<THE EVENING NEWS>
Monday, April 19, 1999
MARKET CLOSE
DJIA          10440.53   -53.36   (-0.51%)
S&P 500        1289.48   -29.52   (-2.24%)
Nasdaq         2345.61  -138.43   (-5.57%)
Russell 2000    412.41    -9.17   (-2.18%)
30-Year Bond   96 4/32   +25/32     5.52 Yield

HEROES

In keeping with the trend of Internet companies being able to stir investor fervor based just as much on the promise of services to become available eventually as services available today, bank holding company USABancShares (Nasdaq: USAB) raced ahead $3 3/8, or 31%, to $14 1/4 today after launching its USABanc.com online banking service. The site itself is pretty much a tease, even featuring a movie-theater style animation mimicking the famous "coming soon" green screen. For now, users can check stock quotes and buy CDs online; full brokerage services are scheduled for a third-quarter release. Given the strength of that news, that USABancShares was able to withstand the forces pulling down its competitors today is a little baffling, as Florida Banks (Nasdaq: FLBK) lost $3 1/8 to $10 1/4, Net.B@nk (Nasdaq: NTBK) retreated $34 13/16 to $139 7/8 and Atlantic Bank (Nasdaq: ATLB) returned $1 3/4 to $19 1/4. Even Equitex (Nasdaq: EQTX), which said Net1Bank -- the Internet bank it announced plans to buy a week ago -- expects to be profitable this month, a quarter ahead of forecasts, gave up $2 3/4 to $15 1/4.

Healthcare information technology firm QuadraMed (Nasdaq: QMDC) won $1 27/32 to $8 1/32 after the company said it expects first-quarter revenues of between $57.5 million and $60 million, up from $46.3 million in Q4 and nearly 90% ahead of the year-ago $30.7 million figure. QuadraMed, which has its data systems in use in 3,800 hospitals in the U.S. and Canada, hasn't had much of a year so far, with its shares tumbling more than 70% in 1999. But with Wall Street expecting consistent earnings growth in 1999 and a breakout year in 2000 from a company that hasn't disappointed analysts much in the past two years, investors may want to take a longer look at the former highflier that has hung around penny stock territory of late. Trading today was about twice the company's average for the last 30 days.

QUICK TAKES: Automaker General Motors (NYSE: GM) sped up $2 1/16 to $90 on news of a five-year technology pact with Japan's Toyota (Nasdaq: TOYOY) to develop technology for electric and fuel cell vehicles. Toyota's American depositary receipts moved up $1 to $61 3/4... Paramount Pictures and MTV Networks parent Viacom Inc. (AMEX: VIA), which announced the expansion of its stock purchase program by $100 million to $600 million to include the company's outstanding warrants, got $1 3/16 to $41 9/16... Gas company Consolidated Natural Gas (NYSE: CNG) steamed up $3 9/16 to $56 after Columbia Energy Group (NYSE: CG) announced an unsolicited takeover offer for Consolidated. Under the offer, each Consolidated share would be converted into $45.50 in cash and $24.50 in Columbia stock.

Lyondell Petrochemical Co. (NYSE: LYO), which makes ethylene and propylene used in plastics, took $13/16 to $16 1/4 after announcing that its lenders approved a refinancing plan to help the company meet its near-term debt requirements... Secondary mortgage market giant Fannie Mae (NYSE: FNM) got $2 7/16 to $68 5/8 after announcing that lenders will have access to First Union's (NYSE: FTU) jumbo mortgage underwriting services network... Financial services company Metris Companies (Nasdaq: MTRS) gained $5 1/32 to $59 1/32 after U.S. Bancorp Piper Jaffray analyst Jeffrey Evanson raised his Q1 EPS estimate by a nickel to $0.67, $0.04 ahead of First Call's 11-analyst consensus.

