Friday, March 12, 1999
DJIA 9885.51 -11.93 (-0.12%) S&P 500 1292.10 -5.58 (-0.43%) Nasdaq 2366.33 -45.92 (-1.90%) Russell 2000 398.08 -3.00 (-0.75%) 30-Year Bond 95 25/32 +11/32 5.54 Yield

An Investment Opinion
by Dale Wettlaufer

How Now 10K Dow?

The Dow's going to 10,000! The Dow's going to 10,000! If I were on the committee at Dow Jones that decides what companies get included in its century-old Industrial Average, I'd split the divisor just out of a sick sense of humor. I guess no one would be celebrating the 10,000 mark, though, which means less publicity for Dow Jones. Remember, the Dow Jones Industrial Average is a publicity thing. It's not necessarily the best index of what is going on in the stock market or corporate America. Like the QWERTY keyboard, though, it's the standard index of market activity that is quoted by almost all news outlets.

When you hear about how the Dow has done over the years, it doesn't give you the best or even an accurate indication of how an investor would have done over that period. For instance, although the Dow index has experienced years of flatness at times, the index does not reflect the payment and reinvestment of dividends. For instance, over the last 18 years, the S&P 500 has advanced at a compound annual rate of 13.12% per year. Reinvesting dividends, however, especially at market lows, compounds your returns. Over the last 18 years, the compound annual return on the S&P 500 with dividends reinvested would was 16.98%. That's a gigantic difference over 18 years. Here's an example of how this works: Had you started an index at 1,000 without reflecting the reinvestment of dividends, the index would be at 9,198 today. If you had constructed an index that did reflect reinvestment of dividends, the index would be at 16,827 today. That's a pretty substantial difference between the two and points to the vulnerability of price indexes telling the whole story on investors' returns.

Finally, when you see stories about the Dow and the S&P 500's advance over the last three years, consider that the S&P 500 isn't the entire market. When you look at the 9.5% compound annual return (with dividends reinvested) over the last three years on the Russell 2000 (the bottom 2,000 stocks of the 3,000 largest publicly traded companies), you should realize that it's the creme de la creme of American corporations that are enjoying super-normal returns right now -- not the smaller companies.

Some people will chalk it up to liquidity conspiracies and large-cap bubbles. The fact is that the cream of the crop of American corporations are the most competitive companies in the world that are reaping excellent rewards from: 1) investments in process-enhancing technologies that speed up asset turns; 2) a lower cost of capital than smaller companies; and 3) Better margins. The pricing of larger corporations also reflects investors' expectations that these companies will be able to capitalize on global growth. After all, the vast majority of Coca-Cola's profits come from overseas and the vast majority of its investments are being made overseas.

So, the entire market is not going up at a breakneck rate. Dow 10,000 is not as significant as it seems, because the longer-term investors (I'm talking about people in the market for 10 and 20 years) who have reinvested dividends, even after paying taxes, saw their account values (if indexed) pass Dow 10,000 long ago.


Los Angeles-based brokerage and securities trading firm Jefferies Group (NYSE: JEF) took on $2 to $41 1/4 after announcing that it received a favorable ruling from the IRS on its plan to separate Jefferies & Co. and other subsidiaries from Investment Technology Group (Nasdaq: ITGI) through a tax-free spin-off. Investment Technology shares won $3 7/16 to $41 1/2 this morning.

Sonar products and orbital satellite receiver maker Lowrance Electronics (Nasdaq: LEIX) improved $11/16 to $5 11/16 after Magellan Corp., a division of Orbital Sciences (NYSE: ORB), agreed to buy the company for about $24.1 million. The $6.41 per share deal represents a 28% premium on yesterday's closing price. Orbital was up $1 7/16 to $20 3/4 at midday.

Internet advertising company DoubleClick (Nasdaq: DCLK) raced ahead $13 7/16 to $119 7/8 after announcing it will split its stock 2-for-1, payable April 2. Check out the Fool's recent StockTalk interview with DoubleClick CEO and Co-founder Kevin O'Connor.

Gadget and gift retailer Sharper Image (Nasdaq: SHRP) wrapped up a gain of $11/16 to $12 this morning. Last night CEO Richard Thalheimer said that for the first 10 days of March, total sales rose 27% compared with last year, same-store sales increased 17%, catalog sales jumped 20%, and Internet sales shot up 380%.

