<THE EVENING NEWS>
Tuesday, March 30, 1999
DJIA 9913.26 -93.52 (-0.93%) S&P 500 1300.75 -9.42 (-0.72%) Nasdaq 2480.29 -12.55 (-0.50%) Russell 2000 398.78 -0.98 (-0.25%) 30-Year Bond 95 6/32 +26/32 5.58 Yield
Some good news out of US Airways Group (NYSE: U) helped rally airline stocks today despite recent reports that the near-term prognosis for the industry was about as appealing as an "is this the chicken or the fish?" dinner. US Airways picked up $3 5/16 to $49 13/16 after saying it expects Q1 EPS to be in line with analysts' estimates of $0.46 despite heavy cancellations from "severe weather along the East Coast." The firm, which also expects to meet Wall Street's full-year $5.60 EPS estimate, added that it intends to buy back $500 million of its shares. Last week, BT Alex. Brown airline analyst Susan Donofrio told Reuters to expect a more-than-40% drop in Q1 net income from the airline industry, in part because of the American Airlines sickout and rising fuel costs. Delta Air Lines (NYSE: DAL) -- also the beneficiary of a reinstated "outperform" rating at Morgan Stanley Dean Witter -- moved up $2 to $71, while American Airlines operator AMR Corp. (NYSE: AMR) rose $3 1/4 to $59 7/8. United Airlines parent UAL Corp. (NYSE: UAL) advanced $2 1/4 to $79 3/8, and Northwest Airlines Corp. (Nasdaq: NWAC) gained $1 to close at $27 11/16.
Home healthcare services provider Apria Healthcare Group (NYSE: AHG) grabbed $2 5/8 to $10 15/16 today after it said it expects Q1 EPS to be at least $0.25, crushing First Call's three-analyst $0.04 profit estimate and last year's $0.13 loss. In fact, Apria returned to profitability today, reporting Q4 EPS of $0.04 -- $0.03 above Wall Street projections -- which reversed a four-quarter stretch of losses. The turnaround, led by a new management team that has downsized and refocused the company, has come sooner than hoped for by Apria and its investors, who are now being instructed to expect increased acquisitions to complement its key respiratory therapy business. Apria said its financial picture has improved to the point that plans for a $50 million convertible debentures offer have been scrapped so the company can look for outside financing that will give it better terms. Among those that have noticed Apria's progress are an investors' group including Cooper Capital, which recently disclosed a 2.8 million share, 5.5% stake in the company purchased earlier this month.
QUICK TAKES: Online services giant America Online (NYSE: AOL) grabbed $12 1/8 to $144 1/2 after it unveiled details about the alliance between its Netscape division and Sun Microsystems (Nasdaq: SUNW), which will work to develop new e-commerce software. Elsewhere, PaineWebber raised its price target on AOL shares to $215 from $125 while reiterating a "buy" rating on the stock. Sun rose $1 7/16 to $125 15/16 today... The announcement of a new addition to the increasingly crowded online pharmacy space sent shares of pharmacy benefits manager (PBM) Express Scripts (Nasdaq: ESRX) up $17 13/16 to $91 7/8 today. Click here for a closer look from today's Lunchtime News... Online travel bidding site Priceline.com Inc. (Nasdaq: PCLN) shot up $53, or 331%, to $69 in its first day of trading, reaching as high as $85 per share after selling 10 million shares at $16 apiece yesterday.
Enterprise software firm Sapient Corp. (Nasdaq: SAPE) gained $6 to $70 after it announced plans to acquire Adjacency Inc., a San Francisco-based consulting firm, in exchange for about $50.6 million of company stock based on yesterday's closing price... Computer media and technology company Ziff-Davis Inc. (NYSE: ZD) raced ahead $5 5/16 to $29 after it said in an SEC filing that an IPO price of $18 or $19 per share is likely for its ZDnet online subsidiary, rather than the $11-$13 range originally expected... Home furnishings retailer Bed Bath & Beyond (Nasdaq: BBBY), rated a new "buy" at Lehman Brothers, added $5/8 to $34 1/2... Canadian broadband datacom products company Newbridge Networks (NYSE: NN) skated ahead $15/16 to $30 5/8 after its TimeStep affiliate, one-third owned by Newbridge, reportedly got an unsolicited takeover bid.
