<THE EVENING NEWS>
Thursday, February 4, 1999
DJIA 9304.50 -62.31 (-0.67%) S&P 500 1248.49 -23.58 (-1.85%) Nasdaq 2410.07 -83.34 (-3.34%) Russell 2000 417.79 -5.95 (-1.40%) 30-Year Bond 99 13/32 -12/32 5.29 Yield
Earlier this week, the Fool's Alex Schay (TMF Nexus6) highlighted the attention investors pay to the progress drug developers show in bringing new products to market. One company currently under the microscope is Trimeris Inc. (Nasdaq: TRMS), which raced ahead $4 3/16 to $25 3/16 today after the company's developmental T-20 drug, meant to block the entry of HIV into cells, earned "fast track" designation from the FDA, which speeds the review process. Good news about T-20, currently in the second of three trial stages, pushed Trimeris stock up nearly 85% in one session about three months ago. News of fourth-quarter losses of $0.56 per share, worse than the year-ago $0.45 and a penny below the three-analyst estimate reported by First Call, didn't dampen the enthusiasm much today, if at all; companies like Trimeris typically post deep losses while their products are in the pipeline.
Speculating that a company's product will eventually be made commercially available is a time-honored practice, but jumping into lesser-known brokerage stocks on optimism about online investing is this week's flavor. Jersey City's M. H. Meyerson & Co. (Nasdaq: MHMY) is exhibit A, skyrocketing after Tuesday's announcement that it plans to offer online trading -- albeit not until late 1999 at the earliest. After today's jump of $4 15/16, or 66.39%, to $12 3/8, the shares three-year history spent mostly between $1 and $3 a piece seems a faint memory, with the company's relatively small public float churning tirelessly away. Also leaping ahead on the outlook for Internet brokerages was J.B. Oxford (Nasdaq: JBOH), ahead $3 7/8 to $15 7/8 today and reaching intraday levels more than 880% above Friday's close. The Fool's own Louis Corrigan (TMF Seymor) takes a look at some of the forces currently pushing stocks skyward in today's Lunchtime News.
QUICK TAKES: Several retail companies moved ahead today on January sales news, traditionally reported en masse on the first Thursday of each month. Children's apparel retailer Gymboree Corp. (Nasdaq: GYMB) ran ahead $1 7/8 to $10 3/8 on an 11% same-store sales boost, while casual apparel merchant Paul Harris Stores (Nasdaq: PAUH), which reported an 11% comp sales boost, took $9/16 to $7 3/4. Click here for an expanded list of monthly sales figures... Building, aerospace, and industrial control systems designer Honeywell Inc. (NYSE: HON) sweetened $3 1/16 to $71 1/2 after saying it expects full-year 1999 EPS of between $4.95 to $5.05, compared with First Call's $0.498 consensus... Regional communications services provider CapRock Communications (Nasdaq: CPRK) expanded $4 3/8 to $15 7/8 after announcing an agreement with Enron Corp.'s (NYSE: ENE) communications subsidiary to build a $100 million fiber optic network in Texas.
Investment banking and securities company Eastbrokers International (Nasdaq: EAST) raced ahead $3 3/8 to $8 after agreeing to acquire privately held Lloyd Wade Securities of Dallas for an undisclosed sum... Information databases firm Dialog Corp.'s (Nasdaq: DIALY) American depositary receipts took $11/16 to $6 3/8 after launching an Internet-based business information service for German customers of CompuServe... Drug developer Albany Molecular Research (Nasdaq: AMRI) swelled $3 1/2 to $23 1/2 after selling 2.5 million shares for $20 each in its initial public offering. After reaching as high as $85 3/4 today, Perot Systems Corp. (NYSE: PER), the computer services firm headed up by presidential infomercial purchaser extraordinaire Ross Perot, finished with a gain of $4 to $65 7/8.
Cardiac medical device maker St. Jude Medical (NYSE: STJ) pumped up $2 to $26 1/16 after announcing the first implant of a new pacemaker system... Beauty products direct seller Avon Products (NYSE: AVP) painted on $4 3/16 to $43 1/2 after CEO Charles Perrin said in the company's earnings press release that Avon expects to meet internal earnings targets in 1999... Computer-aided design and manufacturing software developer Parametric Technology (Nasdaq: PMTC) snagged $1 1/4 to $14 3/16 on news that Italian automaker Fiat Auto SpA made a $3 million order for software and service.
