<THE EVENING NEWS>
Thursday, February 11, 1999
DJIA 9363.46 +186.15 (+2.03%) S&P 500 1254.04 +30.49 (+2.49%) Nasdaq 2405.55 +96.05 (+4.16%) Russell 2000 406.16 +8.20 (+2.06%) 30-Year Bond 98 11/32 +1/32 5.36 Yield
In a move Macy's and Bloomingdale's parent Federated Department Stores (NYSE: FD) hopes will give the department store chain a strong foothold in e-commerce, Federated said it will buy direct marketer Fingerhut Cos. (NYSE: FHT) for $25 per share in cash. Investors cheered the 33% premium on Fingerhut's closing price yesterday, pushing the shares up $5 9/16 to $24 3/8. Federated expects the purchase to hurt earnings for a year or two but anticipates that the deal will accelerate growth and increase its return on investment, and it picks up considerable Internet experience -- as well as Fingerhut's catalog operation -- and a sizable consumer database and order fulfillment savvy in the deal. Unhappy with the dilutive nature of the deal, investors dragged Federated down $2 13/16 to $39 11/16.
Investors rushed to pick up -- and sell -- shares of two more Internet-related initial public offerings today. VerticalNet (Nasdaq: VERT), operator of business-to-business community sites for disparate industries including beverageonline and solidwaste.com (quite a combination, huh?) raced ahead $29 3/8 to $45 3/8 and as high as $55 7/16 after selling 3.5 million shares yesterday at $16 apiece. The shares were among the most actively traded issues today, selling more than twice over. Vertica Software (OTC: VERI) stock traded as high as $6 5/8 yesterday as investors reportedly thought they had lucked into the IPO early -- the company had previously used the VERT ticker symbol. Meanwhile, "venerable" Internet name Prodigy Communications (Nasdaq: PRGY) -- a former America Online (NYSE: AOL) competitor now refocused on Internet connections and, prompted by the Mexican telecommunications company now running the show, the Hispanic market -- finished ahead $13 1/8 to $28 1/8 after selling 8 million shares at $15 each.
QUICK TAKES: In other IPO action, telecommunications software firm Catapult Communications (Nasdaq: CATT) shot up $3 to $13, while healthcare software company Healtheon Corp. (Nasdaq: HLTH) swelled $23 3/8 to $31 3/8 today... Internet portal Lycos (Nasdaq: LCOS) rose $16 to $103 1/4 as a drama unfolded around its planned takeover by USA Networks (Nasdaq: USAI). Internet venture capital firm CMGI Inc. (Nasdaq: CMGI), a 20% owner of Lycos, apparently doesn't support the deal, leading some to speculate that a higher bid for Lycos may be forthcoming. CMGI advanced $19 15/16 to $112... Shares of new media company CNET (Nasdaq: CNET) soared $38 3/16 to $129 1/2 today, rebounding from the recent Internet sell-off, after announcing better-than-expected fourth quarter profits and a crowd-pleasing 2-for-1 stock split payable March 8. Read all about it in today's Lunchtime News.
British bank Barclays PLC's (NYSE: BCS) American depositary receipts, which represent four shares each, deposited $5 1/16 to $93 1/16 following reports that it hired BankAmerica's (NYSE: BAC) Michael O'Neill, an American and the company's president of principal investing and wealth management, as its CEO... Information services provider Electronic Data Systems (NYSE: EDS) rose $2 7/16 to $48 5/16 on news that it will acquire MCI WorldCom's (Nasdaq: WCOM) information technology services unit MCI Systemhouse for $1.65 billion in cash. Further details on the deal are in this morning's Breakfast With the Fool. MCI WorldCom, which reported Q4 EPS a penny ahead of Street projections at $0.23 today, improved $4 3/16 to $80 7/16... Online brokerage firm E*Trade Group (Nasdaq: EGRP) was bid up $5 1/2 to $48 1/4 after it said it completed its initial investment in E*Offering, its Internet-based investment bank.
