<THE EVENING NEWS>
Wednesday, August 12, 1998
DJIA 8552.96 +90.11 (+1.06%) S&P 500 1084.22 +15.24 (+1.43%) Nasdaq 1825.53 +32.83 (+1.83%) Value Line ndx 868.67 +15.57 (+1.83%) 30-Year Bond 107 12/32 -3/32 5.61% Yield
Computer Learning Centers (Nasdaq: CLCX) bounced back $2 13/16 to $19 11/16 after plunging $5 3/4, or 25%, in heavy trading yesterday on news of a shareholder lawsuit alleging that the computer training schools company discarded "hundreds of records" requested by federal auditors in a dumpster outside its Alexandria, Va., campus in an attempt to "destroy evidence." In response, the company asked the Department of Education's Inspector General to review the documents that the plaintiffs' investigators allegedly found in the dumpster. Computer Learning Centers has been under investigation in recent months regarding the quality of instruction, its record of placing students, and its handling of federal student loans and grants. Company CEO Reid Bechtle said nothing was thrown away that would've been pertinent to the investigation. Today Legg Mason Wood Walker upgraded its rating on the company to "buy" from "outperform," calling yesterday's sell-off an "overreaction" and "much ado about nothing." Legg Mason said the papers likely will prove to be insignificant to the investigation.
Electronic design automation tools maker Quickturn Design Systems (Nasdaq: QKTN) shot up $3 1/32 to $11 1/32 after Mentor Graphics (Nasdaq: MENT) announced an unsolicited cash tender offer for all of the company's shares at about $216 million, or $12.125 per share -- a 51.6% premium over Quickturn's $8 closing price yesterday. The offer became public in an ad in today's Wall Street Journal, and Mentor announced the bid this morning. The tender, which started today, is set to expire at midnight Eastern time on Sept. 9. Mentor, which already has acquired more than 3% of Quickturn shares, expects the deal to be accretive to earnings after a six-month transition period and anticipates cost savings of around $30 million. Mentor concentrates mainly on software used to design semiconductor chips, while Quickturn focuses on hardware and software for testing the performance of chip designs. Last month Quickturn reported a second quarter net loss of $0.28 per share compared with a profit of $0.04 in the year-ago period due to weak sales in Asia. Goldman Sachs lowered its rating on Mentor to "market perform" from "market outperform."
QUICK TAKES: Cendant (NYSE: CD) charged up $2 to $16 1/8 after announcing plans to sell its Hebdo Mag International subsidiary to a company organized by Hebdo management for roughly 7 million shares of Cendant stock and $410 million in cash. Cendant will report its quarterly earnings tomorrow morning... 3Com (Nasdaq: COMS) added $2 5/8 to $30 on rumors that it may be taken over by Intel (Nasdaq: INTC), Dow Jones reported... Casual clothing retailer Gap Inc. (NYSE: GPS) leapt $4 1/16 to $66 9/16 in advance of reporting Q2 earnings tomorrow morning. Stay tuned... Paine Webber Group (NYSE: PWJ) moved up another $4 1/4 to $52 5/8 after The Wall Street Journal reported that Germany's third largest bank, Dresdner Bank, has made a "preliminary overture" to acquire the brokerage firm for up to $10 billion.
Macintosh computer maker Apple Computer (Nasdaq: AAPL) was up another $1 1/16 to $40 1/16 after yesterday busting through a 52-week high and reaching a level the company has not seen since takeover rumors drove up shares in late 1994-early 1995... Computing, communications, and measurement products manufacturer Hewlett-Packard (NYSE: HWP) was up $1 7/8 to $52 after announcing price cuts of up to 45% on its HP MediaStream Broadcast Servers and HP MediaStream Disk Recorders... Business software company Computer Associates International (NYSE: CA) picked up $1 5/8 to $38 7/16 after Chairman and CEO Charles Wang told shareholders he is committed to boosting the company's stock price "through a number of aggressive steps."
GeoCities (Nasdaq: GCTY) surged another $8 3/16 to $45 1/2 after more than doubling yesterday in its first day of trading. The personalized homepage website operator's initial offering was priced at $17 a share... Internet portal company Infoseek Corp. (Nasdaq: SEEK) powered up $5 3/16 to $28 13/16 after late yesterday announcing it will acquire privately held Internet shopping and local events guides builder Quando Inc. for about $17 million in Infoseek stock... The usual Internet suspects rebounded from yesterday's fall: Yahoo! (Nasdaq: YHOO) picked up $4 to $95 3/8, Excite (Nasdaq: XCIT) climbed $1 1/2 to $46 1/8, Lycos (Nasdaq: LCOS) advanced $2 5/16 to $65 7/8, America Online (NYSE: AOL) gained $2 9/16 to $109 11/16, and Amazon.com (Nasdaq: AMZN) rose $6 3/8 to $130 3/8.