Christian website operator Didax Inc. (Nasdaq: AMEN) was raised $1 1/8 to $11 11/16 after it said National Discount Brokers (NYSE: NDB) will become the first online trading partner on the money channel of its Crosswalk website... Financial services company Atalanta/Sosnoff Capital (NYSE: ATL) sent out a statement today saying it was not aware of any reason for its stock's rise of $2 1/16 to $10 9/16... World Color Press (NYSE: WRC) brightened $1 11/16 to $26 after Robert Burton, CEO of the print and digital information management firm, said "multiple acquisition efforts appear ready to come to fruition," reporting Q4 EPS of $0.63 that beat last year's figure by a dime and market projections by a penny.
Mining company Cyprus Amax Minerals (NYSE: CYM) shone $1 5/16 to $11 1/16 after Morgan Stanley boosted its rating on the company to "strong buy" from "outperform." The brokerage upgraded three copper companies this morning, with Phelps Dodge Corp. (NYSE: PD) moving ahead $4 1/2 to $47 1/2 after earning an upgrade to "outperform" from "neutral," while Asarco Inc. (NYSE:AR) took $1 1/2 to $15 1/16 on an identical upgrade... Automated semiconductor fabrication systems developer PRI Automation (Nasdaq: PRIA) advanced $3 13/16 to $40 15/16 after Morgan Stanley Dean Witter upgraded the stock to "outperfrom" from a "buy" rating... Drug developer ICOS Corp. (Nasdaq: ICOS) took on $1 5/8 to $28 7/8 after earning a "strong buy" rating in new coverage from Prudential Securities, which set a 12-month price target of $40 per share.
Boston Communications Group (Nasdaq: BCGI) up $1/4 to $9 1/4; Q4 EPS $0.03 vs. loss of $0.08 last year; estimate: $0.01
Cambridge Technology Partners (Nasdaq: CATP) up $2 15/16 to $31 1/16; Q4 EPS $0.26 vs. $0.17 last year; estimate: $0.25
Colgate-Palmolive (NYSE: CL) up $2 1/4 to $84 11/16; Q4 EPS: $0.73 vs. $0.63 last year; estimate: $0.72
CompUSA (NYSE: CPU) up $3/4 to $13 7/8; fiscal Q2 EPS: $0.17 vs. $0.36 last year; estimate: $0.16
Global Directmail (NYSE: GML) up $1 1/4 to $18 7/8; Q4 EPS $0.31 vs. $0.34 last year; estimate: $0.28
International Aircraft Investors (Nasdaq: IAIS) up $1 to $7 1/2; Q4 EPS $0.32 vs. $0.75 last year; estimate: $0.18
IXC Communications (Nasdaq: IIXC) up $13 1/4 to $46 1/4; Q4 EPS loss of $1.17 vs. loss of $0.84 last year; estimate: loss of $1.59
MGM Grand Inc. (NYSE: MGG) up $15/16 to $31 9/16; Q4 EPS $0.41 vs. $0.57 last year; estimate: $0.35
SDL Inc. (Nasdaq: SDLI) up $11 3/8 to $59 1/2; Q4 EPS $0.28 vs. $0.13 last year; estimate: $0.21
Timberland Co. (NYSE: TBL) up $5 3/8 to $56 11/16; Q4 EPS $1.80 vs. $1.48 last year; estimate: $1.66
Healthcare management information systems company Cerner Corp. (Nasdaq: CERN) was trounced $7 1/16 to $16 15/16 after posting Q4 EPS of $0.24, which was a penny ahead of the First Call mean estimate. However, at least nine brokerage firms lowered their ratings today after the company placed the blame of delayed contracts on the information technology industry's default boogeyman, Mr. Y2K. Suddenly, a feared cutback in IT spending by healthcare providers has many observers spooked, reminiscent of last year's ERP woes. Fellow healthcare info manager IDX Systems (Nasdaq: IDXC) lost $3 1/16 to $33 15/16. McKesson HBOC (NYSE: MCK), which by some estimates will receive up to half of its pro forma operating profits this year from the business of recent acquisition HBO & Co., dropped $7 5/8 to $65. QuadraMed Corp. (Nasdaq: QMDC) also dropped $4 to $22 7/8.
