<THE EVENING NEWS>
Wednesday, December 30, 1998
DJIA 9274.64 -46.34 (-0.50%) S&P 500 1231.93 -9.88 (-0.80%) Nasdaq 2166.95 -14.82 (-0.68%) Value Line Index 908.79 +3.20 (+0.35%) 30-Year Bond 102 17/32 +6/32 5.08% Yield
Online financial market data firm Track Data Corp. (Nasdaq: TRAC) made tracks and soared $3 7/8 to $7 11/16 after saying it will provide the 35,000 registered users of its myTrack Internet market quotation and news service with online trading services through broker-dealer Track Securities Corp. before the end of the first quarter. The rapid rise is a bit reminiscent of the share price freakshow that has been K-tel (Nasdaq: KTEL) this year, where the company's minuscule float changes hands several times over the course of a single trading day on the back of some obscure Internet-related press release. Of Track Data's 14.5 million outstanding shares, only 2.6 million are accessible to Joe Q. Daytrader. Today's announcement caused a feeding frenzy for those scarce shares, driving Track Data's daily trading volume to around 9.5 million shares, or 181 times the normal volume.
A handful of PC and computing products retailers got a boost today after trade rag Computer Retail Week announced that sales of computer-related merchandise was up a "respectable" 13.8% to $29 billion in 1998. The results exclude sales from mail order firms and this year's crop of start-up firms. CompUSA (NYSE: CPU), which was listed as the top retailer for the year with $5.75 billion in projected sales, gained $3/4 to $13 1/8 today. Second on the list was computing and electronics retailer Best Buy (NYSE: BBY), which rose $1 7/8 to $61. Further down the list with $1.24 billion in estimated sales was office supplies mainstay OfficeMax (NYSE: OMX). That total was good enough for eighth place in computer-related sales, sufficient ammo to send the company's shares up $1 to $12.
QUICK TAKES: Internet-based telecommunications services firm Tel-Save.com (Nasdaq: TALK) gained $2 3/8 to $17 9/16 after signing a 25-year guaranteed customer agreement with AT&T (NYSE: T). As part of the deal, AT&T will allow Tel-Save to purchase an unlimited amount of broadband fiber capacity over the next 12 months... Corporate travel management services company Navigant International (Nasdaq: FLYR) took flight and rose $1/2 to $8 5/16 after saying it will centralize the online presence of its various operating companies into a single website in the first quarter of 1999... Networking products and switch designer FORE Systems (Nasdaq: FORE) teed up a $13/16 gain to $16 11/16 after Credit Suisse First Boston said it expects the company to hit the First Call mean earnings estimate of $0.10 per share for Q3, allaying fears of an impending earnings warning that deep-sixed the firm's shares yesterday.
Internet search and caching software developer Inktomi (Nasdaq: INKT) gained $5 to $132 after announcing a two-for-one stock split payable on or around Jan. 27... Specialty retailer Genesis Direct (Nasdaq: GEND) jumped $2 13/16 to $9 7/8 after signing an e-commerce agreement with portal company Excite (Nasdaq: XCIT). Under the deal, Excite will help sell 20 of Genesis Direct's catalog brands, including athletic apparel, travel merchandise, tin toys, and rock 'n' roll and TV memorabilia... Casual and golf apparel marketer Hartmarx Corp. (NYSE: HMX) moved up $13/16 to $5 5/16 after announcing a 1.5 million share repurchase plan. Elsewhere on the stock buyback front, oil and gas exploration firm HS Resources (NYSE: HSE) doubled the size of its previously announced repurchase plan to $10 million, sending the company's shares up $9/16 to $7 3/8.
Financial services software maker Interlinq Software (Nasdaq: INLQ) pieced together a $1 1/4 gain to $9 after announcing a plan to take the company private by repurchasing all but 1.25 million of its shares for $9 1/4 a pop in cash. For more details on the transaction, please see this morning's Breakfast With the Fool...
Smart card systems developer PubliCARD Inc. (Nasdaq: CARD) dealt its shareholders a $1 1/8 gain to $14 1/4 after agreeing to buy privately held PC card designer Greystone Peripherals Inc. for undisclosed terms... Israeli multimedia educational software developer Edusoft Ltd. (Nasdaq: EDUSF) picked up $1 9/16 to $7 13/16 after announcing that its board of directors has agreed to sell the company to an unspecified foreign buyer for about $40.2 million, or $8.50 per share.