E-commerce outsourcing solutions specialist Digital River (Nasdaq: DRIV) gained $2 3/16 to $12 1/16 from an initial offering price of $8.50 a share. It was originally estimated to be priced between $10 and $12... Oil, natural gas, and chemicals company Amoco Corp. (NYSE: AN) spurted up another $1 5/16 to $48 3/16 following its agreement to merge with British Petroleum (NYSE: BP) in a stock swap valued at about $48 billion, or $50 per Amoco share. Bear Stearns raised its rating on Amoco to "buy" from "attractive" and its rating on BP to "attractive" from "neutral." BP gained $1 to $78 3/8... MidAmerican Energy Holdings Co. (NYSE: MEC) surged $5 1/4 to $25 1/4 after announcing it has agreed to be acquired by CalEnergy Co. (NYSE: CE) for $27.15 per share in cash. The deal values MidAmerican at about $4 billion, including $1.4 billion of debt and preferred stock.
Casual clothing retailer Abercrombie & Fitch (NYSE: ANF) rose $1 9/16 to $51 7/16 after reporting second quarter earnings of $0.20 per share, up from $0.04 per share in the year-earlier period. Analysts had expected EPS of $0.12. Comparable store sales in the quarter increased 45%... Call center management software company Davox Corp. (Nasdaq: DAVX) climbed $1 1/2 to $12 7/16 after announcing it has been granted a U.S. patent for software pertaining to the grouping of call center agents for management and reporting purposes... Medical devices maker and developer Boston Scientific (NYSE: BSX) gained $2 1/16 to $74 3/8 after announcing it has received FDA approval to market its NIR ON Ranger and the NIR ON Ranger with SOX coronary stent systems for the treatment of coronary artery disease.
Jones Intercable (Nasdaq: JOIN) jumped $2 1/2 to $28 7/8 after The Wall Street Journal reported that Comcast Corp. (Nasdaq: CMCSK) is expected to announce it will immediately buy a controlling stake in the Denver-based cable company instead of in stages as was originally planned... Process manufacturing optimization software developer Aspen Technology (Nasdaq: AZPN) cranked up $3 3/8 to $29 1/8 after reporting Q4 EPS of $0.33 (before charges), a penny less than last year but $0.03 ahead of estimates... Spirits and entertainment company Seagram (NYSE: VO) rose $3 7/16 to $34 11/16 after reporting Q4 EPS of $0.93, up from $0.40 in the same year-earlier period... Networking solutions firm Newbridge Networks (NYSE: NN) gained $1 1/2 to $20 3/4 after announcing it has been selected to install the high-performance Newbridge VIVID Switched Routing system at St. Paul's Hospital in Vancouver.
Interactive entertainment software company MicroProse Inc. (Nasdaq: MPRS) surged $1 3/16 to $5 3/4 after announcing it has agreed to be acquired by toy maker Hasbro Inc. (AMEX: HAS) for $6 a share in cash plus the assumption of debt and redeemable preferred stock... Music and video retailer Trans World Entertainment Corp. (Nasdaq: TWMC) added $3 3/8 to $34 7/8 after announcing Q2 EPS of $0.12, an improvement over last year's loss of $0.04 a share and better than analysts' mean estimate of a profit of $0.09. The company also announced a 3-for-2 stock split.
Application software developer Adobe Systems (Nasdaq: ADBE) cracked $3 7/16 to $27 3/8 after saying it expects fiscal Q3 earnings to be breakeven or a loss (including a one-time restructuring charge), falling short of the First Call mean estimate of $0.52 per share. To cut costs, the company said it will fire 240 to 300 employees. The shortfall was blamed on "adverse economic conditions in Japan," where the firm reportedly used to derive up to 25% of its revenues. Adobe had suggested that trouble might be brewing in its most recent 10-K annual report, which stated that inventory levels at the firm's Japanese distributors were "higher than what the [c]ompany considers normal" at the end of fiscal 1997. Making matters worse, Adobe books the majority of its Japanese revenues in yen rather than dollars, opening the company up to foreign exchange losses with the Japanese currency currently trading near an eight-year low against the greenback.
Transaction processing services and software company CheckFree Holdings Corp. (Nasdaq: CKFR) tumbled $9 13/16 to $13 15/16 after saying it expects a fiscal Q1 loss of $0.04 to $0.06 per share, which is below the $0.03 per share loss forecast by the Street. Further, the company said lower-than-expected subscriber growth will result in fiscal 1999 EPS between $0.12 and $0.16, well below the First Call mean estimate of $0.32. The growth problem probably won't be resolved until CheckFree's big bank clients transition their online banking operations from dial-up PC software to Internet-based systems. The sketchy outlook prompted BT Alex. Brown, Legg Mason, and Salomon Smith Barney to cut their ratings on the company. Lost amid today's dire revelations was CheckFree's Q4 earnings, which were right in line with the Street's estimates of $0.03 per share.
