<THE EVENING NEWS>
Tuesday, February 9, 1999
DJIA 9133.03 -158.08 (-1.70%) S&P 500 1216.14 -27.63 (-2.22%) Nasdaq 2310.79 -94.13 (-3.91%) Russell 2000 403.13 -8.20 (-1.99%) 30-Year Bond 99 5/32 +19/32 5.31 Yield
Cable TV networks operator USA Networks (Nasdaq: USAI) jumped $3 11/16 to $41 5/8 after agreeing to combine its Ticketmaster Online-Citysearch (Nasdaq: TMCS), Home Shopping Network, and Internet Shopping Network/First Auction interests with Web portal Lycos (Nasdaq: LCOS). The deal ended weeks of takeover speculation regarding Lycos, dissipating the various rumors swirling about the company like a 2,000 volt bug zapper taking out every stray gnat in sight on a muggy summer night. USA will end up owning 61.5% of the new entity, which will be called USA/Lycos Interactive Networks. Lycos Chairman and CEO Bob Davis reportedly said the new company will have a $45 billion market valuation, but that didn't keep Lycos from losing $33 to $94 1/4 today. Ticketmaster also dropped $15 1/2 to $42 1/4. For more details on the transaction, see this morning's Breakfast With the Fool.
Pharmacy benefit management firm Express Scripts (Nasdaq: ESRX) gained $4 1/2 to $66 7/16 after agreeing to acquire drug maker SmithKline Beecham's (NYSE: SBH) Diversified Pharmaceutical Services subsidiary for $700 million in cash. The deal will create the country's third-largest pharmacy benefit management firm, behind Rite-Aid's (NYSE: RAD) recently acquired PCS Health Systems and Merck's (NYSE: MRK) Merck-Medco unit. Merck-Medco, which manages roughly as many prescriptions annually and spends as much money on drugs on behalf of its clients as PCS, finds itself in an interesting position. The unit may now look appealing to two different kinds of suitors: a large drug store chain looking to keep pace with Rite-Aid, or an independent drug manager intent on giving Express Scripts a run for its managed care money in a growing business with just a few large-scale players.
QUICK TAKES: Medical diagnostic testing services provider Quest Diagnostics (NYSE: DGX) gained $2 11/16 to $22 1/8 after agreeing to buy SmithKline Beecham's (NYSE: SBH) clinical laboratory operations for around $1.3 billion in cash and stock today. SmithKline also added $15/16 to $67 1/8... Telecommunications services company Intermedia Communications (Nasdaq: ICIX) advanced $7/8 to $18 7/16 after reporting a 134% jump in year-on-year revenues in Q4 to $193.4 million, thanks to growth in its Competitive Local services unit and its Enhanced Data and Internet services unit. The company also set plans to sell to the public a roughly 49% stake in its DIGEX Inc. Web hosting subsidiary, which it acquired in 1997.
Personal computing products direct marketer PC Connection (Nasdaq: PCCC) moved up $1 9/16 to $19 1/16 after posting Q4 EPS of $0.32 versus $0.27 a year ago, topping the Zacks mean estimate by $0.03... Hampton Inn and Embassy Suites hotel operator and franchiser Promus Hotel Corp. (NYSE: PRH) advanced $1 13/16 to $31 13/16 thanks to upgrades from PaineWebber and Morgan Stanley Dean Witter... Sneaker maker K-Swiss (Nasdaq: KSWS) sprinted ahead $7 7/8 to $42 1/2 after reporting Q4 EPS of $0.65, beating the $0.53 expected by the two analysts surveyed by Zacks. The company also split its stock two for one, increased its quarterly dividend, and received an upgrade to "trading buy" from "market outperform" from Goldman Sachs.