Title insurance and real estate services firm First American Financial (NYSE: FAF), upgraded to intermediate- and long-term "accumulate" from "neutral" at Merrill Lynch, moved up $2 5/8 to $17 9/16... Title insurance company Chicago Title (NYSE: CTZ) moved up $1 5/8 to $38 as this week's Barron's said the company intends to cut costs through increased automation of its core businesses... Appliance maker Whirlpool Corp. (NYSE: WHR) added $4 1/2 to $64 5/16 today, building on Friday's $5 3/16 advance spurred by CEO David Whitwam's comments in a press release that "we expect to... deliver a year of solid operating performance improvement.''

Specialty gases distributor Airgas Inc. (NYSE: ARG) expanded $1 3/4 to $12 following an ratings boost to "outperform" from "neutral"... Film and imaging products maker Eastman Kodak (NYSE: EK) developed $1 3/4 to $74 3/4 today after rising $6 7/16 Friday on news of impressive first-quarter earnings and a $2 billion stock buyback plan. Several brokerages upgraded the stock today... Crude oil and natural gas company Nuevo Energy Co. (NYSE: NEV), which J.P. Morgan upgraded to "buy" from "market performer" because of improved financial strength and the potential for acquisitions, closed up $1 3/8 to $15 3/8.

Polyester products company Wellman (NYSE: WLM) finished at $1 3/8, up $13 3/4, today. Morgan Stanley upgraded the stock to "outperform" from "neutral"...Paper and wood products manufacturer and distributor Boise Cascade (NYSE: BCC) took $2 1/16 to $39 3/4 after Prudential Securities' analyst Mark Rogers raised the stock to "strong buy" from "hold," saying in a note that "the evidence of a turnaround is compelling"... Chemical company DuPont Co. (NYSE: DD), which Deutsche Bank upgraded to "hold" from "accumulate," bubbled up $3/8 to $68 1/8.

Earnings Movers

Amcol International Corp. (Nasdaq: ACO) up $1 9/16 to $11 1/4; Q1 EPS $0.21 vs. $0.12 last year; no estimate

American Standard Cos.
(NYSE: ASD) up $3 11/16 to $44; Q1 EPS $0.65 vs. $0.49 last year; estimate: $0.54

Case Corp. (NYSE: CSE) up $2 to $34 15/16; Q1 EPS loss of $0.68 vs. profit of $0.88 last year; estimate: loss of $0.85

Consolidated Freightways Corp. (Nasdaq: CFWY) up $1 9/16 to $12; Q1 EPS $0.30 vs. $0.30 last year; estimate: $0.28

Dana Corp. (NYSE: DCN) up $2 15/16 to $50; Q1 EPS $0.97 vs. $0.84 last year; estimate: $0.99

FMC Corp. (NYSE: FMC) up $3 7/8 to $65 3/4; Q1 EPS $0.92 vs. $0.75 last year; estimate: $0.83

Rockwell International (NYSE: ROK) up $3 7/8 to $52 13/16; fiscal Q2 EPS $0.74 vs. $0.60 last year; estimate: $0.70

Rohm and Haas Co. (NYSE: ROH) up $2 7/8 to $39 15/16; Q1 EPS (before items) $0.61 vs. $0.58 last year; estimate: $0.58

Tower Automotive (NYSE: TWR) up $4 3/16 to $26; Q1 EPS $0.51 vs. $0.37 last year; estimate: $0.44

Travelers Property Casualty (NYSE: TAP) up $1 13/16 to $36 7/16; Q1 EPS $0.83 (from operations) vs. $0.77 last year; estimate: $0.83

