24.29 as of last night's close. Though some analysts were skeptical, Camden said it will spin off some of the Las Vegas properties after the closing on the merger and that the deal with be immediately accretive to funds from operations (an analog to earnings for other companies). REIT junkies without enough information to keep them happy can sign up for the Fool's daily and weekly REIT spreadsheet, which is now in beta. To sign up, simply rip off an email to TMF Yorick, REIT analyst extraordinaire, at

Fair, Isaac & Co. (NYSE: FIC) dropped $8 5/16 to $32 after the firm warned of flat first quarter earnings. Shares of the San Rafael, California-based information analysis and services firm traded more than 26 times average daily volume, ending the day near their 52-week low. Fair Isaac blamed earnings problems on a margin squeeze caused by a number of factors: the recent flurry of bank mergers that has put the kibosh on some orders; customer preoccupation with Year 2000 compliance issues, which has left the company without key data to complete products; and spot staffing shortages that have caused Fair Isaac to hire expensive contract labor to complete some big jobs -- a problem encountered in the third quarter of fiscal 1997. The company says demand remains strong for products and services that integrate the company's risk analysis algorithms and its credit scoring devices, an assertion that seems true given that revenue growth will be in the "mid-twenties," according to the company. Through acquisitions and internal growth, Fair Isaac has come to dominate the market for "decision" technology used for credit risk management, credit bureau scoring, and mortgage and small business loan approval.

QUICK CUTS: Centocor (Nasdaq: CNTO) dropped $6 3/8 to $31 1/2 after the company warned that 1997 EPS would only come in at $0.20. The company has been unable to find a marketing partner for Avakine, an anti-THF inhibitor designed to treat Crohn's disease and rheumatoid arthritis... Interlink Electronics (Nasdaq: LINK) dropped $7/8 to $5 3/4 after the developer of "computer pointing device technology" reported that lower-than-expected yields on its new VersaPad product would cause the company to lose $750,000 to $1 million in its fiscal fourth quarter... In a complicated legal story, VISX (Nadsaq: VISX) is off $1 5/8 to $22 5/8 after the company announced it would exceed fourth quarter earnings estimates of $0.27 a share because it is no longer making royalty payments to Summit Technology (Nasdaq: BEAM) and is suing the company instead. However, if the agreement is found to be valid, VISX will have to fork over the royalties, which may be why the market reacted negatively to the news.

Sundstrand Corp. (NYSE: SNS) dropped $3 9/16 to $48 1/4 after the technology component and subsystem manufacturer specializing in aerospace and industrial markets was downgraded to "buy" at Cowen & Co... Barbecue purveyor Famous Dave's of America (Nasdaq: DAVE) dropped another $1 9/16 to $8 1/16 today after warning yesterday that earnings for the upcoming quarter would not meet expectations... Development stage medical device manufacturer Heartport (Nasdaq: HPRT) was clocked for $3 7/8 to $19 1/2 after BT Alex. Brown downgraded the shares to "buy"... (Nasdaq: AMZN) dropped $13/16 to $52 11/16 after Barnes & Noble (NYSE: BKS) paid America Online (NYSE: AOL) $40 million for exclusive rights to sell books on the online service. Although the news had pretty much already been known, the size of the price tag and the fact that America Online now controls 20 million eyeballs has some investors worried that Barnes & Noble might be catching up.

Wisconsin Central (Nasdaq: WCLX) fell $5 7/8 to $21 3/8 today after the railroad said that higher-than-expected labor costs and expenses related to a derailment and lower-than-expected contributions from its Great Britain and New Zealand units would impact the company's fourth quarter... American Pad & Paper (NYSE: AGP) was dumped for $2 to $9 1/2 after Salomon Smith Barney cut the company to "neutral"... Interra Financial (NYSE: IFI), owner of investment banker Dain Bosworth, dropped $3 15/16 to $62 1/16 after investment banks lost some of the gains they posted yesterday on the news of the Piper Jaffray (NYSE: PJC) acquisition by U.S. Bancorp (NYSE: USBC). Jefferies Group (NYSE: JEF) fell $2 3/8 to $45 for the same reason... Merrill Lynch lowered its near-term rating on O'Sullivan Industries (NYSE: OSU) to "neutral" from "accumulate," which nicked the shares of the ready-to-assemble furniture company for $5/8 to $10 1/2 in the wake of its downward guidance yesterday.

