Thursday, April 15, 1999
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Commercial and military aircraft maker Boeing Co. (NYSE: BA) ascended $3 11/16 to $41 11/16 after reporting Q1 EPS of $0.50, up from last year's dismal $0.05 and ahead of the First Call mean estimate of $0.43. The company chalked up the improved results to higher margins at all three of its business units (commercial, military, and space) and smoother production rates for commercial jets, especially its Next-Generation 737 family. For the year, Boeing is expecting $1.6 billion to $1.8 billion in earnings on about $58 billion in revenues. Boeing shareholders have been down this "worst is behind us" runway before, after a management reshuffling and reports of easing production bottlenecks led to a 41% rise in the firm's shares last fall. Production rate cuts and a fresh round of layoffs dashed the optimism in December, though. So while today's news is certainly encouraging and a step in the right direction for the firm, some performance consistency over a few quarters may be required before management can receive their official "turnaround service" pins.

Mattel (NYSE: MAT) marched up $2 5/16 to $28 1/4 after releasing enough news to fill a spoiled brat's toy box today. While the announcements of a Q1 loss of $0.07 per share and a restructuring that will reduce staff by 10% and result in a $300 million to $350 million Q2 charge excited investors about as much as a tired old toy, plans of a $50 million investment in a Mattel/The Learning Company e-commerce site got traders' blood pumping and the share price jumping. Elsewhere in toyland, arch-rival Hasbro (AMEX: HAS) gained $1 7/8 to $32 after reporting Q1 EPS of $0.07, beating the First Call mean estimate by $0.02. The company said its outlook for the remainder of 1999 looks "very positive," keeping the pressure on Mattel with the rollout of new toys tied to the upcoming first episode of the new Star Wars movie trilogy and Furbys in five foreign languages.

QUICK TAKES: Virus protection software developer Symantec Corp. (Nasdaq: SYMC) gained $2 15/16 to $17 1/16, adding to yesterday's 9% rise fueled by the appointment of former IBM (NYSE: IBM) executive John Thompson as the company's new chairman and CEO... Several aluminum producers got a boost today after Goldman Sachs raised its rating on a quartet of companies. Reynolds Metals (NYSE: RLM) rose $1 7/16 to $57 7/16, Alcan Aluminum (NYSE: AL) added $1 1/16 to $29 3/8, and Kaiser Aluminum (NYSE: KLU) gained $1/2 to $6 7/16. Alcoa (NYSE: AA), which also received an upgrade from Morgan Stanley Dean Witter, rose $9/16 to $53 13/16... Business and information technology consulting firm American Management Systems (Nasdaq: AMSY) tacked on $3 11/16 to $29 5/8 after posting Q1 EPS of $0.37 versus $0.21 a year ago, topping the Zacks mean estimate of $0.29.

Integrated oil and gas company BP Amoco (NYSE: BPA) tacked on $5 5/8 to $105 after Bloomberg News reported that the company said it will meet or beat the First Call mean earnings estimate of $3.07 per share for this year thanks to accelerated cost cutting efforts... Laser vision correction systems developer VISX Inc. (Nasdaq: VISX) eyed a $14 15/32 gain to $133 15/32 after reporting Q1 EPS of $0.58, beating the Street's mean estimate of $0.54. The company also set a two-for-one stock split... Cranes and heavy duty off-road trucks maker Terex Corp. (NYSE: TEX) rumbled $1 11/16 higher to $27 1/2 thanks to a Morgan Stanley Dean Witter upgrade to "strong buy" from "outperform."

Water treatment and process chemicals maker Nalco Chemical Co. (NYSE: NLC) moved up $3 3/16 to $32 5/16 after saying a new shipping software system and strengthening world markets will lead to double-digit year-on-year revenue growth in the period and earnings about 20% above last year's $0.49 per share. Analysts had been expecting EPS of $0.46, according to the company... Computer digital printing technologies developer Electronics for Imaging (Nasdaq: EFII) picked up $5 3/4 to $46 7/8 after posting Q1 EPS of $0.31 compared to $0.08 last year, topping the First Call mean estimate of $0.25... Electronic communications products maker Brooktrout Technology (Nasdaq: BRKT) swam upstream $1 9/16 to $16 11/16 after Prudential Securities raised its rating on the company to "strong buy" from "accumulate."

Arlington, Virginia-based investment bank Friedman, Billings, Ramsey Group (NYSE: FBG) was lifted $4 5/8 to $14 7/16 after launching an online site at www.fbr.com that will allow online investors to participate in the company's initial public offerings and venture capital investments... X86 chipmaker Advanced Micro Devices (NYSE: AMD) rose $1 5/8 to $16 3/8 after reporting a Q1 loss of $0.81 per share (excluding restructuring charges), worse than last year's loss of $0.44 per share but not quite as bad as the thrice-revised First Call mean estimate of a loss of $0.92 per share. However, the company said better production yields over the last seven weeks "increase [its] confidence" in hitting its goal of shipping 5 million chips this quarter.