Satellite systems designer Orbital Sciences Corp. (NYSE: ORB) dropped $4 1/4 to $34 1/2 after saying non-cash accounting charges at two of its subsidiaries will result in Q4 EPS below the $0.23 expected by the nine analysts surveyed by First Call. Of course, the firm's revenues and backlog figures should be in line with estimates, but those all-important earnings numbers took precedence in traders' eyes today. The consensus view appears to be that the charges are a non-event as far as Orbital's financial health is concerned -- the first charge was due to a $130 million increase in the value of a contract, while the other was related to product development costs. While far from offering irrefutable proof of what some would categorize as Mr. Market's "efficiency deficiency," today's drop does raise questions about his mental health in these earnings-obsessed times.
QUICK CUTS: Networking products company 3Com (Nasdaq: COMS) slid $3 3/16 to $34 3/16 after cutting the street prices of its Palm III and PalmPilot Professional Edition personal digital assistants by about 20%... Brawny paper towels and Dixie paper cups maker Fort James Corp. (NYSE: FJ) was besieged today and fell $4 7/8 to $30 3/8 despite reporting Q4 EPS of $0.63, a penny above the First Call mean estimate. However, the company said tough year-over-year comparisons and higher marketing expenses due to competition will result in fiscal 1999 earnings flat with last year's results "through at least the first half of the year"... Telecom equipment maker Lucent Technologies (NYSE: LU) lost $7 1/8 to $102 7/8 as Lehman Brothers reiterated its "neutral" rating, saying the company's share price is "ahead of itself," according to Reuters.
Advanced Micro Devices (NYSE: AMD) tanked $2 to $18 15/16 before being halted around 3:15 p.m. Eastern time. After the halt, the company said it could see an operating loss in Q1 based on a "re-assessment of competitive conditions." Fellow chip maker National Semiconductor (NYSE: NSM) lost $1 1/16 to $12, and Intel (Nasdaq: INTC) shed $8 9/16 to $130 1/8... Financial services firm MONY Group (NYSE: MNY) dropped $1 to $27 after The Wall Street Journal reported that the company's Mutual Life Insurance Co. of New York unit is being investigated for possible accounting fraud by the SEC. The company said the allegations are "without merit" and were part of an earlier class-action lawsuit against MONY, which was thrown out... Nursing home operator HCR Manor Care (NYSE: HCR) lost $1 3/4 to $25 after posting Q4 EPS of $0.45 (excluding charges), missing the First Call mean estimate by a penny.
Enterprise workflow and electronic forms automation company JetForm Corp. (Nasdaq: FORMF) skidded $5 1/4 to $6 after saying delayed contracts caused by Y2K issue "distractions" on the parts of its clients will result in a fiscal Q3 net loss of $0.36 per share, below the First Call mean earnings estimate of $0.13 per share... Pharmaceutical promotions consultant Boron, LePore & Associates (Nasdaq: BLPG) tumbled $12 5/8 to $16 1/8 after reporting Q4 EPS of $0.24, a penny below both last year's results and the Zacks mean estimate. The company also announced that COO Gregory Boron is leaving to "pursue personal interests"... Israeli telecommunications systems designer ECI Telecom (Nasdaq: ECILF) lost $5 5/8 to $37 after saying its Q4 revenues rose a less-than-expected 15% to $214.8 million.
A quartet of assisted-living companies fell this morning after Dow Jones Newswires reported that BancBoston Robertson Stephens suspended its coverage of the industry on fears that an upcoming government report may take the companies to task for their pricing policies. Sunrise Assisted Living (Nasdaq: SNRZ) lost $3 3/8 to $38 1/4, CareMatrix (AMEX: CMD) slid $5 3/8 to $18 5/8, Balanced Care Corp. (AMEX: BAL) dropped $1/2 to $6 1/4, and Alternative Living Services (AMEX: ALI) slipped $4 1/16 to $21 13/16... Optoelectronic technology-based devices maker OSI Systems (Nasdaq: OSIS) slumped $1 1/2 to $8 3/8 after posting fiscal Q2 EPS of $0.20 (excluding charges), which was $0.02 short of the First Call mean estimate.