Year 2000 solutions company Keane (AMEX: KEA) recovered $6 3/4 to $33 3/4 today after issuing a statement clarifying a Dow Jones news story yesterday that said the company overstated Q3 backlog by $83 million. President Brian Keane said the backlog figure has "no impact on our outlook for the future"... Children's and branded shoe marketer Stride Rite Corp. (NYSE: SRR) strode ahead $1 1/2 to $11 7/16 after CEO James Eskridge said at a conference that the company is targeting EPS of more than $1.00 in 2001, well ahead of First Call's $0.77 six-analyst projection... Bargain retailer Dollar Tree Stores (Nasdaq: DLTR), a favorite of the Fool's Warren Gump, added $1 15/16 to $39 3/16 after Goldman Sachs & Co. started coverage of the company, putting it on the "recommended list."
Maryland-based biotechnology firm EntreMed (Nasdaq: ENMD) reclaimed $12 13/16 to $25 11/16 after losing $11 5/8 yesterday on news that Bristol-Myers Squibb (NYSE: BMY) backed away from development of EntreMed's angiostatin protein. Reports that government tests of the company's endostatin anti-cancer drug showed encouraging results in tests on mice helped the shares today... Cable Internet service provider SoftNet Systems (AMEX: SOF) added $1 5/8 to $16 7/8 after it completed the acquisition of privately held Intelligent Communications, which provides two-way satellite Internet access, for about $14 million... PC maker Compaq (NYSE: CPQ) moved ahead $2 3/8 to $44 3/4 after a regional executive told reporters the company expects to become a $50 billion business in 2000. Revenues were $31.17 billion in 1998, up from $24.58 billion in 1997.
Investment banking and securities company Eastbrokers International (Nasdaq: EAST) won $1 15/16 to $7 5/16 after the company said Wolfgang Kossner, its largest shareholder, boosted his stake in the company to 33% after buying 526,884 shares from former Chairman and CEO Peter Schmid in a private transaction at $15 per share... Technology media and marketing firm CMP Media (Nasdaq: CMPX) took $8 to $27 after the company said it retained Lazard Freres & Co. to help examine strategic alternatives including a sale or merger. The company also announced Q4 EPS of $0.20, a penny ahead of Street projections... Online services provider America Online (NYSE: AOL) took on $13 5/8 to $164 1/2 after ING Barings Furman Selz reiterated a "strong buy" rating on the stock.
Semiconductor packaging and testing services provider Amkor Technology (Nasdaq: AMKR) moved up $2 1/4 to $11 1/4 today. "While we continued to experience softness in our packaging and test business during the fourth quarter," said President John Boruch, "we believe we may have reached the bottom of the cycle"... Internet sports media company SportsLine USA (Nasdaq: SPLN) dunked $5 1/4 to $40 1/8 after extending its partnership with CBS Corp. (NYSE: CBS) through 2006. CBS will receive additional equity in SportsLine USA in exchange for providing additional promotional and sales opportunities... Web-based network reporting and analysis tools maker Concord Communications (Nasdaq: CCRD) squeezed out gains of $7 7/16 to $51 3/16 after BancBoston Robertson Stephens upgraded the stock to "buy" from "long-term attractive." Analyst John Powers believes the stock can hit $60 per share in six to nine months.