Eyecare company Bausch & Lomb (NYSE: BOL) won $1 to $62 after it said it will acquire privately held ophthalmic diagnostic technology firm Orbtek Inc. for an undisclosed sum... Spray paint equipment maker Binks Sames Corp. (AMEX: BIN) took on $2 5/8 to $18 3/4 after it said it received "unsolicited inquiries by parties interested in acquiring all or a part of the company." Binks Sames has put its financial advisor on the job examining the offers and other strategic alternatives... Central and Eastern European commercial television company Central European Media Enterprises Ltd. (Nasdaq: CETV) tuned in $4 1/2 to $13 after SBS Broadcasting SA (Nasdaq: SBTVF) agreed to buy the company in a stock deal valuing the company at $15 5/16 per share based on yesterday's close, about an 80% premium.
Internet website co-location services and direct access provider AboveNet Communications (Nasdaq: ABOV) rose $25 15/16 to $106 13/16 after announcing plans for a two-for-one stock split effective May 7. Yesterday morning the company reported a joint venture to build one of its Internet service exchanges in Frankfurt, Germany... Southern California commercial banking company East West Bancorp (Nasdaq: EWBC) deposited $1 1/2 to $9 after last night it announced plans to buy back $7 million in company shares on the open market or through private transactions... Drugstore operator Rite Aid Corp. (NYSE: RAD) gained $1 3/16 to $26 7/8 after at least three brokerages set positive ratings on the stock. Yesterday, the shares moved back slightly after fiscal Q4 EPS was worse than the company expected... Equipment rental company Neff Corp. (NYSE: NFF) added $15/16 to $7 15/16 after moving up $1 1/4 yesterday after saying it hired Donaldson, Lufkin & Jenrette to consider strategic alternatives, including a possible sale of the company.
Health care and death care firm Hillenbrand Industries (NYSE: HB) rose $3 3/4 to $45 5/16 after reporting Q1 EPS $0.67, up from the $0.64 that marked both the year-ago tally and the Street's estimate... Powertrain components specialist Borg-Warner Automotive (NYSE: BWA), which said it expects Q1 EPS to beat First Call's $1.18 estimate by approximately 10%, drove ahead $2 9/16 to $47 7/16... Surgical instruments and systems company Conmed Corp. (Nasdaq: CNMD) added $1 7/16 to $30 7/8 after it obtained the FDA's approval to market its Concept Ablator, an arthroscopic surgery device that uses electrical frequencies to remove damaged soft tissue... Photon Dynamics (Nasdaq: PHTN) which makes test, inspection, and repair systems for the flat panel display industry, zoomed ahead $1 1/2 to $7 7/8 after Lehman Brothers set a 12-month price target of $9 a share and boosted its rating on the stock to "outperform" from "neutral."
Razor blades and batteries marketer Gillette Co. (NYSE: G) was nicked for a $3 3/8 loss to $60 1/4 after a Goldman Sachs analyst said the company will see 2% to 4% total sales growth in Q1, below previous growth estimates of 5% to 7%. The culprit, not surprisingly, is continued weakness in international markets, which is also hampering fellow multinational Coca-Cola (NYSE: KO). Coke went flat for a $1 9/16 loss to $63 1/4 today after warning that its worldwide case-volume sales will fall by 1% to 2% in Q1, laying the bulk of the blame on global economic queasiness. While market goo-roos and their ilk take turns congratulating themselves for Dow 10K, the economic waters around what Fed Board Chairman Alan Greenspan termed the U.S. "island of prosperity" continue to show little signs of calming. An estimated 30% of the world's economies are mired in recession and the outlook for worldwide growth still looks bleak, as was recently stated in a Group of 7 communiqu�.
Business certainly is not rosy at floral importer and wholesale distributor U.S.A. Floral Products (Nasdaq: ROSI), which was mowed down for a $4 1/8 loss to $6 3/4 today. The company said lower import demand from South America, lower Dutch export supply, and the strength of the dollar will result in lower-than-expected Q1 revenues. For the quarter, the firm forecasts EPS between $0.21 and $0.24, missing the First Call mean estimate of $0.47. Full year EPS is seen between $0.65 and $0.70, below analysts' expectations of $1.06. The announcement appeared to shock some analysts, four of whom quickly downgraded the company. Just over a month ago, the firm said it was "comfortable" with estimates despite noting that product pricing was slipping somewhat. Today's announcement suggests price deterioration is quite severe, with average unit prices falling between 12.5% to 21% in January and February.