QUICK CUTS: Bookseller Borders Group (NYSE: BGP) fell $1 7/16 to $28 13/16 after reporting fiscal Q2 EPS of $0.03, which was in line with the Street's mean estimate... Semiconductor wafer fabrication equipment maker Applied Materials (Nasdaq: AMAT) slumped $3/4 to $32 1/8 after reporting fiscal Q3 EPS of $0.19, which was half of what the company earned last year... Telecommunications systems designer Advanced Fibre Communications (Nasdaq: AFCI) fell $3 5/8 to $13 1/16 as four of the eleven analysts surveyed by First Call cut their fiscal Q3 earnings estimates today. However, the First Call mean estimate remained unchanged at $0.10 per share.
Computer retailer and services company CompUSA (NYSE: CPU) slipped $5/16 to $17 7/8 before reporting after the market close a fourth quarter loss (before extraordinary items) of $0.19 per share on an 8.7% decline in same-store sales. The company said it was planning on flat same-store sales for Q1 on declining average selling prices and a gross margin lower than last year's 14.7%... Luggage maker Samsonite Corp. (Nasdaq: SAMC) was tossed for a $1 3/32 loss to $5 3/4 after saying in a federal filing that a computer conversion problem at its wholesale business in July disrupted its U.S. distribution system, resulting in fiscal Q2 results "significantly below" the Street's expectations... Eatertainment company Rainforest Cafe (Nasdaq: RAIN) got soaked $15/16 to $9 7/16 after COO Greg Carey resigned to "pursue another opportunity within the restaurant industry."
Healthcare services provider Humana (NYSE: HUM) continued to fall, slumping $13/16 to $16 9/16 two days after calling off its proposed merger with managed care company United HealthCare (NYSE: UNH)... Specialty adhesives, paints, and waxes maker H.B. Fuller Co. (Nasdaq: FULL) got stuck with a $2 1/4 loss to $51 3/4 after saying the recent General Motors (NYSE: GM) strike and the Asian financial crisis will result in fiscal Q3 EPS below last year's $0.78 and the First Call mean estimate of $0.83... Finlay Enterprises (Nasdaq: FNLY), which operates fine jewelry departments in department stores, was ripped for $8 7/8 to $10 1/2 after saying its fiscal Q2 EPS will be $0.11 to $0.14 below the First Call mean estimate due to lower European sales and higher expenses.
Prepaid telecommunications services firm SmarTalk TeleServices (Nasdaq: SMTK) dropped another $17/32 to $6 5/8 after falling 57% yesterday following an announcement that it is delaying its fiscal Q2 financial report to resolve "potentially significant" accounting issues... Electronic components distributor and contract manufacturer Reptron Electronics (Nasdaq: REPT) fell $1 3/16 to $6 11/16 after saying that softness in the electronics component industry produced a fiscal Q2 loss of $0.24 per share, missing the Street's estimates for $0.07 per share loss... Blood substitute developer Northfield Laboratories (Nasdaq: NFLD) slid $2 9/16 to $13 15/16 after the FDA requested that the company expand the number of patients used in its Phase III trials of its PolyHeme blood substitute, which will delay the completion of the trials "into the late spring of 1999."
Online advertising and software firm NetGravity (Nasdaq: NETG) gave back $2 7/16 to $16 1/2 after rising 16% yesterday on news that it had signed a co-marketing, service, and technology strategic relationship with IBM (NYSE: IBM)... Several Russian stocks slid as the Russian Trading System's index fell for the sixth day in a row. Ma Bell wannabe Rosetelecom (NYSE: ROS) dropped $1 to $8 1/8 and Vimpel-Communications (NYSE: VIP) slid $5 1/16 to $24 13/16.... Bowling alley operator AMF Bowling (NYSE: PIN) was pinned with a $5/16 loss to $14 11/16 after Standard & Poor's placed the company's corporate credit rating on "CreditWatch" with negative implications.
Scuttlebutt -- An Investor's Edge
Losing money is never pleasant. That's why it ought to be good for you. No pain, no gain -- but the gain is up to you. The occasional unpleasantness of squandered resources is there to drive home lessons either missed or forgotten. To learn from mistakes, though, you have to own up to them. Given that most investors are overconfident and may even have a spouse to answer to, admitting defeat can be an ego-bruising ordeal. Get over it! Embrace your capacity to be wrong as a prerequisite for ever learning how to be right. Your losses are assets (literally, come tax time). Your confession of sin is the key to your salvation. The two sides of the coin are connected.
Successful investing requires, most of all, an honest admission of your limitations. What do you know, and how well do you know it? What can you reasonably learn given the resources available to you? How much time do you have to devote to filling in the dark places on your investment map, and do you really have the desire to do the work? What are your blind spots, and how substantial a risk do they present for any given investment?
