DJIA: 7908.25 -7.72 (-0.10%) S&P 500: 970.43 -0.41 (-0.04%) Nasdaq: 1570.35 +5.32 (+0.34%) 30-Year Bond 102 4/32 -22/32 5.97% Yield
1997 Total Return DJIA: +24.9% S&P 500: +33.4% Nasdaq: +21.6% 30-Year Bond Yield: -0.67 percentage points
Computer retailer CompUSA (NYSE: CPU) gained $1 3/8 to $31 after announcing that comparable-store sales for its fiscal second quarter came in at 8.8%, beating expectations for same-store sales of 6%. The company attributed the gain to sales of sub-$1000 personal computers, as well as hot software titles like "Riven" from Broderbund (Nasdaq: BROD) and "Quicken Deluxe 98" from Intuit (Nasdaq: INTU). Findings from a joint study by International Data Corp. and ACNielson indicate that of those planning to purchase a PC by the end of January, 48% are first-time buyers and nearly 30% are budgeting less than $1,250 for their systems. CompUSA assuaged fears that competition from Best Buy (NYSE: BBY) and Circuit City (NYSE: CC) would hurt it during the critical holiday season. This year CompUSA introduced its own brand of built-to-order PCs, generally for high-end specialty users. (CompUSA's core business is sales of PCs from other manufacturers). The company has beat earnings estimates for 12 out of the last 13 quarters, and currently trades at 24 times 1998 estimates.
After getting drilled for 23% since the beginning of the month over concerns surrounding the efficacy of its products, Enamelon (Nasdaq: ENML) flashed a smile and gained it all back today, rising $2 1/2 to $12 7/8 on news that positive clinical results supporting the company's claims will be released in early 1998. Five studies will be published at the Annual Meeting of the American Association for Dental Research in March and two additional studies will be presented at the June meeting of the International Association of Dental Research. Thus far, the company has been loathe to claim in its advertising that calcium and phosphate are "active ingredients" in its products -- which would demand evidence from clinical trials supporting the two as safe and effective for the prevention of cavities. Enamelon, in order to distinguish itself from other fluoride toothpastes, maintains that its toothpaste makes fluoride work better by adding increased quantities of calcium and phosphate to saliva, which gives the re-mineralization process a boost.
Analyst upgrades helped a number of securities in diverse industries today. American HomePatient (Nasdaq: AHOM) gained $2 7/16 to $23 1/2 as the home health care services provider was reiterated "buy" at BT Alex. Brown. Semiconductor company ATMI Inc. (Nasdaq: ATMI) rose $2 5/8 to $24 1/4 after it was reiterated "strong buy" at Advest Inc. Flatbed trucking company Boyd Brothers (Nasdaq: BOYD) peeled out for $1 1/8 to $8 3/8 after it was raised to "aggressive buy" from "buy" at Morgan Keegan. Savings and loan Eagle Bancshares (Nasdaq: EBSI) ascended $2 1/4 to $22 after it was rated a "buy" in new coverage at J.C. Bradford & Co. Oregon Steel Mills (NYSE: OS) rose $2 7/8 to $21 5/16 after receiving a Jensen Securities upgrade to "buy" from "neutral." Another steel producer, USX-U.S. Steel (NYSE: X), charged $2 1/8 to $31 1/4 after the company was raised to "outperform" from "market perform" at Sanford C. Bernstein & Co. Finally, software and services company Viasoft (Nasdaq: VIAS) rose $3 1/4 to $42 1/4 after it was reiterated a "buy" at Wessels Arnold & Henderson.