BT Office Products International (NYSE: BTF) lost $1 1/16 to $7 3/8 after the office products distributor announced that it will take a $1 million fourth quarter charge to upgrade its computer system and for severance and facility costs. The move will also hurt earnings in 1998 and 1999... TRO Learning (Nasdaq: TUTR) got schooled for $1 to $5 15/16 after the company became the target of a securities fraud lawsuit seeking class action status... Pharmaceutical Product Development (Nasdaq: PPDI) fell $1 9/16 to $13 1/2 after it said it expects to report earnings in the range of $0.14 to $0.16 per share for the fourth quarter of 1997 versus estimates for $0.20... FirstPlus Financial Group (Nasdaq: FPFG) fell $6 3/16 to $27 after the consumer finance company was downgraded to "accumulate" from "buy" at Sutro & Co.

Wyman-Gordon Co. (Nasdaq: WYMN) fell $1 7/8 to $16 1/2 after announcing a net profit of $13.3 million, or $0.36 per share, for its second fiscal 1998 quarter, even with expectations... Circuit City Stores (NYSE: CC) fell $1 5/16 to $33 7/8 after reporting Q3 earnings that matched estimates of $0.14 per share. The electronics retailer saw an increase in costs and lower same-store sales for the quarter. Comments about strong price competition at the low-end by Circuit City CEO Richard Sharp also brought down competitor Best Buy (NYSE: BBY) $2 to $34 3/8... Networking products company Ascend Communications (Nasdaq: ASND) dropped $2 1/8 to $24 3/4 after the company was taken off Goldman Sach's "recommend list" and rated a "market outperform."

An Investment Opinion by Louis Corrigan

Attention Stock Shoppers!

For everything there is a season, and the market is no different. All year 'round investors can worry about constant companions: Alan Greenspan, inflation, the dollar, and corporate earnings. Sporadically, we have one-hit wonders that make a couple of magazine covers and then fade away: the Asian contagion and, when in doubt, El Nino. Yet between the malady du jour and the old standbys, Wall Street also works on its own seasonal calendar, with the summer slowdown in technology stocks supposedly followed by a summer rally just as surely as the kids come home from camp suntanned and mosquito-bitten. When the November/December period arrives, then, we should all realize 'tis the season for bargain shopping. The talismanic codes of this ritual are "tax-loss selling" and the "January effect."

Tax-loss selling is a straightforward phenomenon. As the year turns into the final stretch, investors start thinking about the taxes to be paid on capital gains. Those who can balance gains with losses can cut their taxes. No one likes losers, but like poor relations, nearly all of us have them. Rather than leave these paper losses to get rattier and clutter an otherwise well-kept portfolio, many investors make them earn their keep by canceling out some of those gains. The new tax break on long-term gains complicates the picture a bit by requiring you to match gains and losses based on your holding period. Still, the logic is the same. And it's as infectious as the Asian contagion itself since everybody must pay The Man (Uncle Sam) but nobody wants to.

The prime candidates for tax-loss selling are stocks that are heavily owned by individual investors and that have gotten whacked enough for many of these shareholders to be underwater. The stocks you thought about cutting your losses on but didn't have more than likely become tax-loss fodder for others. Generally, smaller-cap stocks are more likely targets since they experience broad price swings. Selective mid- to large-cap tech stocks that have been hit by fundamental news, say the disk drive makers in this market, are also good candidates. Furthermore, "window-dressing" by institutional investors can reinforce tax-loss selling trends, too. Big money runners are often anxious to protect year-end profits and avoid the embarrassment of holding losers. So they will shoot their dogs, shifting the money into year-to-date winners or more defensive large caps like a Coca-Cola or pharmaceutical companies.