Omaha, Nebraska-based consumer products distributor AMCON Distributing Co. (Nasdaq: DIST) added $1 1/2 to $8 after reporting fiscal Q1 EPS of $0.56, more than doubling last year's figure of $0.27... Information technology and staffing services provider Metamor Worldwide (Nasdaq: MMWW) climbed $1 to $23 1/16 after reporting Q4 operating EPS of $0.33 compared to $0.18 last year, topping the Zacks mean estimate by a penny. Merger mate SPR Inc. (Nasdaq: SPRI) gained $5/8 to $18 1/8... Ceramic and solid tantalum capacitors producer KEMET Corp. (Nasdaq: KMET) fluxed $1 higher to $11 after Merrill Lynch boosted its near-term rating to "accumulate" from "neutral."
Electronic resistors, capacitors, and transistors maker Vishay Intertechnology (NYSE: VSH) moved up $1 1/2 to $13 after reporting Q4 EPS of $0.21 (excluding charges), in line with the Zacks mean estimate. The company said demand in its key telecommunications and mobile computers markets is improving and 1999 should be a better year than 1998. Merrill Lynch raised its near-term rating to "accumulate" from "neutral"... Textile company Delta Woodside Industries (NYSE: DLW) wove its way $1 1/4 higher to $6 after its board gave the green light to spin-offs of its Duck Head and Delta apparel units. The company reportedly will then try to sell its remaining assets, leaving shareholders with shares from both spin-offs and a cash payment.
Fluid flow control systems maker Parker-Hannifin Corp. (NYSE: PH) gushed ahead $1 13/16 to $36 after Morgan Stanley Dean Witter raised its rating to "outperform" from "neutral" and set a price target of $40 per share based on the strength of the U.S. economy and expectations of future industrial sector growth... Medical diagnostic applications developer Cytyc Corp. (Nasdaq: CYTC) picked up $1 1/4 to $17 3/8 after BancBoston Robertson Stephens started coverage with a "buy" rating and Piper Jaffray boosted its opinion to "strong buy" from "buy"... Solid fuel propulsion systems and aerospace fasteners maker Cordant Technologies (NYSE: CDD) rose $1 9/16 to $38 5/16 after posting Q4 EPS of $0.80, beating the First Call mean estimate by $0.02. The company also said it is "comfortable" with Street's earnings estimates for fiscal 1999 and 2000.
Shareholders of food wholesaler and grocer store operator Nash Finch (Nasdaq: NAFC) ate up a loss of 25% today as the stock dropped $3 1/4 to $9 3/4. The company announced preliminary Q4 results showing an ongoing loss of $0.04 per share, compared to a profit of $0.51 per share last year. Furthermore, the company will reduce its first quarter dividend by 50% to $0.09 per share to save cash. First Call no longer has an earnings estimate for the company, demonstrating the low level of interest investors have in the stock. Excluded from ongoing results is a $105.6 million pre-tax charge ($5.75 per share, after-tax) related to a "revitalization effort," including closing warehouses and stores and writing off software that will no longer be used.
Outpatient surgery and rehabilitative services provider HEALTHSOUTH Corp. (NYSE: HRC) slid $1 9/16 to $13 5/16 after saying it will take a $310 million non-cash charge in Q4 to revalue assets obtained through past acquisitions. The company said various inherited businesses will be sold off, allowing for more focus on the core surgical and rehab operations. Additionally, a 1.6 million share buyback plan has been completed, permitting the company to embark on an extended 70 million share repurchase program over the next 3 years. While the size of the buyback is staggering and represents 16% of the firm's total sharecount, management's rationale is simple -- it believes the stock is a bargain. With its shares trading at 12 times fiscal 1999 earnings of $1.13 per share and its cash flow from operations forecasted at a "mere" $500 to $600 million this year, HEALTHSOUTH is taking advantage of a buying opportunity presented by a stock market that has been healthcare-wary for nearly a year now.