Semiconductor yield management firm KLA-Tencor (Nasdaq: KLAC) gained $1 13/16 to $43 1/8 after Lehman Brothers selected the firm as its top pick in the chip capital equipment industry for 1999... Clothing retailer Jos. A. Bank Clothiers (Nasdaq: JOSB) vaulted ahead $1 to $7 7/8 after announcing an 8% increase in December same-store sales compared to a year ago. The company also said about 6,000 people are visiting its website each month since its launch in August... CardioThoracic Systems (Nasdaq: CTSI) advanced $3 3/4 to $8 3/8 after the surgical instruments maker was upgraded to "buy" from "neutral" by Piper Jaffray. The one-day move also laid waste to Piper's 6-month price target for the stock of $8 per share.
Contract circuit board assemblies manufacturer Jabil Circuit (NYSE: JBL) gained $3 1/8 to $74 after Goldman Sachs started coverage with a "market outperform" rating and a 12-month price target of $85 per share... Information technology outsourcer Sykes Enterprises (Nasdaq: SYKE) added $2 to $29 3/4 after buying two privately held call center providers, TAS GmbH Nord Telemarketing und Vertriebsberatung of Germany and Oracle Service Networks Corp. of Canada, for around 2.06 million shares... Shareholders of air bed maker Select Comfort Corp. (Nasdaq: AIRB) will sleep well tonight on the knowledge that the company gained $4 1/16 to $27 11/16. Three of the underwriters of the company's initial public offering earlier this month started coverage with "buy" ratings today.
It hasn't been the busiest week for news on Wall Street, but that hasn't kept investors from trading the auld lang syne out of a host of lesser-known stocks, frequently on Internet-related "news" of varied magnitude. While active trading in 'Net issues is good news for online brokerages, today's "Heard on the Street" column in The Wall Street Journal cooled the holiday cheer a bit when it suggested those same brokerages may feel the bite if the mania in trading Web-related stocks recedes. Yikes, investors said, pulling shares of National Discount Brokers Group (NYSE: NDB) down $7 5/8 to $23 7/8 despite the company's report of strong Q2 earnings yesterday. Meanwhile, annoying "mydiscountbroker.com" commercial creator Southwest Securities (NYSE: SWS) slid $3 11/16 to $21 5/16, Ameritrade Holding Corp. (Nasdaq: AMTD) dropped $3 1/4 to $33 1/2, recent darling E*Trade Group (Nasdaq: EGRP) fell $9 5/16 to $50 13/16, and discount powerhouse Charles Schwab (NYSE: SCH) gave back $3 1/16 to $56 3/8.
Investors who may have gotten a bit ahead of themselves last week pulled back from shares of merger partners British Petroleum (NYSE: BP) and Amoco (NYSE: AN) today after the FTC approved the companies' $57.1 billion merger. Both companies fell today after moving up a week ago, likely in anticipation of the ruling. BP, as high as $92 3/16 last Wednesday, fell $6 3/4 to $83 3/16, while Amoco, which hit $59 15/16 seven days ago, dropped $3 1/4 to end at $54 3/4. Under the conditions of the approval, the companies will have to let 134 gas stations and 9 light petroleum products terminals go. They must also make it easier for independent gas stations to move to other brands, although some analysts don't foresee a mass exodus. Uncoincidentally, Firstar Corp. (NYSE: FSR), which is set to replace Amoco in the Standard & Poor's 500, won $4 to $91 5/16 today.
QUICK CUTS: Online media streaming technology company RealNetworks (Nasdaq: RNWK), an October Daily Double, lost $5 to $34 1/2 today, possibly because of speculation that Apple Computer (Nasdaq: AAPL) may introduce a new version of its competing Quicktime multimedia software at next week's MacWorld Expo trade show... Meanwhile, retailers moving recently in part on e-commerce news started back downhill this morning: ValueVision International (Nasdaq: VVTV) lost $3 1/4 to $8 1/8 and SkyMall Inc. (Nasdaq: SKYM) fell $13 to $27 3/4... Active Apparel Group (Nasdaq: AAGP) dropped $6 1/2 to $12 1/2 after CEO George Horowitz said on CNBC that his company, which currently markets activewear under the Everlast, Converse All Star, and MTV's The Grind brand names, may not renew contracts for the latter two.