Programmable logic devices maker Altera Corp. (Nasdaq: ALTR) picked up $9 5/16 to $76 9/16 after posting Q1 EPS of $0.48 (excluding charges), ahead of the First Call mean estimate of $0.44. BT Alex. Brown and Volpe Brown both raised their ratings on the company today... Diversified transportation firm CNF Transportation (NYSE: CNF) rolled $2 1/4 higher to $40 1/16 after Merrill Lynch raised its near-term rating to "accumulate" from "neutral." Fellow trucking company USFreightways (Nasdaq: USFC), which was upgraded to "buy" from "accumulate," rose $3 1/32 to $33 5/32... Cable-based Internet services provider WorldGate Communications (Nasdaq: WGAT) jumped $13 to $34 in its first day of trading after selling 5 million shares in an initial public offering at price of $21 per share.

Earnings Movers

Allaire Corp. (Nasdaq: ALLR) up $5 to $61 1/2; Q1 EPS: loss of $0.19 vs. loss of $0.89 last year; estimate: loss of $0.27

BFGoodrich Co. (NYSE: GR) up $3 to $38 5/16; Q1 EPS: $0.88 (excluding charges) vs. $0.72 last year; estimate: $0.81

Chesapeake Corp. (NYSE: CSK) up $2 5/8 to $31 3/16; Q1 EPS: $0.39 vs. $0.37 (excluding accounting change) last year; estimate: $0.39

Owens Corning (NYSE: OWC) up $2 1/4 to $36; Q1 EPS: $0.77 vs. $0.16 last year; estimate: $0.74

PPG Industries (NYSE: PPG) up $4 15/16 to $58 7/8; Q1 EPS: $0.81 (excluding charges) vs. $1.07 last year; estimate: $0.78

Timberline Software Corp. (Nasdaq: TMBS) up $1 1/4 to $15 1/4; Q1 EPS: $0.23 vs. $0.12 last year; estimate: $0.15


Information storage devices maker Storage Technology Corp. (NYSE: STK) was socked for a $7 1/16, or 27.1%, loss to $19 after the company said it expects Q1 EPS of between $0.05 and $0.10, considerably below the First Call mean projection of $0.42. Disappointing sales of the company's Virtual Storage Manager system and manufacturing constraints on the 9840 tape drive -- both high-margin products -- hurt revenues for the quarter, and the resultant margin pressures were compounded by increased operating expenses laid out in expectation of the sales that didn't materialize. CEO David Weiss, while optimistic that the outlook for the two products will clear up over the next three quarters, conceded that, "We must address both short-term tactical issues and longer-term strategic expense issues." Storage Technology issued another earnings warning in January but said the two products' introductions were on track, instead blaming older merchandise.

Down the block in the storage neighborhood, data storage giant EMC Corp. (NYSE: EMC) reacted strongly to a downgrade to "hold" from "buy" at NationsBanc Montgomery Securities. Analyst Paul Fox said a survey of 45 major companies indicated that 30 of them -- two-thirds -- planned to slow or freeze their new storage purchasing by Q4 in response to Year 2000 fix worries. Shares of EMC lost $9 3/16 to $115 7/8 on the news. The company struck back with a press release this afternoon citing its own survey -- of 250 companies conducted in Q1 -- that it said points to "robust demand throughout 1999." EMC reiterated that it expects revenue and net income to grow 30% during the year. Fox, who cut his Q4 EPS estimate by $0.08 to $0.51, compared to a $0.61 consensus, said EMC's clients might accelerate sales into earlier quarters, perhaps boosting figures in Q1, Q2, and Q3.

QUICK CUTS: Drugmaker Pfizer (NYSE: PFE) spilled $14 5/8 to $130 after it guided investors toward full-year 1999 EPS of between $2.40 and $2.50, hinting at a disappointment when compared with First Call's current $2.49 consensus. Tonight's Rule Maker portfolio report has some additional insights... Brokerage hotshot Charles Schwab Corp. (NYSE: SCH) fell $14 1/4 to $124 despite reporting Q1 EPS of $0.34, up from $0.16 last year and a penny ahead of Street estimates. Growth in daily trades reportedly underperformed industry figures by more than half... Portal operator Excite (Nasdaq: XCIT) lost $3 11/16 to $146 15/16 today. After the close, the company reported Q1 EPS of $0.04, up from losses of $0.16 last year but a penny off analysts' projections.