American International Group (NYSE: AIG) up $7 3/4 to $106 1/2; Q4 EPS $0.94 vs. $0.84 last year; estimate: $0.93
Antec Corp. (Nasdaq: ANTC) up $1 5/16 to $24 13/16; Q4 EPS $0.05 vs. loss of $0.11 last year; estimate: $0.03
Bally Total Fitness (NYSE: BFT) up $1 5/8 to $21 3/4; Q4 EPS $0.19 vs. loss of $0.01 last year; estimate: $0.17
Brite Voice Systems (Nasdaq: BVSI) up $5/8 to $10 3/16; Q4 EPS $0.14 (before charges) vs. $0.04 last year; estimate: $0.12
British Telecommunications (NYSE: BTY) up $15 1/4 to $163 1/2; fiscal Q3 EPS $1.55 vs. $1.53 last year; estimate: $1.47
Fox Entertainment Group (NYSE: FOX) up $1 1/2 to $26 11/16; fiscal Q2 EPS: $0.17 vs. $0.13 last year; estimate: $0.13
Friede Goldman International (NYSE: FGI) up $3/4 to $12 5/8; Q4 EPS $0.51 vs. $0.19 last year; estimate: $0.40
Landstar System (Nasdaq: LSTR) up $2 3/4 to $38 13/16; Q4 EPS $1.07 vs. $0.65 last year; estimate: $0.77
MarketWatch.com (Nasdaq: MKTW) up $6 1/2 to $72; Q4 EPS: loss of $0.47 vs. Q3 EPS of $0.40
News Corp. (NYSE: NWS) up $1 3/8 to $29 3/4; fiscal Q2 EPS $0.34 vs. $0.41 last year; estimate: $0.33
Sunterra Corp. (NYSE: OWN) up $1 1/16 to $12 13/16; $0.35 vs. $0.28 last year; estimate: $0.33
The Class A shares of aerospace parts supplier and services firm HEICO Corp. (NYSE: HEI.A) slumped $1 5/16 to $20 after the company's offering of an additional 3.2 million Class A shares was priced at $20 per share, which was 6.16% below the closing price of the shares yesterday. HEICO's regular common shares (NYSE: HEI) also fell $2 1/16 to $20 13/16. The offering adds $56 million in new financing to HEICO's business, which mostly centers on designing replacement parts for commercial jet aircraft engines. Since FAA approval is needed to market new replacement parts, HEICO finds itself virtually alone in the field, competing only with the world's three engine makers themselves -- General Electric (NYSE: GE), United Technologies' (NYSE: UTX) Pratt & Whitney unit, and Rolls Royce. By pricing its parts below the engine makers' replacement parts, HEICO has been able to carve out a nice business niche for itself, growing EPS at a 62.5% compounded annual rate over the last five years.
Pacemaker and cardiovascular medical device maker St. Jude Medical (NYSE: STJ) was zapped $1 11/16 to $26 9/16 after reporting Q4 EPS of $0.36, up from $0.30 (excluding charges) a year ago and in line with the Zacks mean estimate. However, revenue growth flamed-out during the quarter, as net sales of $248.5 million were essentially flat year-on-year. Also possibly weighing down the stock today was a somewhat cautious near-term forecast; management reportedly said on its conference call that it sees Q1 EPS toward the low end of the $0.38 to $0.45 range currently expected by analysts. In the pacemaker arena, St. Jude is feeling the heat from its larger rivals Medtronic (NYSE: MDT) and Guidant (NYSE: GDT) and their dual chamber implanted defibrillators -- a product St. Jude still lacks. Analysts expect demand for the dual chamber devices will grow 25% to 30% annually, resulting in little added demand for the single chamber products St. Jude sells.
QUICK CUTS: Hotel owner and operator Patriot American Hospitality (NYSE: PAH) slipped $5/8 to $5 7/8 after The Wall Street Journal reported that the company may ditch its real estate investment trust (REIT) status and reorganize as a corporation. The REIT will possibly also discontinue its dividend as requested by Hilton Hotels Corp. (NYSE: HLT) and Apollo Real Estate Advisors, which are both bidding to make a large investment in Patriot American... Cigarette and packaged food products company Philip Morris (NYSE: MO) was burned $1 1/16 to $40 3/8 after a California jury awarded a cancer-stricken ex-smoker $1.5 million in compensatory damages and $50 million in punitive damages in a liability suit against the company. Philip Morris said it will appeal the judgement, calling the punitive damages "absurd and grossly disproportionate to the compensatory damage award."