GOATS

Prozac developer Eli Lilly and Co. (NYSE: LLY) slipped $9 9/16 to $72 3/4 after reporting somewhat prosaic Q1 EPS of $0.53 (excluding gains and charges), up from $0.46 a year ago and in line with the First Call mean estimate. Sales of the company's flagship depression drug slowed 4% year-on-year and 6% in the U.S. alone due to increased competition and an inventory buildup in Q4 by drug wholesalers, who were possibly expecting price increases down the road. The buildup also hurt sales of Lilly's osteoporosis drug Evista, which increased 63% year-on-year but dropped 13% sequentially. Since its introduction early last year, Evista has failed to live up to its initial publicity as the blockbuster drug heir apparent to King Prozac's throne. While some analysts in late 1997 were expecting Evista to ring up $500 million to $800 million in fiscal 1998 sales, Lilly was only able to sell $144 million worth of the drug in its first year. Meanwhile, Lilly's Zyprexa schizophrenia drug has stolen much of Evista's thunder, racking up $550 million in sales in its first year on the market (1997) and $401 million in sales in the most recent quarter alone.

Several Internet-related companies were thumped today by a couple of cautionary articles regarding the valuations of some of the companies in the cyber-sector. Wharton finance professor and author Jeremy Siegel climbed up into The Wall Street Journal's editorial page pulpit this morning and questioned the market value of Internet services conglomerate America Online (NYSE: AOL) with an article entitled "Are Internet Stocks Overvalued? Are They Ever." Noted Morgan Stanley Dean Witter analyst Mary Meeker provided more uncertainty by reportedly telling The New Yorker that Internet stocks are due for a "big correction" this year, although she still likes the long-term prospects for many of the sector's heavyweights. And then there's that whole "sector rotation" thing. Among the losers today, AOL lost $23 7/8 to $115 7/8, Amazon.com (Nasdaq: AMZN) fell $31 1/16 to $158 15/16, Yahoo! (Nasdaq: YHOO) slid $25 1/2 to $163 11/16, CMGI Inc. (Nasdaq: CMGI) slipped $46 7/8 to $214, and Inktomi (Nasdaq: INKT) sank $29 1/2 to $89
.
QUICK CUTS: Front-office automation software developer Vantive Corp. (Nasdaq: VNTV) was knocked down $3 1/16 to $6 5/16 after saying lower software license revenues will lead to break-even Q1 results, missing the earnings of $0.06 per share expected by analysts... Drug developer Sepracor (Nasdaq: SEPR) fell $8 1/8 to $85 7/8 after Bear Stearns lowered its rating on the company to "unattractive" from "neutral." On Friday, the company reported a Q1 loss of $0.93 per share compared to a loss of $0.43 per share a year ago... Competitive local exchange carrier (CLEC) IXC Communications (Nasdaq: IIXC) slid $3 3/8 to $40 7/8 after Merrill Lynch lowered its near-term rating on the company to "neutral" from "accumulate."

Television-based Internet service company WorldGate Communications (Nasdaq: WGAT) gave back $13 1/16 to $30 11/16 after rising 108% in its first two days of trading last week... Micropositioning and precision optical products supplier Axsys Technologies (Nasdaq: AXYS) slid $2 5/8 to $14 3/8 after warning that lower sales volumes due to weak market demand for its products will result in Q1 EPS between $0.04 and $0.06 (excluding charges), missing the Zacks mean estimate of $0.15... Startec Global Communications (Nasdaq: STGC) shed $3/4 to $6 1/2 after Friedman, Billings, Ramsey lowered its rating on the facilities-based international telecommunications carrier to "buy" from "strong buy."

Digital subscriber line (DSL) systems designer Orckit Communications (Nasdaq: ORCTF) slipped $7 to $22 5/8 after posting a Q1 loss of $0.38 per share compared to a loss of $0.13 per share a year ago, which was in line with analysts' expectations... Bank holding company Citizens Banking Corp. (Nasdaq: CBCF) dropped $6 3/8 to $32 5/8 after agreeing to buy Wisconsin's F&M Bancorporation (Nasdaq: FMBK) for about $820 million in stock. ABN Amro downgraded Citizens to "hold" from "outperform"... Electronics contract manufacturer Sanmina Corp. (Nasdaq: SANM) fell $3 5/8 to $65 ahead of its fiscal Q2 earnings release. After the bell, the company reported EPS of $0.47, up from $0.40 a year ago and in line with the Zacks mean estimate.

