Friday, April 9, 1999
DJIA          10173.84   -23.86      (-0.23%)
S&P 500        1348.35    +4.37      (+0.33%)
Nasdaq         2593.05   +19.66      (+0.76%)
Russell 2000    405.86    +5.97      (+1.49%)
30-Year Bond  96 30/32    -7/32  5.46 Yield


Gigabyte Ethernet switches maker Extreme Networks (Nasdaq: EXTR) made investors extremely happy today, rising $38 3/8 to $55 3/8 after selling 7 million shares in an initial public offering at a price of $17 per share. The company's switches and software are designed to increase bandwidth across enterprise local area networks (LAN), acting as "less expensive and significantly faster routers," according to the company's S-1 federal filing. Extreme Networks is running headlong into a competitive marketplace featuring such well-established rivals as Cisco Systems (Nasdaq: CSCO) and Nortel Networks (NYSE: NT). But with one research group expecting the gigabyte Ethernet sea to expand to $3.4 billion by 2001, the company is hoping there is enough swimming room to avoid becoming fish food in the eyes of the big networking sharks. Clients like Compaq and Barnes & Noble and venture capital backing from Silicon Valley heavyweight Kleiner Perkins should provide Extreme Networks with some initial cover, however.

Joining the initial public offering festivities today was iTurf Inc. (Nasdaq: TURF), the long-awaited incarnation of the online operations of teen apparel retailer dELiA*s (Nasdaq: DLIA). iTurf gained $35 7/16 to $57 7/16 from its IPO price of $22 after selling 4.2 million shares, which worked out to about a 25% stake. At those levels, the market slapped on a debutante valuation approaching $1 billion for the entire company, which posted $1.9 million in revenues and $52,000 in net income for the nine-month period ending last Oct. 31. iTurf's performance blew away the first-day results of its parent, which garnered a "meager" $173 million valuation during its own coming out party in late 1996. At that time, however, dELiA*s was selling its Generation Y-targeted products purely through catalogs and bricks-and-mortar retailers -- a fact that underlines the valuation chasm that has opened up between New World and Old World business models over the past three years.

QUICK TAKES: Scalable Internet search and caching software developer Inktomi Corp. (Nasdaq: INKT) added $27 9/16 to $132 3/16 after announcing that its Inktomi Shopping Engine online shopping platform has signed agreements with five new portal sites and over 350 online merchants offering more than two million products over the Internet... Online community operator theglobe.com (Nasdaq: TGLO) gained $19 15/16 to $78 15/16 after announcing a 2-for-1 stock split, effective May 14... Wholesale pharmaceuticals distributor AmeriSource Health Corp. (NYSE: AAS) rose $2 1/8 to $28 3/8 after saying it expects its fiscal Q2 earnings to be in line with the $0.40 per share currently expected by analysts. Additionally, the company forecasted at least 20% EPS growth for the second half of fiscal 1999 and beyond.

Telecommunications networking services company e.spire Communications (Nasdaq: ESPI) picked up $2 5/8 to $15 13/16 after Business Week's "Inside Wall Street" column speculated that the company might be a takeover target... Electronic payment technologies firm Bottomline Technologies (Nasdaq: EPAY) tacked on $3 3/4 to $64 1/2 after signing an alliance with enterprise resource planning software developer PeopleSoft (Nasdaq: PSFT) to provide PeopleSoft's clients with Bottomline's PayBase 32 suite of e-commerce enabling products... SkyWest Inc. (Nasdaq: SKYW), which provides carrier service for Delta Airlines' (NYSE: DAL) Delta Connection regional airline, gained $1 5/8 to $25 1/2 after Merrill Lynch boosted its near-term rating on the company to "buy" from "accumulate."