Fiber-optic transmission products maker Ortel Corp. (Nasdaq: ORTL) slid $2 to $7 after pre-announcing a fiscal Q3 loss of $0.09 per share, below the First Call mean estimate for earnings of $0.03 per share in the quarter, due to slower sales. If the sales slump persists, the company said it could report a loss in Q4 as well... Gallium arsenide integrated circuits maker TriQuint Semiconductor (Nasdaq: TQNT) fell $2 1/4 to $19 7/8 after reporting Q4 operating earnings of $0.25 per share, missing the Zacks mean estimate of $0.32 per share. The results exclude $1 million in "other income" included on the company's income statement... Whitman Corp. (NYSE: WH) fell $1 1/4 to $19 3/8 after Robert Cushing quit as president of Pepsi-Cola General Bottling, Whitman's principal operating unit.
Global telecommunications services firm Teleglobe Inc. (NYSE: TGO) dropped $3 7/16 to $33 3/8 despite reporting Q4 EPS of $0.31 (excluding charges related to its recent merger with Excel Communications), coming in a nickel ahead of the First Call mean estimate. However, revenues declined 9% in the period to $809.6 million... Luxury goods maker Gucci Group N.V. (NYSE: GUC) was tarnished by a $2 1/16 loss to $66 1/4 after announcing that 34.4% stakeholder LVMH Moet Hennessy Louis Vuitton (Nasdaq: LVMHY) has requested a special meeting for Gucci shareholders to vote on a proposal to add a LVMH-backed member to the Gucci board. LVMH fell $2 to $46 1/4 today as well... Outdoor furniture maker Meadowcraft (NYSE: MWI) lost $2 7/8 to $6 1/4 after saying it will report a fiscal Q2 loss on a 21% decline in year-over-year revenues.
International integrated oil and gas company Royal Dutch Petroleum (NYSE: RD) lost $15/16 to $44 after reporting that its Q4 operating profits fell 52% in U.S. dollar terms due to low oil and gas prices, which was a bigger slide than most analysts reportedly had been expecting. Shell Transport & Trading (NYSE: SC), the other member of the Royal Dutch/Shell Group, fell $7/8 to $33 1/4. Several other companies in the oil patch also lost ground this morning. Conoco (NYSE: COC) shed $1 1/8 to $20 9/16, Unocal (NYSE: UCL) slipped $1 7/8 to $29 7/8, and refiner and marketer Sunoco (NYSE: SUN) moved down $2 7/16 to $33 7/16... Fibre Channel-based storage technologies developer Ancor Communications (Nasdaq: ANCR) slid $1 3/8 to $6 3/16 despite reporting a Q4 loss of $0.07 per share, which was not quite as bad as the loss of $0.13 per share expected by the sole analyst surveyed by Zacks.
Natural gas production, transmission, and marketing company Columbia Energy Group (NYSE: CG) slid $2 15/16 to $46 5/16 after reporting Q4 EPS of $1.05, which was below the Zacks mean estimate of $1.24... Eyeglass lens designer and manufacturer Sola International (NYSE: SOL) was shattered $1 9/16 to $12 11/16 after posting fiscal Q3 EPS of $0.25 (excluding charges) after the bell, missing the Zacks mean estimate of $0.39... Hot rolled steel maker Rouge Steel Co. (NYSE: ROU) was torched for a $1 3/8 loss to $10 11/16 after Reuters reported that the company will temporarily layoff 250 to 300 workers at its Dearborn, Michigan facility, which was damaged by an explosion last week.
The Misunderstood Market
The market is a complex adaptive system that very often eludes very simple cause/effect explanations as to why things are moving. Individual insights, in and of themselves, into why something is moving are less often useful than a collection of insights can offer.
Analyst Michael Mauboussin offers an explanation of this truism by drawing a parallel between market efficiency and the behavior of migrating birds. Migrating birds have no leader, though species such as geese fly with what appears to be a leader. That bird does not happen to be a leader, in fact. There is a collective intelligence at work that leads the geese to warmer climes, not some wise bird out front. Oftentimes, market price setting works in such a way.