Your portfolio should be built to accentuate your strengths and hide your weaknesses. Good investors look for opportunities that offer them an edge, and they avoid the ones that don't. They may compensate for what they don't know and don't care to learn by diversification, by buying into an S&P 500 index fund, for example. Or they may embrace large, high return-on-capital businesses such as the Cash-King stocks on the theory that with a long-term investment horizon, quality businesses with strong brands will more than compensate for an inattention to temporary blips or for a disinclination to haggle over a few points on the purchase price.
Of course, you can play it relatively safe without sticking to the indexes or buying the companies that everyone knows -- as long as you buy what you know. Classic Peter Lynch investing, of course, involves more than buying Dunkin Donuts because you love the chocolate glaze donuts. You have to understand the financials. But Lynchean investing works largely because it highlights those businesses that fall within your circle of competency while discouraging you from chasing after those companies that don't.
This is a powerfully constructive approach to investing partly because it keeps you from making some of the dumbest mistakes. Consider the fact that people tend to see investment opportunities the way they see anything else, with a capacity to fill in the blind spots with more of what surrounds those gaps. When we're looking at something we know, our mind fills in the blank areas pretty accurately. Just the opposite can be true when we approach something for which we have only a sketchy but positive feel. The grass we can't make out very well can look a lot greener than what we're sitting on. Yet we may learn later it wasn't even grass.
The beauty of Lynchean investing is that you at least begin with something you know. Though one usually thinks of more consumer-oriented stocks as classic Lynch stocks, that need not be the case. Through your job or education, you may have special technical knowledge that can give you an investment edge in a sector that would seem merely arcane and thus off-limits to another investor. The real question is, are you in a position to really understand the business and to follow it?
Relatively little gets said about what Phil Fisher called "scuttlebutt," but it's really the key to following any investment. Consider that the most direct ways to understand a business are through its financial statements and through conversations with its management. Legendary value investor Ben Graham relied wholly on the former since he mistrusted management. His protege Warren Buffett depends on the financials, but he also likes to get to know the managers. Today, the SEC's EDGAR database allows easy access to the financials while company conference calls and investor relations officers provide good windows onto management. Yet you also need to cultivate additional sources of information, sources that will provide the scuttlebutt to keep you really up to speed.
Lynchean investing takes advantage of the kinds of scuttlebutt knowledge you already come across, such as that steady stream of buyers exiting the Gap (NYSE: GPS) with full shopping bags. In its heyday, the Fool's Iomega (NYSE: IOM) message board was a great source of scuttlebutt, from the fact that the parking lot at Iomega's manufacturing facility was full on Sunday (somebody drove by to check) to the news lifted from a trade publication that another computer manufacturer would feature the Zip drive in a new line of PCs. For a time, such incremental information provided some online investors with a meaningful edge when it came to this hot growth story that traditional Wall Street types either didn't see or didn't believe.
Fisher's idea of scuttlebutt, however, encompassed much that might fall under standard due diligence. He suggested talking to perhaps five companies in an industry and asking intelligent questions not just about each company but about the competitors too. Competitors may provide a slightly distorted version of the truth, but the mosaic of information you put together should form a pattern and perhaps raise questions you hadn't thought about.
But don't stop with the competitors. Fisher suggested that investors talk to a company's customers and suppliers, too. Then there are trade magazines that follow an industry with more depth and regularity than the mainstream financial press does. The goal is to develop an edge by cultivating different information sources, perhaps even contacts you check with on a regular basis to see how business is faring.
Sure, this sounds like what the best professional investors and analysts do themselves. That is, it sounds awfully time-consuming. Yet after some initial legwork, the scuttlebutt method becomes easier, especially in this age of the Internet. That's because you can readily track down obscure sources of information and because investors can usually find online communities of like-minded people willing to share their incremental knowledge about a company or industry.
Individual investors would be smart to stick to those companies about which they can generate a significant amount of scuttlebutt knowledge. The fact is, most active investors are looking for an information edge, something beyond the financial statements, the press releases, or even the conference calls. If you don't have some kind of network that provides you with ongoing incremental knowledge to modify your overall mosaic, then you don't have the kind of edge that other investors probably do have. Now, you don't necessarily need better or more timely information to beat the market, but you do need to invest in ways that highlight your strengths while making allowances for your limitations. To do that, you first have to admit your limitations.
[Correction: In today's Fool Plate Special, Dale Wettlaufer corrects a mistake and offers a clarification to some points he made in last night's Fool on the Hill column about Apple Computer (Nasdaq: AAPL).]
Please see the Motley Fool's Conference Calls page for call information and links to synopses.
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Dale Wettlaufer (TMF Ralegh), Final Fool