Information technology investor Safeguard Scientifics (NYSE: SFE) lost $3 3/4 to $86 1/4 today, adding to yesterday's $25 1/8 downward move. The company said yesterday it had no explanation for the losses and no comment has been released today. Discounting today's action, the stock had nearly doubled in the past month... Flash memory data storage products company SanDisk Corp. (Nasdaq: SNDK) retreated $1 7/8 to $21 1/4 after CEO Dr. Eli Harari said "we expect product gross margins to remain under pressure in the second quarter of 1999 due to anticipated declines in average selling prices"... Teen retailer Delia's (Nasdaq: DLIA) dropped $8 3/8 to $22 1/2 after reporting fiscal Q4 EPS of $0.21, up from last year's $0.15 profit and a penny above estimates. Recent spinoff iTurf (Nasdaq: TURF), Delia's Internet subsidiary lost $11 1/2 to $47.

Information gathering and analysis software company Sagent Technology (Nasdaq: SGNT) returned $3 3/16 to $12 3/8 in its second day of trading. The company picked up $6 11/16 yesterday after selling five million shares for $9 apiece... Audio download company audiohighway.com (Nasdaq: AHWY) slowed $3 1/4 to $28 after agreeing to buy online music retailer Mass Music for 36,000 shares of company stock and $200,000 in cash as the company sets plans for a venture into e-commerce... Greeting-card maker Gibson Greetings (Nasdaq: GIBG) lost $3 11/16 to $6 3/8 after it said it expects a Q1 loss of between $0.22 and $0.25, missing Wall Street's $0.36 profit estimate. The company counts lower-than-planned everyday sales among the culprits.

Records and document management outsourcer Lason Inc. (Nasdaq: LSON) shed $11 1/8 to $40 9/16 today. Ten officers and employees of American Presort Inc., the assets of which Lason acquired last year, were reportedly arrested on charges of $25 million worth of postal fraud. Lason said it bought the company after the crime took place but the company wasn't charged... Information technology consulting company META Group Inc. (Nasdaq: METG) faded $4 1/2 to $9 after reporting that it expects Q1 EPS of between $0.10 and $0.11, missing First Call's $0.18 estimate... Vacation planning services company Travel Services International (Nasdaq: TRVL) bagged a loss of $1 1/2 to $6 3/8 after the company said Q1 EPS is seen coming in between $0.05 and $0.07, missing First Call's $0.14 estimate badly.

Insurance giant American International Group (NYSE: AIG) gave up $3 7/8 to $120. The company reportedly turned down a settlement offer that would end its lawsuit against Reliastar Financial (NYSE: RLR)... Digital telecommunications company PairGain Technologies (Nasdaq: PAIR) was pared by $1 5/16 to $11 11/16 today as a company employee was reportedly arrested by the FBI on suspicion of formulating a fake online news report in hopes of boosting his company's stock price... Internet service provider EarthLink (Nasdaq: ELNK), was downgraded to "market performer" from "outperform," slipped $8 1/8 to $73. The brokerage cited concerns about missed subscription targets.

Earnings Movers

Ameritrade (Nasdaq: AMTD) down $11 3/8 to $136 5/8; fiscal Q2 EPS $0.14 vs. break-even last year; estimate: $0.07

Aspect Telecommunications (Nasdaq: ASPT) down $11/16 to $6 5/16; Q1 EPS loss of $0.19 (before charges) vs. profit of $0.28 last year; estimate: loss of $0.10

Donaldson, Lufkin & Jenrette Inc.
(NYSE: DLJ) down $7 15/16 to $85 1/16; Q1 EPS $0.84 vs. $1.00 last year; estimate: $0.70

General Motors (NYSE: GM) down $3 3/16 to $86 9/16; Q1 EPS $3.04 vs. $2.27 last year; estimate: $2.89

Mace Security International Inc. (Nasdaq: MACE) down $2 7/8 to $10 5/8; Q4 EPS loss of $0.04 vs. loss of $0.07 last year; no estimate

Polaroid (NYSE: PRD) down $3/16 to $20 15/16; Q1 EPS loss of $0.34 (before one-time items) vs. loss of $0.39 last year; estimate: loss of $0.35

Tellabs (NYSE: TLAB) down $8 1/16 to $100 1/4; Q1 EPS $0.52 vs. $0.37 last year; estimate: $0.49

Terayon Communication Systems
(Nasdaq: TERN) down $4 5/16 to $51 3/16, Q1 EPS loss of $0.32 vs. loss of $0.48 last year; estimate: loss of $0.29

TranSwitch Corp. (Nasdaq: TXCC) down $7 13/16 to $42; Q1 EPS $0.18 vs. $0.04 last year; estimate: $0.16

An Investment Opinion
by Dale Wettlaufer

What Have You Done for Me Lately?

When looking at a companies like Coca-Cola, Gillette, or Berkshire Hathaway, some people wonder why they're flat or down year-over year. Assuming that those wondering about these things don't have a problem computing compound returns over multiple year time periods, it bears a look at some useful data that indicates why outperformance over multi-year periods doesn't need to be totally linear. Outperformance over multi-year periods also doesn't need to be comprised of outperformance each year; nor does the outperformance need to be placid and lacking in volatility.