Swiss implantable medical devices maker Sulzer Medica (NYSE: SM) grabbed $13/16 to $17 13/16 on the news that the FDA okayed its Durasul polyethylene, a wear-resistant material used in orthopedic implants, for commercial release.

Drug maker American Home Products (NYSE: AHP) added $2 to $66 after it won FDA approval to market its Effexor XR antidepressant drug for expanded use in treating general anxiety disorder, one of the most prevalent anxiety disorders, estimated to affect roughly 5% of people.

Onyx Software (Nasdaq: ONXS) moved up $4 7/16 to $22 7/16 after Credit Suisse First Boston analyst Michael Kwatinetz started coverage of the company with a "buy" rating. Kwatinetz anticipates full-year 1999 and 2000 revenues of $51 million and $72 million, up 44% and 42%, respectively.

Regional theme park company Premier Parks (NYSE: PKS) moved ahead $1 to $31 7/8 after Goldman, Sachs & Co. put the stock on its "recommended list."

Rodent empire Walt Disney Co. (NYSE: DIS) vaulted $1 7/16 to $36 1/8 after BT Alex. Brown raised its rating on the stock to "buy" from "market perform." Deutsche Bank, meanwhile, upped Disney to "buy" from "accumulate."

Cigar distributor and retailer 800-JR Cigar (Nasdaq: JRJR) rolled up $3/4 to $9 1/16 after burning off $6 15/16 yesterday on news of Q4 EPS of $0.15, well below First Call's $0.49 two-analyst estimate. Operating profits fell 5.8% from year-ago levels to $22.5 million.


Database software maker Oracle Corp. (Nasdaq: ORCL) slid $8 11/16 to $28 3/16 after reporting fiscal third-quarter earnings of $0.20 per share, up from $0.14 per year ago and a penny ahead of the analysts' mean estimate. Total revenues rose 19% in the period to $2.1 billion, but licensing sales increased by a slower-than-expected 7% to $825.7 million. At least five brokerage firms cut their ratings on the company today.

Heavy construction machinery maker Caterpillar (NYSE: CAT) was plowed under for a $5 1/4 loss to $45 5/8 after saying lower demand from agriculture, mining, and oil and gas customers and economic problems in Latin America will result in Q1 EPS about 50% below the $0.84 the company said analysts had been anticipating.

Outerwear designer The North Face (Nasdaq: TNFI) skidded $2 1/8 to $10 7/8 after saying it will restate its financial statements for fiscal 1997 and 1998 after its auditors raised questions about the accounting of certain transactions and the recognition of some revenues. The company said it will know the extent of the restatement in about two weeks.

Powder-free latex gloves maker Safeskin Corp. (Nasdaq: SFSK) was handed a $5 11/16 loss to $9 9/16 after saying higher-than-estimated distributor inventory levels and slower-than-expected new order growth will result in Q1 EPS $0.25 to $0.26 below the First Call mean estimate of $0.27.

Auto parts maker Federal-Mogul (NYSE: FMO) was dumped for $7 1/8 to $36 3/8 after Merrill Lynch lowered its near-term rating to "accumulate" from "buy" on fears that a weak European replacement parts market will hurt near-term earnings. Merrill cut its Q1 earnings forecast for the firm to $0.92 per share from $0.95 per share, while the fiscal 1999 view was reduced to $4.50 per share from $4.80 per share.

Drug stores operator Rite Aid Corp. (NYSE: RAD) called in a $14 loss to $23 after saying costs associated with opening and relocating stores, liquidating inventory, marking down the prices of some seasonal items, and other charges will lead to fiscal Q4 EPS between $0.30 and $0.32, missing the First Call mean estimate of $0.52.

Day planners and personal organizers maker Day Runner (Nasdaq: DAYR) tripped $2 3/8 to $10 7/8 after saying inventory tightening by its major U.S. customers will result in a fiscal Q3 loss between $0.35 and $0.40 per share, worse than the loss of $0.16 per share expected by the three analysts surveyed by Zacks.

Oil and gas seismic data acquisition systems developer GeoScience Corp. (Nasdaq: GSCI) was shaken for a $2 1/8 loss to $7 7/8 after Core Laboratories (NYSE: CLB) said it is reviewing its proposed merge with the company due to concerns that warranties and representations made by GeoScience in the merger agreement "are not true." Tech-Sym Corp. (NYSE: TSY), which owns a 79% stake in GeoScience, said the statements made by GeoScience "were true and correct when first made [and] are true and correct now."


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