QUICK TAKES: Sterling West Bancorp (Nasdaq: SWBC) rose $5/8 to $6 3/8 after announcing that it would acquire Pacific Bank (Nasdaq: PBSF) for $11.8 million in cash... "Large-size" women's apparel retailer Catherines Stores Corp. (Nasdaq: CATH) rose $1 to $7 after it reported December comparable-store sales "in the low double digits"... Computer retailer CDW Computer Centers. (Nasdaq: CDWC) gained $2 13/16 to $52 1/8 after receiving a "top ten" mention in Computer Retail Week magazine's top 100 retailer issue... Duramed Pharmaceuticals (Nasdaq: DRMD) gained $1 3/16 to $5 11/16 after the company received FDA approval for its generic version of Bristol-Myers Squibb Co.'s hormone replacement therapy Estrace.
Wholesale wireless communications products company Intellicell Corp. (Nasdaq: FONE) rose $1 1/4 to $5 after ending acquisition talks with Pacific Unplugged Communications... First Security Corp. (Nasdaq: FSCO) shot $3 9/16 higher to $41 7/8 after the bank received Federal Reserve approval to expand its investment banking services and offerings through a new unit, First Security Capital Markets Inc... Quadramed Corp. (Nasadaq: QMDC) added $2 to $27 1/2 after the healthcare software company acquired closely held Rothenberg Health Systems... Shipbuilder Halter Marine (NYSE: HLX) rose $2 1/8 to $28 7/8 after its Engineered Products Group acquired all of the assets of McElroy Machine & Manufacturing and was reinstated on Furman Selz's "recommend list."
Sucked into the vortex of a disappointing second half of 1997 at Micron Electronics (Nasdaq: MUEI), electronics contract manufacturer CMC Industries (Nasdaq: CMCI) was told today that Micron is severing the business relationship between the companies. Whereas the announcement last week of the sale of Micron's contract manufacturing business and its plan to concentrate on PC manufacturing could have been construed as good news for CMC, that's apparently not the case. Rationalization for the lagging direct marketer of PCs is going farther than that, leaving CMC out in the cold. In only four fiscal quarters, CMC had ramped up sales to Micron from nothing to 42% of CMC's total revenues last quarter. CMC shares were slammed for $4 15/16 to $5 7/8 on the news.
Dallas-based "food distribution management company" Fresh America (Nasdaq: FRES) today announced that it will miss earnings estimates for the fourth quarter and for the year. The company also announced the acquisition of three food distributors located in San Antonio, Dallas, and Atlanta. The acquired companies are expected to add $46 million in revenues in the coming year. Fresh America has trailing revenues of $317.7 million. More importantly to shareholders, judging by today's $5 1/8 drop to $19 1/4 in the company's share price, Fresh America announced that it will record charges to earnings of $650,000 for consolidating certain facilities. Before those charges, the company expects to report Q4 EPS of $0.35 to $0.40 and 1997 EPS of $1.25 to $1.30, below the Q4 estimate of $0.46 and 1997 estimate of $1.35. The company said its earnings shortfall is due to below plan sales in certain markets and additional expenses for hiring people involved in acquisition activities.
Disposable diaper maker Paragon Trade Brands (NYSE: PTB), once a part of the investing zeitgeist when brands were supposedly dying, lost $7 3/8 to $12 7/8 after a judge ruled that the company's disposable diapers with an "inner leg gather" feature infringed on the intellectual property of diaper king Procter & Gamble (NYSE: PG). Paragon estimates that damages could reach $160 to $200 million, which could eat up all the company's tangible shareholders' equity, if its patent infringement appeal and antitrust counterclaims against the colossus of Cincinnati come up empty. On the antitrust front, things aren't looking that great, as a district court granted a P&G motion to summarily dismiss Paragon's claim in 1996. Incredibly, perhaps, Paragon did not take any reserves on its balance sheet for this contingency.