QUICK CUTS: Bikes and sporting goods company Huffy Corp. (NYSE: HUF) skidded $1 7/8 to $13 7/16 after saying it expects Q1 EPS (before charges) to be between $0.08 and $0.12, with earnings from continuing operations to be approximately half that. The two analysts surveyed by First Call had called for EPS of $0.30... >Digital audio and video tool creator Avid Technology (Nasdaq: AVID) slid $7 5/16 to $17 1/16 after saying recent changes in the way the SEC views the accounting treatment of in-process R&D related to acquisitions has prompted it to reduce its $193.7 million Q3 charge for the purchase of Softimage Inc. to $28.4 million. The move will result in a series of smaller quarterly charges by the firm over the next two years... Controlled-release drug maker Alza Corp. (NYSE: AZA) lost $1 3/4 to $39 after Bear Stearns lowered its rating on the company to "attractive" from "buy."
Elderly long-term care provider Centennial HealthCare (Nasdaq: CTEN) dropped $7 1/16 to $8 7/16 after the Department of Health and Human Services' inspector general subpoenaed documents in connection with a civil investigation into possible "improper" Medicare claims by four of the company's facilities. Centennial said it is cooperating with the investigation... Global satellite and paging company Iridium World Communications (Nasdaq: IRID) slipped $3 3/16 to $16 3/4 after Merrill Lynch lowered its near-term rating to "neutral" from "accumulate." Yesterday, the company's shares fell 8% after CFO Roy Grant announced he would step down next month... Communications and electronic products maker Harris Corp. (NYSE: HRS) slumped $2 1/8 to $29 9/16 after pre-announcing fiscal Q3 EPS between $0.50 and $0.54, shy of the First Call mean estimate of $0.60.
Wonder Bread and Hostess snack foods maker Interstate Bakeries Corp. (NYSE: IBC) was burned $1 9/16 to $21 3/16 after posting fiscal Q3 EPS of $0.41, a penny above last year's results but a penny short of the Zacks mean estimate... Specialty insurer Meadowbrook Insurance Group (NYSE: MIG) was shot down for a $2 1/16 loss to $14 3/4 after saying it will report a Q1 loss between $0.14 and $0.16 per share. The company said analysts had been expecting earnings of $0.27 to $0.35 per share. For the year, EPS is seen between $0.70 and $0.73, also below previous expectations... Cigarette and packaged foods company Philip Morris (NYSE: MO) was smoked for a $3 7/16 loss to $37 3/4 after an Oregon court ordered the company to pay $800,000 in compensatory damages and $79.5 million in punitive damages to the family of an ex-smoker who died from cancer.
Los Angeles-based bank holding company GBC Bancorp (Nasdaq: GBCB) lost $2 13/16 to $12 7/8 following a downgrade to "market perform" from "attractive" from Keefe, Bruyette & Woods... Irish pharmaceutical contract research organization Icon PLC (Nasdaq: ICLR) tumbled $13 5/8, or 50.9%, to $13 1/8 after saying a reduced contract from one of its customers will lead to a $5 million decrease in expected fiscal Q3 earnings and 30% year-on-year earnings growth for the year, rather than the 40% growth expected by analysts... Information technology and home healthcare staffing firm Olsten Corp. (NYSE: OLS) slid $3/8 to $6 after saying it will record a $70 million ($0.86 per share) charge in Q1 to settle two federal Medicare investigations and realign its business units.
Why I Selectively Diversify
Over the past year, I'm thankful to have maintained an investment portfolio holding more than the small capitalization stocks that I think provide some of the most compelling investment opportunities in the market. The performance of these stocks has stunk, even as many of the companies in the sector continue to boost their intrinsic value by increasing their cash flows, earnings, and growth prospects. While I still have a strong affinity toward these stocks, I continue to allocate a portion of my portfolio into mid- and large-cap issues in the name of diversification.
For those of you who haven't been following the markets closely (or just hear the daily results of the Dow Jones Industrial Average and the Nasdaq Composite), a lot of stocks out there have not been doing phenomenally well over the past three years. While the Standard and Poor's 500 Index of the largest stocks has returned about 28% compounded annually over the past three years, the Russell 2000 index of smaller stocks has only increased at a compound annual rate of 7%. Over the past year, the small-cap index is actually down 15%!