Danish networking products developer Olicom A/S (Nasdaq: OLCMF) sank $1 7/16 to $5 1/4 after reporting a Q4 loss of $1.31 per share (excluding restructuring charges), which was much worse than the loss of $0.59 per share forecasted by the two analysts surveyed by Zacks... Financial planning and tax preparation firm Gilman + Ciocia (Nasdaq: GTAX) lost $2 15/16 to $15 3/8 after reporting a fiscal Q2 loss of $0.01 per share, missing the Zacks mean earnings estimate of $0.03 per share... Life sciences and pharmaceuticals products company Monsanto Co. (NYSE: MTC) dropped $2 1/8 to $47 1/4 after seed developer Pioneer Hi-Bred International (NYSE: PHB) filed a federal suit against the company, alleging misappropriation of trade secrets and genetics by Monsanto's recently acquired overseas seed corn business.
The Weakness of Relative Strength
Beware "relative strength" as a measure of a stock's attractiveness. While there are useful aspects of this statistic, there are overwhelming weaknesses, too.
Relative strength measures a stock's performance versus all other stocks in a universe being measured. It's usually expressed by percentile with 1 percentage point increments. Thus, if a company's stock has outperformed 900 stocks out of a universe of 1,000, its relative strength (RS) will be 90. Its usefulness stems from its telling a short story about how much shareholder value has been recognized by the market over a period of time. For investors, the thinking on buying high RS stocks is this: You want to acquire shares of companies where sales, earnings, or cash flow are growing and you want to be involved with businesses that have proven they can build shareholder value.
There are problems with relative strength, though, just as there are problems with other one-shot indicators such as beta. For beta, one has to know how many data points are being gathered if the covariance coefficient means anything. For relative strength, you want to know its composition if the data are to mean anything. For instance, if you're measuring relative strength on a five-year or ten-year basis, then you're looking at a relative indicator of how the company has built shareholder value over a longer period of time.
But not all relative strength indices are the same. The best-known relative strength data comes from Investors' Business Daily. There's a huge flaw with that data, in my opinion. It's not simply how a company's stock has done over the last year. The most recent three months is given a double weighting in a year comprised of four quarters. In the trailing twelve months, then, each of the first three quarters are weighted at 20% apiece and the most recent quarter is weighted at 40%. You can see the problems that would arise from that data.
A company's stock can have a great first quarter, stay in line for the two subsequent quarters, and then have a poor fourth quarter. Even if the company and its stock have had a good year in absolute and relative terms, the most recent quarter is going to color the relative strength performance under this weighting scheme. If you're using RS as a forward-looking indicator, then perhaps the weighting helps, since the market is supposed to be telling you something with the fall of a stock. You should ask why a stock is down. But just because a company's stock starts to slip below an arbitrary relative strength threshold does not mean it should go off your research list.
One should realize that the stocks of excellent companies are not going to outperform every quarter of every year. But if you filter your world through the RS indicator, you're going to miss the most attractive points to add money to an investment. It's a bizarre situation when relative strength all of a sudden tells you that a company that was attractive last quarter is less attractive because it has been marked down this quarter.
Personally, I think it's a non factor in selecting companies for investment. I'm sure you can backtest these things and say that high relative strength companies do this or do that. That's okay if that's your bag -- I'm not going to try to dissuade you from believing that investing is all science and no art, even if I don't agree with you. Good investment returns can be had on companies whose stock has been crushed or whose stock has crushed the market over the last year. I would just like to call attention to the failings of the standard relative strength data people use. They are:
1. It only measures one year, when management's ability to create value relative to the rest of the competing investments is better judged over longer timeframes; and
2. It overweights the most recent quarter, distorting full-year performance and dissuading those who take high RS as gospel from considering investments where quality AND good value compound to provide portfolio outperformance.
In all, push relative strength way down or off your list of things to consider in researching a company. There are much better uses of your time and much more relevant data to consider.
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Brian Graney (TMF Panic), a Fool
David Marino-Nachison (TMF Braden), a new Fool