Fizzy drink giant Coca-Cola (NYSE: KO) lost $1 1/2 to $67 13/16 as investors may be worried that its new Diet Coke ad campaigns are a signal that PepsiCo's (NYSE: PEP) Pepsi One product is hurting its market share in the one-calorie market... Sportswear designer G-III Apparel Group (Nasdaq: GIII) lost $4 1/16 to $4 13/16 today following a heavily traded session yesterday reportedly fueled by rumors of an impending launch of an e-commerce site. A company spokesperson told Reuters yesterday no date was set... Even news of yet another online sales site from cruiser motorcycle maker Biker's Dream (Nasdaq: BIKR) wasn't enough to fuel a rise today, as the shares skidded $2 25/32 to $4 1/16. That's a bit strange, since rumors of just such an announcement were credited for yesterday's rise to as high as $9 1/4 on about 27 times normal trading volume. The site is expected to go online in February.
Nuclear medical imaging systems maker Adac Laboratories (Nasdaq: ADAC) slid $1 15/16 to $19 15/16 today after it fell $5 1/4 in yesterday's session on news that it will restate fiscal 1996, 1997, and 1998 results. Warburg Dillon Read didn't help matters by cutting Adac to "hold" from "strong buy" this morning... Internet fax company FaxSav (Nasdaq: FAXX) couldn't save $7/8 today and fell to $6 1/2 as it announced a $3.5 million, 645,000-share private placement of new shares plus a warrant for 65,000 more with Tail Wind Fund, an emerging growth company investor... Online service provider America Online (NYSE: AOL) said its membership is over 15 million, adding a million since Nov. 12 -- its quickest jump of that magnitude ever -- but it still lost $7 1/8 to $147 1/2... Oilfield services company Halliburton Co. (NYSE: HAL) slid $1 to $29 3/8 after leaking $2 9/16 yesterday on news 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.
Buffet Bets Against Internets!
To top off a year full of surprising stories, this reporter has uncovered one that's so scrumptiously unexpected that you won't read about it anywhere else: Warner Buffet is betting against the Internet! Or, at least, he's apparently betting against many of the lesser known names registering triple digit gains of late. "Buffet isn't known for his high-tech investments," said one trader, who insisted on anonymity. "But he's been quietly doing his homework, and he's convinced he's found a veritable smorgasbord of overvaluation."
The Fool has not been able to ascertain the specific stocks deemed particularly unattractive by Buffet. However, the operator of a burger joint in Omaha reportedly saw the famed investor salivating profusely while reading a Barron's article about tulips. Said proprietor confessed that he knew the smell of his burgers wasn't sufficient to unleash such a flood of lubrication. Yet, he had no inkling prior to this that Buffet had a taste for bulbs. (The proprietor may update his menu).
An exhaustive investigation of Omaha's waste disposal sites uncovered a ketchup-stained Barron's with the words uBid, Multiple Zones, and Creative Computers underlined and circled. A Dow Jones search uncovered a less mussed copy of the same article in which Wall Street's pros discussed the Internet "tulips," stocks that have been bid up by speculators convinced they can trade the shares to someone else an hour later for a fat profit. The article concluded with comments from a hedge fund manager who said short-sellers had suffered bad dyspepsia in this sector and were now backing away from the table. Many believe that to bet against these stocks you need a boundless appetite for risk as well as an endless supply of money.
Enter Buffet. While usually considered a plain vanilla buy-and-hold investor, Buffet is actually something of an investment epicurean, frequently sampling more speculative dishes when the risks make sense. As one of the country's leading insurers, Buffet has essentially built his empire not on value, per se, but on calculated gambles. In addition to forays into silver and zero coupon bonds, Buffet has also practiced the art of arbitrage. One Buffet-watcher believes the cherry Coke addict initially shorted uBid and went long on its majority owner Creative Computers to take advantage of the outrageous price disparity between these stocks.
Others, however, say Buffet has been planning this feast for months, long before uBid went public. The conventional wisdom, established in part by Ames Grant of the Grant's Tomb Observer, was that Buffet's Burkshire Holdings acquired insurance outfit General Lee earlier this year in an effort to water down its equity exposure with bonds and thus head off a veritable Gettysburg should the stock market collapse. However, some permabears who haven't gone into complete cold storage hibernation now read Buffet's pursuit of the General as an attempt to expand his asset base to take on the ultimate reinsurance challenge: protecting himself in a bet against the Internets.
The problem all along for those left aghast by the casino mentality invading the markets is the difficulty of borrowing shares and holding them long enough for the stocks to plummet. The risk of forced buy-ins and crippling losses has sobered those who have attempted it. Options contracts have been unappealing as well, since it's impossible to time the collapse of the Internet also-rans within a matter of months. Meanwhile, Internet index options include too many of the legitimate online names. Well-placed sources say Buffet has found a way to dine on the overvalued dishes by creating a new financial instrument called a REAP.