In fact, super-normal returns generated by world-class companies or world-class investors frequently show periods of underperformance over short periods of time, sometimes by significant margins. Fund manager Robert Hagstrom details in his recent effort (and best effort on investing, in my opinion), The Warren Buffett Portfolio, the short-term and long-term track records of some excellent investors:

"In 1986, V. Eugene Shanan, a Columbia University Business School alumnus and portfolio manager at U.S. Trust, wrote a follow-up article to Buffett's "The Superinvestors of Graham-and-Doddsville." In his piece, titled "Are Short-Term Performance and Value Investing Mutually Exclusive?" Shahan took on the same question we are now asking: How appropriate is it to measure a money manager's skill on the basis of short-term performance?

"He noted that, with the exception of Buffett himself, many of the people Buffett described as "Superinvestors" -- undeniably skilled, undeniably successful -- faced periods of short-term underperformance. In a money-management version of the tortoise and the hare, Shahan commented, "It may be another of life's ironies that investors principally concerned with short-term performance may well achieve it, but at the expense of long-term results. The outstanding records of the Superinvestors of Graham-and-Doddsville were compiled with apparent indifference to short-term performance." In today's mutual fund performance derby, he pointed out, many of the Superinvestors of Graham-and-Doddsville would have been overlooked." (The Waren Buffet Portfolio, p. 68)

Let's look at some of the track records of these investors, all of whom consider themselves "value" investors in the sense that, whether they are buying growth or assets or whatever, they consider all investing to be value investing. These are John Maynard Keynes, Warren Buffett, Charlie Munger, Bill Ruane, and Lou Simpson:

*Table 4.1 The Superinvestors of Graham-and-Doddsville

Number of years Number of Years of Underperformance years as
of performance Underperformance a % of all years measured

Keynes 18 6 33
Buffett 13 0 0
Munger 14 5 36
Ruane 27 10 37
Simpson 17 4 24

Let's look at the "dog" of the group, Bill Ruane.

*Table 3.4 Sequoia Fund Inc.

Annual Percentage Change
Sequoia Fund (%) S&P 500 (%)

1971 13.5 14.3
1972 3.7 18.9
1973 -24.0 -14.8
1974 -15.7 -26.4
1975 60.5 37.2
1976 72.3 23.6
1977 19.9 -7.4
1978 23.9 6.4
1979 12.1 18.2
1980 12.6 32.3
1981 21.5 -5.0
1982 31.2 21.4
1983 27.3 22.4
1984 18.5 6.1
1985 28.0 31.6
1986 13.3 18.6
1987 7.4 5.2
1988 11.1 16.5
1989 27.9 31.6
1990 -3.8 -3.1
1991 40.0 30.3
1992 9.4 7.6
1993 10.8 10.0
1994 3.3 1.4
1995 41.4 37.5
1996 21.7 22.9
1997 42.3 33.4

Average return 19.6 16.4
Standard deviation 20.6 16.4
Compound annual return 17.9 13.7

[$1 at inception becomes $85.94 at end of 1997 in Sequoia and $32.24 in S&P 500]

Now let's look at the track record of another Superinvestor of Graham-and-Doddsville:

*Table 3.3 Charles Munger Partnership

Annual Percentage Change
Partnership (%) S&P 500 (%)

1962 30.1 -7.6
1963 71.7 20.6
1964 49.7 18.7
1965 8.4 14.2
1966 12.4 -15.8
1967 56.2 19.0
1968 40.4 7.7
1969 28.3 -11.6
1970 -0.1 8.7
1971 25.4 9.8
1972 8.3 18.2
1973 -31.9 -13.1
1974 -31.5 -23.1
1975 73.2 44.4

Average return 24.3 6.4
Standard deviation 33.0 18.5
[Compound annual return 19.8 4.9]

[$1 at inception becomes $12.57 in Munger Partnership and $1.96 in S&P 500]

(*All tables from chapters 3 and 4, The Warren Buffett Portfolio)

The data in brackets are mine. I think this very clearly shows that an analysis of "what have you done for me lately" without looking ahead is unproductive at best and a reinforcement of a poor investment worldview at worst. Super companies and super investors do not necessarily put together multi-year outperformance that is made up of outperformance in each individual year.

Whether you can outperform each year is a less useful a yardstick than whether you can outperform over a number of years. Furthermore, glaring underperformance in some years is not free-standing evidence of poor investing acumen. So if someone presents you with 365-day or 730-day evidence that Coca-Cola, Warren Buffett, David Dreman, or Garrett Van Wagoner haven't done anything lately and that they therefore have lost their touch, you'll have to look at other evidence to see what they can do for you in the future.


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