Tuesday, December 29, 1998
DJIA               9320.98     +94.23      (+1.02%)
S&P 500            1241.81     +16.32      (+1.33%)
Nasdaq             2181.77      +1.47      (+0.07%)
Value Line Index    905.59      +7.83      (+0.87%)
30-Year Bond      102 8/32     +24/32  5.10% Yield


Investors apparently realized Amazon.com (Nasdaq: AMZN) isn't the only company selling books these days, rewarding Barnes & Noble (NYSE: BKS), the nation's largest retail bookseller, and competitor Borders Group (NYSE: BGP) for their efforts today (maybe it was all those holiday shopping trips to actual stores that did the trick). Barnes & Noble advanced $4 1/8 to $44 3/16 after a Morgan Stanley Dean Witter analyst reiterated an "outperform" rating and raised his target price on the company to $45 from $35 per share based on increased recognition of the company's Internet division, while Borders moved ahead $1 5/8 to 25 in tandem. Meanwhile, Amazon dropped $19 5/8 to $332 5/16, while Books-A-Million (Nasdaq: BAMM), which rode a revamped press release -- uh, that is, website -- to big gains not too long ago, continued its run of Trouble, sliding $7/8 to $15 1/8.

Elsewhere in the world of retail, direct marketer ValueVision International (Nasdaq: VVTV) blasted its old 52-week high of $7 1/2 per share, jumping ahead $5 1/8, or 82%, to $11 3/8 today. The company said its television home shopping division saw pre-Christmas December sales 70% above last year's levels while pre-Christmas Q4 sales were up more than 50%. The clincher for ValueVision's rapid and voluminous rise -- over 26 million shares traded today, more than 14 times the company's 30-day average -- might have been this statement: "Electronic commerce sales continue to increase at a far greater percentage than television sales." Two other e-tailing stars from yesterday continued to move like Superman in an emergency, as apparel marketer Active Apparel Group (Nasdaq: AAGP) grabbed $7 1/2 to $19 after jumping $10 1/4 yesterday, and in-flight catalog and online retailer SkyMall Inc. (Nasdaq: SKYM) added $5 3/16 to $40 3/4 after loading up $23 in yesterday's session.

QUICK TAKES: Geron Corp. (Nasdaq: GERN), a developer of therapeutic and diagnostic products based on the biological mechanisms underlying cancer and other age-related diseases, replicated $2 3/16 higher to $11 15/16 today. This afternoon's Lunchtime News explains why... Online brokerage National Discount Brokers Group (NYSE: NDB) shot up $17 1/2 to $31 1/2 after it announced fiscal Q2 EPS of $0.42, well above last year's $0.16 figure. Meanwhile, E*Trade Group (Nasdaq: EGRP) earned $3 3/8 to $60 1/8 following an $11 3/4 gain yesterday on news that half a million people have signed up for its Destination E*Trade website since its official launch in September. Head back to yesterday's Lunchtime News for a closer look at the announcement.

Enterprise automation software developer Boole & Babbage (Nasdaq: BOOL) added $2 3/8 to $30 3/8 after it said last night the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act in regards to its planned $900 million stock merger with BMC Software (Nasdaq: BMCS) has expired. BMC moved up $2 3/4 to $45 5/8 today... Unmentionables retailer Intimate Brands (NYSE: IBI) strapped on a gain of $1 7/8 to $30 following reports in The Wall Street Journal saying the company's Victoria's Secret catalog division expects a record Q4 because of strong online business. Victoria's Secret part-owner Limited (NYSE: LTD) added $2 1/4 to $29 1/2... Teen accessories retailer Claire's Stores (NYSE: CLE) rose $1 11/16 to $20 3/16 after Scott & Stringfellow upgraded its rating on the company to "strong buy" from "buy."