QUICK CUTS: Online services conglomerate America Online (NYSE: AOL) slumped $11 to $148 despite announcing a multi-year, multi-million dollar agreement making CNET (Nasdaq: CNET) the exclusive provider of computer hardware and software buying guides to AOL's online community. CNET also fell $25 3/4 to $98 1/2. Separately, AOL also announced that it has recently surpassed the 16 million worldwide member mark... Financial news agency Reuters Group PLC (Nasdaq: RTRSY) fell $4 3/4 to $80 5/8 after saying it expects lower revenue growth in fiscal 1999 as its clients hold back spending amid an uncertain outlook for global markets and economies... Staffing services provider SOS Staffing Services (Nasdaq: SOSS) fell overboard and sank $5/8 to $8 3/4 after reporting Q4 EPS of $0.13 (excluding restructuring charges and income tax credits), missing the First Call mean estimate of $0.20.
Chip giant Intel (Nasdaq: INTC) lost $6 11/16 to $125 5/16 despite news that Eastman Kodak (NYSE: EK) has started offering photo processing on CD-ROM disks through a new product, called Picture CD, jointly developed with Intel using software from Adobe Systems (Nasdaq: ADBE). Adobe also fell $2 11/16 to $43 11/16... Satellite-based telecom services firm Globalstar (Nasdaq: GSTRF) dropped $7/8 to $18 even though it successfully launched four satellites from Kazakhstan last night. For more details on Globalstar, see this afternoon's Fool Plate Special... Sun International Hotels (NYSE: SIH) slipped $2 1/16 to $37 1/4 after Merrill Lynch lowered its near-term rating to "neutral" from "accumulate," citing higher capital spending, interest expense, and depreciation and amortization expenses at the resort and casino operator.
Internet domain name registrar Network Solutions (Nasdaq: NSOL) lost $26 1/8 to $148 after falling 12% yesterday. This morning, the company announced a secondary offering of 4.58 million shares, most of which will be sold by privately held Science Applications International Corp. at a price of $170 per share... Navarre Corp. (Nasdaq: NAVR) slipped $2 5/8 to $15 3/8 after saying it intends to file a registration statement with the SEC for the long-awaited initial public offering of shares of its online music delivery service Net Radio "within the next several weeks"... Digital and mixed signal chip maker TranSwitch Corp. (Nasdaq: TXCC) was spanked $3 1/16 to $36 3/16 after announcing a secondary offering of 1.7 million shares at a price of $37 per share, 6% below the company's closing price of $39 1/4 yesterday.
Healthcare financing company HealthCare Financial Partners (NYSE: HCF) was cut $5 3/4 to $27 1/2 despite reporting Q4 EPS of $0.42, beating the First Call estimate by $0.02. However, analysts reportedly raised concerns that the company's "other income" portion of its income statement rose nearly six-fold in the quarter to $2.76 million... Property and casualty insurer Reliance Group Holdings (NYSE: REL) slid $1 5/16 to $9 13/16 after posting Q4 EPS of $0.25 (excluding gains), missing the First Call mean estimate of $0.33... Semiconductor foundry services provider Taiwan Semiconductor (NYSE: TSM) slipped $1 1/4 to $18 3/8 after the company said its sales in January fell more than 29% in domestic currency terms.
Fine wine direct marketer Geerlings & Wade (Nasdaq: GEER) was spiked $1 7/32 to $6 9/32 after reporting Q4 EPS of $0.11, down from the $0.12 reported last year... French computer aided design (CAD) software developer Dassault Systems S.A. (Nasdaq: DASTY) slumped $5 9/16 to $39 9/16 following a J.P. Morgan downgrade to "long-term buy" from "buy"... TMP Worldwide (Nasdaq: TMPW) fell $4 to $52 1/2 after Morgan Stanley Dean Witter lowered its opinion on the marketing and advertising company to "outperform" from "strong buy"... Investment technologies and services provider SEI Investments Co. (Nasdaq: SEIC) was knocked down $8 15/16 to $94 1/8 by a downgrade to "outperform" from "buy" by ABN AMRO.
Higher Returns, Higher Volatility
An increasing number of articles touting the benefits of concentrating investments into just a few vehicles seem to be flying around. In fact, most writers here at the Fool concur with that line of thinking, believing it's better to invest in only a few top-quality stocks rather than a whole bunch. While an excellent strategy for many investors, be sure not to ignore the fact that focused investing usually increases the volatility of your portfolio. That's not a bad thing -- it's just an outcome you have to be comfortable accepting.