FOOL ON THE HILL
An Investment Opinion
by Alex Schay

Instant Success

The semi-strong form of the Efficient Markets Hypothesis (EMH) states that security prices adjust rapidly to the release of all public information. In contrast to the weak form of the EMH, where stock prices are said to fully reflect all security-market information, the semi-strong version asserts that current prices reflect not only security market information but all public information. This distinction ups the efficiency ante in that prices not only reflect historical price trends, trading volume, and rates of return, but also "non-market information" like price-to-earnings ratios and other metrics -- as well as economic and political news.

The necessary implication of the theory is that investors who base their decisions on "new information" after it has become public should not be able to generate above-average returns.

Well, reams of studies (notably Latane and associates) have shown that the market does not adjust to the release of public information quite as quickly as is forecast by the theory. One of the most pressing anomalies is the release of quarterly earnings surprises, where a deviation of at least 20% from expectations can result in returns that consistently exceed transaction costs. That is, earnings surprises can be used to predict returns for individual stocks.

This is not as strange as it seems. You mean, it takes human beings time to process information? Data needs to be analyzed, portfolio managers need to be consulted, and optimal trading strategies need to be implemented? Yes, the realities of the human decision-making process demands some time. Information isn't instantaneously broadcast across the human financial network and downloaded into the brains of decision makers, only for transactions to then occur at the speed of thought. Despite this concession to human affairs, though, it does not follow that markets fail to rapidly adjust to public information. They of course do, and modern developments are only accelerating the process.

The more important question deals with how investors are manipulating and interpreting the information that they do receive, rather than how quickly they get it. What is a predictive financial metric anyway? All financial metrics necessarily tell practitioners what has happened in the past, but they differ in their explanatory power and usefulness. So, it stands to reason that investors must at least begin with metrics that best describe what has already occurred. Understanding a business means employing tools that give the investor the best insight into the "reality" of business performance. However, this is a column for another day.

Today, an interesting example of the market's relentless (but not instantaneous) information processing function was the trading in labor management firm Kronos Inc. (Nasdaq: KRON), which gained $2 15/16 to $31 15/16. After reporting record- beating revenues, and estimate-beating earnings for its second quarter on Thursday evening of last week Kronos has seen some serious gains over the two trading sessions that have elapsed since then.


Date Price %Change Volume %Change
4/19 $31 15/16 10.13 215,600 -- 4/16 $29 13.73 578,200 1679.80 4/15 $25 1/2 -6.42 32,500 53.30 (30 day average volume 84,000)
Up until the release, the firm had been tarred with the same brush used to prepare the ERP companies for feathering. The broad issue weighing down shares was concern that their time-management solutions -- which can be used with over 120 ERP packages -- would see the same slow adoption rate as the ERP companies heading into 2000. This thesis was exploded, as the company came in with a 57% increase in EPS and the highest revenues in the firm's history. As I tried to show on Friday, the gains came from a clear increase in the productivity of the company's sales force, as well as the unprecedented amount of new products pushed into the pipeline. Here's the table again, updated with information gleaned from the conference call:

Q2 '99 Q1
Sales&Mkt. 21,700 18,688 Sales 61,686 53,115 SMkt./Sales% 35.18 35.18 R&D 6,600 6,003 R&D/Sales% 10.70 11.30
Q4 Q3
Sales&Mkt. 18,450 17,670 Sales 58,745 52,679 SMkt./Sales% 31.41 33.54 R&D 5,485 5,334 R&D/Sales% 9.34 10.13
Q2 Q1
Sales&Mkt. 15,878 16,051 Sales 46,472 44,573 SMkt./Sales% 34.17 36.01 R&D 4,557 4,324 R&D/Sales% 9.81 9.70 Numbers in (000)
With the future cash flow characteristics of the business looking even brighter than before, an adjustment period has ensued since the announcement. Surprisingly enough, it hasn't been instantaneous.

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