High-stakes bingo network company Multimedia Games (Nasdaq: MGAM) snagged $1 13/16 to $7 11/16 after it said last night it will offer its games to offshore bingo players on the Internet beginning in February... Sprint PCS Group (NYSE: PCS) added $2 15/16 to $21 13/16 after J.P. Morgan listed the wireless telecommunications services provider among its "Best of Sector" picks for 1999. Among other picks, women's sportswear, suits, and dresses designer Jones Apparel Group (NYSE: JNY) sewed up gains of $1 11/16 to $20 13/16... Petroleum refiner and marketer Sunoco (NYSE: SUN), also a J.P. Morgan pick, rose $1 3/8 to $34 15/16 after it said it finished a $150 million stock buyback plan authorized in November 1997 and announced plans for another $150 million repurchase... Little red-headed restaurant chain Wendy's International (NYSE: WEN) cooked up gains of $1 9/16 to $22 after Bear Stears reiterated its "buy" rating on the company.

Urologic disorders diagnosis and treatment products company UroCor Inc. (Nasdaq: UCOR) moved ahead $15/16 to $6 3/8 after it announced a marketing agreement with Mills Biopharmaceuticals to distribute a product used in treatment of early stage prostate cancer... Chicago-style pizza chain Uno Restaurant Corp. (NYSE: UNO) topped its shares with gains of $13/16 to $7 9/16 after it said last night it expects to report 20% earnings growth when it releases fiscal Q1 results. Last year the company turned in a $0.11 per share Q1 result before a charge... AT&T (NYSE: T) rose $4 3/8 to $79 following reports that its move to cut 18,000 jobs may be completed by the end of this year -- a full year earlier than expected -- because of the high number of managers accepting early retirement... Drugstore giant Rite Aid Corp. (NYSE: RAD) popped up $1 1/2 to $48 1/2 after Raymond James Financial reiterated a "buy" rating on the stock.

Copy, fax, printer and other imaging systems sales and service company Global Imaging Systems (Nasdaq: GISX) scanned in $1 1/4 to $23 7/8 after Prudential Securities reiterated a "strong buy" rating on the stock, raising its year price target to $35 from $25 per share... Healthcare products and services distributor Henry Schein (Nasdaq: HSIC) added $4 1/4 to $44 7/8 after announcing an agreement to buy privately held General Injectables and Vaccines, a vaccines direct marketer, for $65 million... Banking and financial services company Pacific Bank (Nasdaq: PBSF) rose $2 3/8 to $39 7/8 after its shareholders approved a $12 million stock buyback plan and a tripling in the number of authorized common shares that will enable the company to effect a stock split on Dec. 31... Printing company Consolidated Graphics (NYSE: CGX) inked gains of $4 1/8 to $65 1/16 after Prudential Securities reiterated a "strong buy" rating on the stock.


Oilfield services company Halliburton Co. (NYSE: HAL) slid $2 9/16 to $30 3/8 after warning that it expects to earn $0.14 to $0.16 per share after charges in the fourth quarter, far short of the First Call mean estimate of $0.36 per share. Factoring in a $24 million ($0.05 per share) after-tax charge related to the elimination of 2,750 jobs and other charges related to its September merger with Dresser Industries, the company should end up with operating earnings in the $0.30 per share neighborhood, according to analysts. The job cuts come with oil prices near a 12-year low and amid upstream budget cutbacks at various oil and gas exploration and production companies. For example, integrated oil and gas firm Conoco (NYSE: COC) joined the reduced spending crowd today and lowered its 1999 capital budget to $1.8 billion, which is 21% less than the $2.3 billion it spent this year.

Nuclear medical imaging systems maker Adac Laboratories (Nasdaq: ADAC) was zapped $5 1/4 to $21 7/8 after announcing it will restate its fiscal 1996, 1997, and 1998 financial results to adjust the accounting treatment of certain one-time charges, revenues, and expenses. The revision is expected to have a "material adverse impact" on the company's 1996 and 1997 results, but a minimal effect on previously reported 1998 figures. The company reportedly told analysts in a conference call today that gaps have arisen between when the company recognizes revenues and when it actually ships the ordered products to its clients. Adac's nuclear medical systems are not exactly pixie sticks from a healthcare purchaser's point of view, so differences among clients' payment methods for large capital expenditures must be taken into account as more purchasers are added to the Adac client list.