The interaction of the many players in the market, each of which has its own opinion as to the factors that decide the value of a company, functions in the same way as migratory birds. It might not look as orderly as a gaggle of geese flying chevron formation, but that's because we overlay the notion of orderliness on what those birds are doing. The market's moves here and there are chaotic in appearance, yet they are ultimately highly efficient in setting the right prices for
In the short-term, this might not appear to be the case, depending upon the way you understand the value of some companies. eBay (Nasdaq: EBAY) looks completely ridiculous to some people (who can't help themselves from saying so vehemently on CNBC). If you look at today's price-to-sales ratio in a vacuum, not looking at the company's sales growth rate or the economics of how it generates earnings, naturally you will proclaim it ridiculous if your investment universe consists of cheap, beaten down companies. Seriously, people look at eBay and ask why it's so expensive compared to US Steel (NYSE: X). I actually heard that one the other day.
People will give you all sorts of explanations for eBay, some of which no doubt hold value. These include the reasons that its float is very small, the shorts keep closing out positions at huge losses, individual investors have gone off the deep end, etc. It seems like the commentators that cry "tulip" never proceed from the hypothesis that maybe there is a good reason why eBay is priced the way it is or why Amazon.com (Nasdaq: AMZN) is priced the way it has been.
I won't argue why eBay is undervalued or overvalued, though I think there are good reasons why it should be valued in the multi-billion dollar range (that doesn't mean I do or do not believe its current price is right). It just seems to me that in the mass media and even in many alternative media outlets, the "tulipmania is here" view is the only one expressed. How many times have you seen a local newspaper guy or a financial TV network commentator ask in the fashion of the true skeptic if eBay is undervalued? I've never seen it.
There are obviously market participants that believe eBay has been undervalued or represents a fair value. Mary Meeker at Morgan Stanley is a fan, and evidently so are some of her clients. But she's an analyst. She's not part of the media. When you are part of the media (and don't take this to mean that I think I am, because even if I am a member of the media, I do not think of myself in those terms whatsoever), you've got to come up with these cause/effect explanations every day. In a chaotic, complex world, one person's view of a single cause/effect in the pricing of eBay or things like it really doesn't mean much. That includes the "tulipmania view."
Consider what Federal Reserve Board Chairman Alan Greenspan said in his explanation of Internet stocks a of couple weeks ago. To the ridiculous question one senator posed -- something about the "principal" retirement investment vehicle of Baby Boomers being Internet stocks -- about what was happening with these stocks, Greenspan said simply and most correctly that the market is a highly effective capital allocation machine. As the primary vehicle of the expression of the economy's valuation of its publicly-traded companies, in the world's most efficient economy, it's wrong to assume that only a horde of day traders with itchy trigger fingers are the people driving prices in this segment of the market.
What Greenspan said is that most of these companies will do poorly. I wouldn't disagree. Most publicly traded companies have historically managed to add little to no value to the capital invested in them. Many subtract value from invested capital and few add lots of value. What Chairman Greenspan said isn't new and is not an indictment of any kind. It's a simple statement of fact.
We all have models in our heads that allow us to look at the world in a rational way, but it's disappointing that many people with access to the media -- whether they're investors, anchors, or whoever -- have decided there's only one reason why Internet stocks all trade at the value they do. There are numerous reasons why something like eBay trades where it does and numerous ways it can also lose value, neither of which I consider to be the presence or the eventual non-presence of a speculative bubble.
I won't tell you why I think that is. I don't need to, either. The market already has. Every day it expresses a collective intelligence that updates the price of the company. In the short term, the collective intelligence can fly off course. But over the long run, the collective intelligence of the market has been more than proven. The longer the Internet leaders stay up (by this, I mean relative to the capital invested in them, not relative to the price at which they traded yesterday or last year), the less like a bubble it looks and the more it looks like the result of a rational, complex pricing mechanism.
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