The benefits of a non-diversified portfolio are numerous. Foremost is that owning only a few stocks will force you to be more selective. Think of a situation where you own 9 stocks and limit yourself to owning only 10 stocks. You've saved up enough money to make an additional purchase and have a list of eight prospects. Of the eight, however, you can only pick one. You will be forcing yourself to make a decision about which stock offers the greatest long-term potential. Not always an easy task, but one that will force you to evaluate the prospects of each company and choose the one that seems most likely to succeed.
Owning only a few stocks also keeps your portfolio management task manageable. Before investing in a company, you need to spend time learning about its industry and business model. After owning a stock, you should invest more time (at least once a quarter), monitoring the performance of the company. Unless you spend all day researching your portfolio, tracking more than a few stocks will prove to be quite a chore. Maintaining no more than 5-15 stocks (everyone defines "focused" a little differently) improves the likelihood that you'll develop a good understanding of each company and its prospects.
Assuming that you have thoroughly done your research and the stocks perform as expected, engaging in a focused strategy leads to stellar returns. You have a group of high quality thoroughbreds in your stable, all galloping ahead in the business world to make you more money. The picture is serene and beautiful. No laggards are pulling down the performance of your portfolio. Your returns are zooming upward. Until, that is, one of your horses is injured.
Even if you were the best stock picker in the world, your companies and stocks are going to run into short-term and possibly long-term problems. A competitor might introduce new products, the government could propose or enact new regulations, or your company might just make a mistake. When that happens, each tumble by a stock in a focused portfolio will have a noticeable adverse impact.
It might be a little easier to comprehend with a numerical example. Let's assume that you have a five stock portfolio. Four of the companies have a good year and their stock prices increase by 15%. One of the stocks, however, is a true superstar and soars 50%. Combining the results for this five stock portfolio results in a total return of 22%. The strong advances by the one superstar increased the portfolio's total return by 7 percentage points over the 15% gain achieved by most of the stocks.
In a 30-stock portfolio, however, the impact of having one superstar performer will not be as significant. Assuming that 29 of the stocks increase 15% and one soars 50%, the total return of the portfolio will be 16%. The superstar's surge only boosts the overall portfolio performance by 1 percentage point. Moves in any one security are dampened by a diversified portfolio.
When the news on stocks in a portfolio is positive, having a focused portfolio is advantageous. On the other hand, when disappointing news hits a stock in a concentrated portfolio, the bad news has an equally powerful adverse impact. If the signs were reversed on the above examples, investors in a concentrated portfolio would not be quite so happy. The holder of the five stock portfolio would be down by 22% compared to a 16% decline for the holder of the diversified portfolio. Always remember that stocks go both up and down in the short- and medium-term.
What does this information mean to an investor? A concentrated portfolio will usually have higher volatility than a diversified portfolio. Moves of individual portfolio will have a more significant influence over returns than the performance of the market at large. In a diversified portfolio, the moves of the overall market tend to have greater importance than the moves in any individual stocks.
If you utilize a concentrated strategy, you need to be prepared for the increase price volatility associated with such a portfolio. The highs will be higher, but the lows will also be lower. If you can't tolerate the "lower lows," you should be cautious about pursuing a focused strategy. If you are going to be frightened out of stocks in a downturn (how did you respond last October when uncertainty was at its peak?), you will likely end up selling at low prices, locking in your losses.
Obtaining the "higher highs" possible with a concentrated portfolio is really exciting and rewarding. You've got to recognize, however, that it isn't a free ride. To benefit from such a strategy, you have to feel confident about your ability to pick good stocks (like any Fool). In addition, you must be willing to accept the more dramatic price moves (both up and down) that will occur on a daily, weekly, quarterly, and annual basis.
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David Marino-Nachison (TMF Braden), a new Fool