Though details are hard to gather, a REAP is apparently a kind of zero coupon un-bond tied to a basket of the more speculative Internet stocks. A REAP will appreciate if the Internet stocks tumble, or lose value if the stocks continue to soar. Rumors have it that Buffet has convinced his old friends at Salmon to put together a consortium of banks willing to take the other side of this trade. The banks apparently can call the bonds at any time after December 31, 2003. So Buffet appears to be making what amounts to a multibillion dollar loan to this consortium with the prospect of forfeiting up to 100% of his principal five years hence or reaping what some say could prove a 200% annualized return over the same period if the specified Internet stocks collapse. Some believe Buffet's real goal is to leverage this bet into dominance of the entire financial services industry. After all, the consortium of financial institutions on the other side of this trade might be forced to cede control to him if his gamble pans out.
Others think there's something fishy about this story. They say the executives who've signed off on these REAPS either don't understand what they're doing or are desperately trying to shore up their troubled franchises, which are increasingly dependent on Internet stocks. Though little discussed, it's widely believed that online brokers and bankers will continue to eat into profits at many high-fee, low-value financial institutions. Ironically, this situation makes these same firms ever more dependent on investment banking fees related to taking unprofitable Internet companies public or floating debt issues to allow these firms to lose money indefinitely. Says one cynic, "There's never been an industry in greater need of investment bankers."
The Fool found mixed reactions from others interviewed for this story. "The scheme has a brilliant simplicity, but I don't think it will work," said Lewis Fairweather, president of the Short-Term Capital Management hedge fund. "Betting on fundamentals is simply too risky. I respect Buffet's acumen, but he's assuming the markets can become wildly inefficient and we know that's not true." Fairweather said that while the relationship between uBid and Creative Computers didn't make sense from a fundamental perspective, the well-established historical trading relationship between the two stocks represented only a modest opportunity at best. "I'd feel much better about Buffet's position if he hedged this move with a major bet on Russian debt."
Meanwhile, Raef Acampoopoo of Rock Investments poopooed the move. "Buffet must not realize that I've turned bullish again," he said yesterday. Reports leaked out this morning, however, that Acampoopoo apparently is now calling for Dow 2000 in 2000.
I also contacted Shark Haynes, anchor of CNBC's Day Trader's Coffee Klatch, to see if he could confirm the story. "I wouldn't believe it if I read it in an analyst's report." He paused, and then noted that he hadn't yet heard the story from the Wall Street firms that might be hurt by the REAPS. "So maybe it's true." Haynes immediately called a special meeting of the Coffee Klatch producers to evaluate what impact this news might have on the network's most popular show.
The most surprising response came from billionaire Bill Grates. "Warren is trying to ruin me," Grates said. "He's in cahoots with the government. He's in cahoots with Steve Jobs. I can't believe what a back-stabber he is. And all because I have more money than he does. He's obviously jealous and paranoid."
Famed hedge fund manager and media gadabout James Maimer simply fumed when asked to comment on the matter. "Buffet is a fraud. He's stolen my idea. Greenspan and I have been plotting for months to hype the Internets so we could short them at outrageous multiples, and now Buffet blows our plans. That jerk." Maimer said he's already preparing articles calling for an SEC investigation. The pieces will appear in every major magazine whose editor invests in his hedge fund.
When I caught up with the unflappable Abbie Jo Sewing, the hardest working woman at Goldman Slacks, she was riding the bus into Manhattan. Putting aside a hand-knitted sweater featuring the real 1998 operating profits from the companies in the S&P 500, Sewing reiterated that supertanker America was healthy and strong. She added, with a twinkle in her eyes, that Buffet would surely be a great guy to work for.
If the Buffet news proves true, it would represent a major departure for Omaha's richest resident. Earlier this year, he said that as a final exam, business schools should ask students how to value Internet companies and fail anyone who tried to answer the question. Since then, he's apparently recalled the words of his mentor, Ben Graham, who said that in the short-term the market is a voting mechanism but in the long-term a weighing machine. Buffet's latest move then, would seem to represent his vote of confidence in the long-term sanity of the financial markets. Now that he's weighed in, he stands to reap billions in profits if he's correct. And when was he not?
This Fool will stay on this -- if you haven't figured it out by now -- fanciful and fictitious story throughout 1999. For now, though, Happy New Year!
Please see the Motley Fool's Conference Calls page for call information and links to synopses.
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