Intranet and Internet applications software developer Netscape Communications (Nasdaq: NSCP) fell $2 1/2 to $24 3/8 after Morgan Stanley analyst Mary Meeker wrote in a research note today that she thinks there is a 60% chance the company will miss its quarterly EPS estimate of $0.14. While Meeker kept a "strong buy" rating on the stock, she said at $18 to $20 the company's "base valuation" would be "reasonable." Valuation-concerned investors might interpret Meeker's note as meaning that Netscape is fairly valued at $18 to $20, with anything above that being a premium due to market share, strategic moves, and company talent. Meeker's maintenance of a "strong buy" rating might be explained as the analyst not knowing for sure that the company will miss, not wanting to miss out on the 40% possibility in the hypothesis that it will make its numbers for the quarter, and by the fact that Meeker is known to act more like a rational investor than a hair-trigger analyst.
QUICK CUTS: Athletic apparel company Russell Corp. (NYSE: RML) lost $1 7/8 to $26 9/16 after saying that it expects to report fourth quarter EPS as low as $0.30, way below the mean estimate of $0.58. Prices in its Jerzees lines were soft because of tough competition while sales were below plan in Licensed Products and the International segment, but the company expressed an optimistic outlook for 1998 due to process improvements and projected segment sales increases... Poncebank (NYSE: PBK) lost $1 1/8 to $18 7/8 on no news, but the percentage of noncurrent loans in its home market of Puerto Rico is tied for the highest among a group including the 50 states and Puerto Rico. At 2.2%, it's tied with Delaware, which has a higher noncurrent loan rate because of the heavy concentration of credit card banks in that state (data as of Q3 1997).
Resolve to Open a Roth IRA
After thinking about what I've learned about investing this year that might help me next year, I ended up with some peculiar resolutions. For example, "Let your winners ride... unless you foresee them falling out of the saddle, landing on their butts, and being dragged through the mud before making it around the victory lap." Knowing when to take a profit and when to just hold tight to the reins still seems like one of the most difficult decisions in investing and a topic for endless second-guessing. It gives rise to corollary resolutions especially related to those investments that deliver fast profits: "Don't look a gift horse in the mouth... just be sure to sell it before you wake up next to it in the barn."
Rather than regale you with more contradictory advice disguised as feeble aphorisms, I'd like to suggest that your top resolution for the new year should be to investigate whether a Roth IRA is right for you. My suspicion is that most of you will find that it's the greatest tax break ever invented for the average investor and positively the best way for you to save for retirement outside of a 401(k) plan where your employer matches your own tax-deductible contributions.
Included in last summer's Taxpayer Relief Act, the Roth IRA offers a new spin on the old-fashioned Individual Retirement Account. With the traditional IRA, many workers can make an annual tax-deductible contribution of $2,000 ($4,000 for joint filers). The money can then be invested in stocks, bonds, mutual funds, and so on, with taxes on gains deferred until the money is withdrawn after age 59 1/2 when it is taxed as regular income. The beauty of the conventional IRA is that the government is offering you three distinct tax breaks. First, it's subsidizing your savings up front. You deposit $2,000, but if you're in the 28% bracket, $560 of that would otherwise have gone to pay taxes. Uncle Sam is basically handing it back to you. Next, you're allowed to grow that savings free of taxes until you retire, helping your profits accumulate much faster. Then, when you finally start withdrawing the money, you're likely to be in a lower tax bracket than you were during your working years.
There are a few caveats. You pay a 10% penalty for early withdrawals. Plus, many folks covered by 401(k) or other corporate pension plans make too much ($20,000 for individuals, $40,000 for couples) to enjoy the tax-deductible contribution. However, they can still put the money in and enjoy the second and third parts of the package. Moreover, the regular IRA income limits for participants of corporate retirement plans will rise in 1998 to $30,000, or $50,000 for joint filers.
If the traditional IRA is good, the Roth is better because it offers tax-exempt rather than simply tax-deferred savings. One word makes a big difference. While both allow you to accumulate wealth without paying taxes along the way on your profits, the regular IRA ultimately sticks you with a tax bill for those profits (plus your initial contributions). The Roth doesn't. As long as you follow the rules, you never pay taxes on your gains.