As long as stock trades settle before January 1, they count for tax purposes. So the window for tax-loss selling doesn't close until just after Christmas. Yet, tax-loss selling is one of those market inefficiencies that pretty much everyone recognizes, so its effects have become more diffuse. Many investors now know that the dogs of October really are likely to get mangier before the new year unless these companies report some tail-wagging good news in the interim, so selling pressure is beginning earlier. Also, the tax code's "wash sale" rule states that you can't take a capital loss on a stock if you sell it and then buy back a "substantially identical" security within 30 days. If you want to benefit from a tax loss on Howler Inc. but also think it's due for a turnaround, you have to wait 31 days after selling it before you can buy it back. The "wash rule" encourages a tax-loss sale by mid-to-late November. Why? The January effect.

The January effect is the flipside to tax-loss selling. Various studies show that, historically, stocks generally do very well in January, but small-cap stocks do even better. One study showed that over the last 50 years, small stocks have seen January price gains of 5.8% on average, clobbering the 1.7% gain for the S&P 500. Ibbotson Associates, for one, compared the January performance between 1926 and 1994 of the smallest and largest New York Stock Exchange issues, finding that smaller stocks outperformed the giants by an average of 10%, with the pattern holding up 91% of the time. Other research shows that from 1974 to 1995, microcap companies valued at less than $60 million enjoyed an average January return of 9.8%, half their annual appreciation. Small-caps worth $60 to $600 million had 4.9% January returns, a third of their annual gain, while the $2.4 billion and larger behemoths saw 1.95% January gains, or about a sixth of their annual gains.

The market, in general, rallies because institutional money managers become less defensive and individual investors increasingly pour year-end bonuses into stock mutual funds. Money managers quickly put it to work. The small caps tend to outperform the rest of the market because tax-loss selling and window dressing have beaten down these issues, or at least artificially constrained them. January, then, is the yin to the year-end selling yang. History, of course, doesn't always repeat itself. Last January, small caps lagged while the S&P 500 barreled ahead. Plus, after lagging, small caps were then pummeled in the spring correction.

Even with caveats, though, this seasonal pattern is deeply motivated, and unlike many other market inefficiencies that are discovered and then eradicated, this pattern of unusual selling followed by strong buying remains pretty much a tradable inefficiency. It's just a bit smoothed over, with tax-loss selling season now beginning in late October and extending through mid to late December while the January effect may begin in early to mid-December and extend into early February. That's part of the reason that trading in smaller issues, in particular, can get awfully choppy this time of year: there's a cold front meeting up with a warm front. No doubt El Nino is involved, too.

This means that you may get a better price for your dogs if you sell them early. Also, shorts may find good candidates in early to mid November by screening for stocks well off their 52-week highs (say a relative strength of 30 or lower) but not yet below book value, for example. On the other hand, the year-end psychology inevitably gets a little overdone. Some investors begin to throw in the towel as they see their losers lose even more ground, adding further to an out-of-favor stock's decline.

As any good Christmas shopper knows, you can get terrific bargains if you have price discipline and patience and don't sweat the fact that the cool jacket you're eyeing might actually be sold out before the "70% off" sign arrives. Mid-December is a great time to be a coldly calculating stock shopper. If in November you make a list of out-of-favor stocks you'd like to own and the price at which the risk is not just fair but minimal, you'll likely be surprised by how many reach your targets. In fact, seeing how easily a fair price meets with further discounting during tax-loss season may encourage you to have more stringent price discipline throughout the year. That way, even if the January effect doesn't come until the summer rally, tax-loss selling season will be a time of ho-ho-hos rather than a time of mangy mutts biting at your heels.


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Dale Wettlaufer (TMF Ralegh), Fool Two
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