QUICK CUTS: Chip maker Intel (Nasdaq: INTC) lost $1 1/16 to $121 1/16 after filing papers with the SEC disclosing that it may sell about $18.3 million in shares of Internet search software developer Inktomi Corp. (Nasdaq: INKT) and around $4 million in shares of online "Computer Network" CNET (Nasdaq: CNWK). While the filings indicate an intent to sell, they don't obligate Intel to go through with the sale. Today, Inktomi dropped $10 3/8 to $127 and CNET slid $6 1/16 to $52 1/2... Ship and offshore oil and gas drilling rig builder Halter Marine Group (AMEX: HLX) slipped $7/8 to $4 3/4 after saying its fiscal Q3 will only be "marginally profitable" due to higher-than-expected costs for the construction of six drill barges. The company said the Street had been expecting earnings of $0.27 per share for the period.

Asynchronous transfer mode (ATM) switches supplier Network Equipment Technologies (NYSE: NWK) dropped $2 1/16 to $11 3/16 after saying weakness in Asian markets and in its leasing business will result in fiscal Q3 EPS "significantly below" the $0.20 expected by analysts surveyed by First Call... Modular and broadloom carpet supplier Interface Inc. (Nasdaq: IFSIA) was burned for a $2 11/32 loss to $8 19/32 after Salomon Smith Barney lowered its rating on the firm to "outperform" from "buy"... Professional audio systems maker Mackie Designs (Nasdaq: MKIE) slumped $1/2 to $6 3/8 after saying economic conditions in the U.S. and overseas will result in fiscal Q4 revenues and earnings below previous expectations.

FORE Systems (Nasdaq: FORE) was sliced $2 13/16 to $15 7/8 on rumors that the networking products and switch designer may by on the verge of pre-announcing earnings for fiscal Q3 below the First Call mean estimate of $0.10 per share, mimicking a similar Q2 warning in October... Garden City, N.Y.-based thrift holding company T R Financial (Nasdaq: ROSE) wilted $2 1/8 to $36 1/2 after saying it will terminate its planned merger with Roslyn Bancorp (Nasdaq: RSLN) unless Roslyn boosts the exchange ratio for the stock swap to 2.1137 shares for each T R share from the current 2.05 shares. T R is allowed to end the deal under the two companies' merger agreement since Roslyn's share price fell below the $20.72 per share level on Dec. 24. Roslyn rose $1/2 to $21.

Integrated energy company KN Energy (NYSE: KNE) was canned for another $1 7/8 loss to $34 1/2 after falling 5.5% yesterday on word it will miss analysts' Q4 earnings forecasts... Cost Plus (Nasdaq: CPWM) slipped $6 1/2 to $29 1/2 after at least two analysts reportedly warned that the home furnishings retailer's December same-store sales figures are running below plan.

An Investment Opinion
by Warren Gump

Indexing Outside the S&P 500

An astute Fool on the message boards recently noted that the Nasdaq 100 has significantly outperformed the S&P 500 over the past ten years, yet more money was flowing into S&P 500 index mutual funds. From the end of 1988 to September 30, 1998, the Nasdaq 100 outperformed the S&P 500 by almost 6 percentage points annually, based on returns of 23.1% and 17.3%, respectively. Why, this reader wondered, would investors be funneling more dollars into the fund with lower performance?

There are several reasons for this phenomenon, but his question elicited an important investing point. There are many indices beyond the S&P 500. While the S&P 500 can be the bedrock of most portfolios, those wishing to devote more time to investing but not interested in individual stocks may find other indices that provide higher returns.