Compass Bancshares (Nasdaq: CBSS) gained $2 5/16 to $28 13/16 on speculation that the Birmingham, Alabama-based bank holding company may be a takeover target. The Wall Street Journal reported that the company rejected a merger offer late last year from rival AmSouth Bancorp (NYSE: ASO)... Professional hockey team owner and hotels operator Florida Panthers Holdings (NYSE: PAW) clawed its way $1 7/8 higher to $9 1/2 after reporting fiscal Q3 EPS of $0.70, up from $0.39 a year ago and ahead of the First Call mean estimate of $0.61... Financial services holding company International Assets Holding (Nasdaq: IAAC) advanced $6 9/16, or 114.1%, to $12 5/16 after saying its International Trader Association subsidiary will start providing online brokerage services in the third quarter.

Local and long-distance telephone services provider MGC Communications (Nasdaq: MGCX) added another $8 1/2 to $46 today on continued positive vibes from a $47.5 million equity investment announced on Monday. For the week, the company's shares racked up a tidy 511% gain... Online packaged software applications provider USinternetworking (Nasdaq: USIX) jumped $36 1/2 to $57 1/2 in its first day of trading after selling six million shares at a price of $21 per stub... Internet access and web services provider Rocky Mountain Internet (Nasdaq: RMII) climbed $2 5/16 to $13 11/16 after saying it will acquire the assets of privately held Seattle-based telecommunications interexchange carriers UStel Inc. and Arcada Communications for $17 million in cash and 275,000 stock warrants.


Upbeat earnings news couldn't help shares of Vitesse Semiconductor (Nasdaq: VTSS) today after analysts reacted to comments that clouded their outlook for the coming quarter. Vitesse, which makes high-bandwidth communications and automatic test equipment integrated circuits, last night reported fiscal second-quarter earnings of $0.22, $0.06 better than last year and a penny ahead of market projections. The worrisome news came when CEO Louis Tomasetta said in a conference call that Vitesse's biggest customer, telecommunications equipment maker Lucent Technologies (NYSE: LU) began exporting its manufacturing to other companies, which could disrupt bookings in Q3 as Lucent's contractors begin ordering from Vitesse instead of Lucent itself. As a result, Vitesse refrained from giving analysts guidance about Q3 sales. Not all market watchers were pessimistic -- at least two analysts posted positive ratings on the company today -- but investors backed away from the stock nonetheless, sending the shares down $6 5/8 to $51 in busy trading.

Intravascular ultrasound imaging products maker EndoSonics Corp. (Nasdaq: ESON) dropped $2 7/32 to $5 1/32 after it told investors to expect Q1 EPS to miss market estimates and hinted at slower growth in future periods as well. Q1 earnings, pulled back by revenues seen around $800,000 instead of the $2 million projected by Wall Street, are expected to come in around $0.05 per share, $0.02 below the First Call mean estimate. Some issues overseas are slowing the company's revenue growth -- EndoSonics is still waiting on Japanese regulatory approval for its balloon catheters, a product developed by a company it acquired in August, and worldwide rollout of its WaveWire blood flow monitor has been slower than expected. CEO Reinhard Warnking warned in a statement last night that those issues "would slow the Company's growth rate in the short term as compared to current analyst estimates." At least three brokerages downgraded EndoSonics today.

QUICK CUTS: Healthcare management information systems company Cerner Corp. (Nasdaq: CERN) dropped $2 9/16 to $12 1/2 after saying Q1 EPS is seen between $0.06 and $0.09, missing First Call's $0.16 consensus estimate. The company blamed deferred purchase decisions... Biopharmaceutical company Biogen (Nasdaq: BGEN), a recent Foolish Double, lost $5 9/16 to $114 7/16 after last night reporting Q1 EPS of $0.58, in line with First Call's mean estimate... Music retailer National Record Mart (Nasdaq: NRMI), which said March same-store sales rose 2.5% to $7.5 million, gave back $1 3/4 to $8 3/4. Total sales for the month were up 22.6% to $9.2 million. For a rundown of March retail sales figures, click here, or see The Lunchtime News for a column taking a look at sales during the Easter season.