This weak performance has not necessarily been caused by poor fundamental results. Steak 'N Shake operator Consolidated Products (NYSE: COP), trading at 19x earnings estimates for the year ending in September, has risen only 8% in the past year, despite growing earnings 16%. Convenience store operator Casey's General Stores (Nasdaq: CASY) has grown earnings 19% over the past twelve months with analysts expecting 18% growth in the future. Even though the Price/Earnings (P/E) ratio is only 20x estimates for the year ending in April, the stock has fallen 2% over the past year. Uno Restaurant Corp. (NYSE: UNO) has only risen 6% in the last year despite growing earnings 26% over that period. The stock now trades at 13x trailing earnings.
For a reference point, the S&P 500 is trading about 28x earnings estimates for calendar 1998, with earnings growth estimated to be about 4%. Evaluating a company relative to an index is somewhat like comparing apples to oranges since outliers distort the average. Hypergrowth company America Online (NYSE: AOL), for example, is trading around 330x estimates for calendar 1999 with estimated growth of 50%. On the other hand, tobacco and food conglomerate Phillip Morris (NYSE: MO) trades at only 12x estimates for 1999 with growth prospects of about 13% per year because of the uncertainty surrounding tobacco.
Looking at more representative companies, we find that Clorox (NYSE: CLX) is trading at 36x 1999 earnings estimates and has expected earnings growth of 13% per year. The stock has risen 40% over the past year. Consistent conglomerate General Electric (NYSE: GE) is trading at about 35x earnings estimates for 1999. The last twelve months yielded a 32% gain in the shares of this company. Super-retailer Wal-Mart (NYSE: WMT), which is trading at 42x expected 1999 earnings, has seen its stock price soar 88% over the past year. These last two companies are expected to have growth rates of about 14%.
These three large companies certainly have advantages over the smaller companies I mentioned above. The big boys control powerful international brands, not well-known regional names. The management strength of the large-cap representatives is recognized by both domestic and international investors, whereas the smaller companies have much more condensed shareholder bases. In addition, the financial resources of the larger companies are much greater than those of the small companies. Nonetheless, given the valuation disparities and each company's future opportunities for growth, I believe the small-cap companies listed offer better investment opportunities than the large-cap issues.
However, despite my belief that many of the best investment opportunities in America lie in small-cap stocks, I'm not putting all of my eggs in this basket. I strive to maintain exposure to a variety of investment styles in my portfolio. In other words, I don't want all of my investments to be in the small-cap stocks. I also don't want all of my investments to be in one sector of the economy. While I find restaurants and retailing to be intriguing businesses, I want to have exposure to other parts of the economy, particularly technology, pharmaceuticals, and services that are becoming increasingly prevalent in our society.
My style of investing can best be called selective diversification. I don't want to have a large number of stocks in my portfolio, yet the ones I hold should have some exposure to several different sectors of the economy and the stock market. It's okay to have an emphasis on small-cap stocks in my portfolio, but I also want exposure to other areas -- even if I think they offer slightly inferior long-term prospects. By being selectively diversified, I increase the likelihood of maintaining relatively strong overall investment returns through thick and thin. Over the past year, owning large-cap companies like Northern Telecom (NYSE: NT) and Starbucks (Nasdaq: SBUX) has enabled me to continue posting solid overall returns despite the not-so-impressive returns from most of my small-cap holdings.
If you don't care at all about the volatility of your portfolio and have a high level of confidence that you are invested in excellent growth companies, you don't need my advice. On the other hand, if you're getting a little queasy when significantly underperforming the market over yearly time frames, I think you would benefit from ensuring that your portfolio contains some level of diversification. Not having your all of your portfolio in a sector when it is hot is sometimes a challenge, but you'll likely be grateful when the sector goes out of favor. (Which always happens at some point.)
Those of you who have made a fortune in technology and Internet stocks over the past few years will understandably be hesitant to invest some of your money elsewhere. You will likely find at some point, however, that you are glad to have the balancing effect that a little diversity offers. Just think if you had a pool of reasonably priced stocks that grew earnings at 15%-20% as expected, yet their price stayed flat or even decreased while most other segments of the market soared. If such a situation happens to you, you will be awfully glad to own a wider variety of stocks.
Please see the Motley Fool's Conference Calls page for call information and links to synopses.
Change the World... work for the Fool.
See something moving a stock that we didn't cover?
E-mail the Fool News Team
and we will start working on the story.
Unfortunately, we cannot answer every e-mail
or respond to individual questions.
Brian Graney (TMF Panic), a Fool
David Marino-Nachison (TMF Braden), a new Fool