What's the catch? In exchange for even more favorable tax treatment in the third phase (i.e., no taxes at all), your initial contribution must be paid for with after-tax dollars. The government doesn't subsidize that initial $2,000 contribution as it does for most folks with the regular IRA. But unless you're just a few years from retirement when you expect to be in lower tax bracket, paying the piper now before contributing to the Roth will be better than paying him later on your investment profits.
Let's say you and your spouse are around 25, and you put $4,000 into a Roth IRA this year and earn a 12% return per year for the next 34 1/2 years until you retire. At that point, your original contribution of $4,000 would have swollen to about $200,000. With a Roth, that's your take-home pay. With a regular IRA, you would have to pay taxes on the amount you cash out each year. You would basically net just $170,000, assuming a 15% tax bracket during retirement, or merely $144,000 if you're still in the 28% bracket. Those figures beat the amount you could accumulate on the same investments outside an IRA. Yet they're not nearly as good as the Roth.
The Roth makes particular sense for people otherwise limited to making non-deductible contributions to a regular IRA. And the Roth is fully available to individuals making up to $95,000 and couples making up to $150,000. It also allows you great flexibility by allowing you, in many cases, to withdraw your principal contributions at any time tax-free, without penalty. First-time homebuyers can also pull out $10,000 in profits penalty free and tax-free if the money has been in the Roth IRA for at least five tax years. There are also some breaks for education spending, though the $500 per child per year education IRA is probably a better vehicle for education savings. Barring these exceptions, though, profits withdrawn before retirement age and before the money has been in the Roth for at least five tax years will be taxed, plus you'll also incur a 10% penalty.
Because the Roth is potentially better than the traditional IRA, it may make sense for you to roll any current IRA into a Roth. To do so, you will have to pay taxes on your old IRA, but there will be no penalty for early withdrawal. If you make the transfer before January 1, 1999, you can pay these taxes over the next four years, so you don't need to have the money right away. Is this a smart thing to do? If you are more than ten years away from retirement and can afford to pay these taxes on your old IRA out of your current income or other savings rather than the IRA money itself, then the answer is almost surely yes. You're essentially paying for the right to store away even more money now into your shiny tax-exempt Roth. On the other hand, if you have to use your IRA savings to pay taxes triggered by shifting them to a Roth, then you may be sacrificing too much principal up-front to make the deal worthwhile, unless you have many years to make up for this dip into your savings. It should be noted, however, that funds rolled over into a Roth IRA come under greater restrictions for penalty-free and tax-free distributions.
My advice to you, though, is to think about rolling your old IRA into a Roth as soon as you can while using other savings to pay any taxes on the transaction. Let's say you're a young investor sitting on $10,000 in your old IRA and you have $4,000 handy. I'd suggest that you make a tax-deductible $2,000 contribution to this IRA for '97 (assuming you haven't already), add another $2,000 for '98, then roll this IRA into a Roth. That will give you a $14,000 Roth IRA plus a tax bill of $3,920 (assuming a 28% bracket) to be paid over four years starting in April 1999. Making the same contributions but waiting until the end of 1998 to roll the regular IRA into a Roth will just leave you with a tax bill for an additional $470, assuming a 12% return.
To determine what course is right for you, pull out your calculator and run the numbers, plugging in various assumptions (principal, average annual return, number of years to retirement, tax rate now versus then, etc.). Particularly for younger investors with sufficient cash flow to handle it, paying the taxman over the next four years in order to beef up your Roth today should really pay off for you down the road. It should be noted, however, that funds rolled over into a Roth IRA from a traditional IRA come under greater restrictions for penalty-free and tax-free distributions.
Those interested in sharing lessons of '97, aphoristic resolutions for '98, or some champagne with greens, hog jowls, and black-eyed peas should drop into the Lessons Learned folder. Folks with questions about IRAs and other tax-related issues should find Foolish insight from Roy Lewis (TMF Taxes) in the Tax Strategies area and message folder. And oh yeah, Happy New Year, Fools.
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