Non-laser vision correction products maker KeraVision Inc. (Nasdaq: KERA) clouded $1 3/4 to $13 5/16 despite the FDA's approval of its Intacs corneal rings that fight nearsightedness... Office supplies retailer Staples (Nasdaq: SPLS) gave up $1 5/16 to $34 7/16 after the company said in an SEC filing that it wants to boost authorized common shares by 500 million to 1 billion... Online software retailer Beyond.com (Nasdaq: BYND) lost $1 1/8 to $34 3/8 following news that rival Digital River (Nasdaq: DRIV) is suing the company, alleging that its officers made false and defamatory statements about Digital River... Personal finance software developer Intuit (Nasdaq: INTU) shed $4 3/16 to $106 1/16 after Credit Suisse First Boston downgraded the stock to "buy" from "strong buy," reportedly because of valuation.

Internet retailer Value America Inc. (Nasdaq: VUSA) lost $10 3/16 to $45 after picking up $32 3/16 yesterday in its first day of trading. The company sold 5.5 million shares for $23 each... Jersey City brokerage M. H. Meyerson & Co. (Nasdaq: MHMY) ticked down $1 11/16 to $6 5/16 after selling 500,000 shares of company stock for $5 apiece in a private placement to fund working capital and "general corporate purposes." Many of the online brokerages that gained ground yesterday moved back in today's session, as Siebert Financial (Nasdaq: SIEB) lost $2 9/16 to $32 1/2, J.B. Oxford Holdings (Nasdaq: JBOH) fell $2 3/8 to $12 7/16 and E*Trade (Nasdaq: EGRP) gave up $2 3/4 to end at $90 1/8... Consumer textiles company Fruit of the Loom (NYSE: FTL), downgraded to "buy" from "strong buy" at Credit Suisse First Boston, wrinkled $1 to $9 3/4.

Internet software developer Spyglass Inc. (Nasdaq: SPYG) gave back $1 7/16 to $16 3/16 after picking up $8 3/4 in the past two days on news of a three-year, $20 million licensing deal with software giant Microsoft (Nasdaq: MSFT) and the purchase of Navitel Communications... Manufactured housing maker and marketer Oakwood Homes (NYSE: OH) fell $3/16 to $12 1/2 after the company said it expects fiscal Q2 EPS of between $0.17 and $0.22, missing the market's $0.27 consensus projection... Chemical company Union Carbide (NYSE: UK) bubbled off $3 5/16 to $48 1/16 after Morgan Stanley Dean Witter downgraded the stock to "neutral" from "outperform"... Data management software firm Fair, Isaac and Co. (NYSE: FIC) cooled $2 9/16 to $33 11/16 following last night's news that President and CEO Larry Rosenberger will resign to head up the company's development unit.

An Investment Opinion
by Warren Gump

Check out the SEC Fee Calculator

Since its inception, The Motley Fool has been advocating the use of low-cost index funds over actively managed funds for investors who don't have the time or inclination to pick individual stocks. The primary reason for our preference of these funds is their outperformance over actively managed funds over the years. Over the past ten years, for example, the S&P 500 index has beaten almost 90% of all actively managed equity funds. A big reason for this poor performance is that actively managed funds must pay a manager and analysts to pick stocks, causing their expenses generally to be much higher than a passively managed index fund. How important are these expenses to investment performance? The Securities and Exchange Commission (SEC) has just released an online calculator that will show you.

You wouldn't think that calculating the expenses of a mutual fund would be
difficult, but in fact it is a somewhat complicated procedure. First, all of the fees charged are based on a percentage of assets under management. No quick and easy $50 for this, $25 for that. Instead, it is 0.50% of assets for this and 0.25% of assets for that. Next, on top of the actual dollars you pay in expenses, you have to incorporate the foregone earnings you would have made if your fees were invested. Let's say you paid an initial fee (or "load" in industry terms) of $100 on an investment that returned 11%. Your ending balance a year later will actually be $111 lower than an investment without a load because you lose out on the $11 gain your load would have earned had it been invested. As you will soon see, foregone earnings can be a major issue, particularly for long-term investors. The SEC calculator incorporates all of these costs.