Before venturing into index funds, it is helpful to understand the differences in how stocks are selected for inclusion in the indices and how the indices are calculated. Anyone can create an index to track the overall stock market or specific sectors within the market. Some consist of a large number of stocks, while others are quite limited. Perhaps the best known index is the Dow Jones Industrial Average (DJIA), which is composed of 30 major stocks in various industries picked by the editors at Dow Jones as bellwethers of the U.S. stock market.

The broadest-based index of large companies is the S&P 500. The 500 stocks in the index are selected by Standard and Poor's, based on the company's representation of the U.S. economy, stable financial profile, and liquidity (i.e., high level of trading activity). One of the best performing major indices in recent years is the Nasdaq 100, which tracks the performance of the largest stocks traded on the Nasdaq stock exchange. Inclusion in this index is based on a formula that selects those stocks with the greatest market capitalization (shares outstanding * price per share).

When calculating indices, companies must decide how each stock in it will be weighted. The most popular methodology is based on market capitalization. In an index such as the S&P 500, a stock's weighting is based on the percentage of value of the entire index an individual company comprises. If the market capitalization of a company's stock is $1,000,000 and the market capitalization of all stocks in the index is $20,000,000, the stock would be included as 5% of the index.

The DJIA uses a different methodology -- priced-based weighting. Not surprisingly, this means that the weighting of each individual stock is based on that stock's price relative to the sum of all the stock prices. Assuming that the sum of each stock in a price-based index is $500, a stock trading for $20 would comprise 4% of an index. An unusual impact of such a system is that a stock split has a noticeable effect on a price-based index. If the $20 stock mentioned above declares a 2-for-1 split, ceteris paribus, its weighting would fall to slightly over 2% despite no fundamental change in the companies in the index. For this reason, there aren't too many price-based indices.

The Nasdaq 100 index just switched on December 21 from being a pure market-capitalization based index to a modified market capitalization index. This change will limit the weighting of securities that comprise over 4.5% of the portfolio to increase the portfolio's diversification. This change was implemented because the largest five stocks in the index totaled about 61% of its value. Under the adjustment mechanism, the weighting of these five stocks will be lowered to 40%.

Why should the S&P 500 be the backbone of an indexing strategy? It consists of 500 of the largest U.S. companies across a wide spectrum of industries. The folks at Standard and Poor's who select stocks for the index go out of their way to ensure that the index substantially represents the U.S. economy. Included in this index are car makers, technology companies, pharmaceutical companies, retailers, financial companies, and Internet companies (starting Monday when America Online (NYSE: AOL) joins the index). With such broad diversification across the U.S. economy, the growth in profitability within companies in the index should roughly mirror the overall growth of corporate America's profitability.

The Nasdaq 100, on the other hand, does not have the breadth of the S&P 500. Five stocks, all of them in technology or telecom, make up 40% of the index. In comparison, the S&P 500's top five industries total only 26% of the index. The focus of the Nasdaq 100 is terrific for investors when the included stocks are doing well, but it does not necessarily allow for participation in the overall growth of U.S. corporate profitability. Investing in the Nasdaq 100 is essentially making a bet that the stocks of some large technology and telecom companies are going to outperform the overall market.

There is nothing wrong with having such an investment strategy, but it is quite different from investing in the S&P 500 and the growth in a diverse group of large capitalization U.S. stocks. Before investing in an index such as the Nasdaq 100, you should feel confident about the prospects for the specific sectors that are overweighted in the index. You are not making the less restrictive assumption (implicit with investing in the S&P 500) that the value of corporate America is going to increase over time.

Investing in indexed funds is generally more profitable than investing in actively managed funds with similar objectives because of lower expense ratios and reduced stock turnover. An index fund lowers expenses because it doesn't have to pay fund managers to pick stocks. In addition, the lower turnover inherent in most index funds results in reduced trading costs (not to mention a lessened tax bite for taxable investors). To easily invest in corporate America in one fell swoop, an S&P 500 index is probably your best bet. If you want to invest in more specialized sectors, you can certainly beat that index. Before doing so, however, you should be willing to invest the time to learn about how the index is constructed and the prospects for the stocks of the companies or industries that are emphasized.


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