Let's look at the difference between a high cost and a low cost fund to see how much fund fees can ultimately cost you. For comparison, we'll use three different S&P 500 index funds that are currently available. We'll assume that an investor puts $10,000 in each fund and the expected gross return is 11% per year. All of the loads and expenses used in the example below were pulled from online prospectuses:

1) Morgan Stanley Dean Witter S&P 500 Index Fund Class A
Load: 5.25% Front-end     Ongoing fees (incl. 12b-1): 0.74%

2) Morgan Stanley Dean Witter S&P 500 Index Fund Class C
Load: None     Ongoing fees (incl. 12b-1): 1.50%

3) Vanguard Index Trust -- 500 Portfolio
Load: None     Ongoing fees (incl. 12b-1): 0.19%

Here are the values and expenses for the portfolios after 10 years:

Paid Foregone
Fund Ending Value Expenses Earnings
MSDW 500--A $24,977.66 $1,776.05 $3,416.55
MSDW 500--C $24,411.37 $2,570.44 $3,982.84
Vanguard 500 $27,859.31 $ 349.11 $534.90

After 30 years, the calculations are as follows:

Paid Foregone
Fund Ending Value Expenses Earnings
MSDW 500--A $173,578.81 $13,767.99 $55,344.16
MSDW 500--C $145,470.95 $24,162.74 $83,452.01
Vanguard 500 $216,227.55 $4,031.24 $12,695.41

As you can clearly see, the impact of fees is dramatic. Over a 10-year period, the low-cost Vanguard fund will save you around $3,000 or more over the Morgan Stanley Funds. The discrepancy becomes even more significant over longer periods of time. Over 30 years, the Vanguard fund will save you more than $40,000 over the Morgan Stanley Class A shares and more than $70,000 over the Morgan Stanley Class C shares. As mentioned previously, these are good comparisons since each fund is designed to mimic the same index.

This example shows you how Morgan Stanley is lining its pockets at your expense. If you think that the advice provided by the company's brokers is worth these high fees, go for it. But if you would prefer $40,000 or more in your coffers after 30 years, avoid that Morgan Stanley fund like the plague. This example brings up a very important point. The Motley Fool doesn't advocate simply investing in any index fund... you should put your money into a low-cost index fund.

You might be surprised to see that the cost of foregone earnings is much greater than the actual costs paid to the funds for long-term holders. When paying fees and loads, you are not only losing out on the money you are paying to the fund for operations. You are also missing out on the gains that those fees could have earned if they were invested in the fund. This severely hampers the terminal value of your investment, particularly if fees and loads are high. Over the 30-year period in the example above, the Vanguard 500 fund saves an investor $9,700 in paid fees relative to the Morgan Stanley 500 Class A shares. More importantly, though, this investor saves over $30,000... that's $30,000 in foregone earnings that you would have been lost if the money were in the Morgan Stanley option.

Evaluating comparable index funds simply on cost is reasonable since their expected return should always be the same. The ultimate decision on which fund to buy is simple -- go with the fund that has the lowest overall total expenses over your investment horizon. If for some reason you decide to venture into actively managed portfolios, however, the decision becomes more complicated. You need to evaluate whether the investment manager can overcome the fees you will be charged.

Most active managers trail the market indices because of the expenses investors must pay for active management. Using the SEC calculator will clearly show you the dollar value of the disadvantage caused by a fund's fee structure. Before investing in a fund with a high expense structure, you need to be confident that its managers can beat your investment alternatives by at least the amount of the load and expenses. The calculator will help you see how much a manager will need to outperform the market to overcome the handicap of higher expenses. (One aside: the calculator does not incorporate the expense of higher capital gains taxes likely to be incurred in an actively managed fund.)

Taking advantage of the SEC's new calculator will make you a much more informed investor. Before going to the site, find out the load and expense ratio (available in the prospectus) of each fund you're considering so that you can enter them into the calculator. Once you determine how much funds really cost, you'll see why The Motley Fool encourages you to place your mutual fund investments into low-cost index funds.


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