Wednesday, July 8, 1998
DJIA            9174.97   +89.93      (+0.99%) 
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Chip giant Intel Corp. (Nasdaq: INTC) gained $3 3/16 to $78 5/16 after Morgan Stanley Dean Witter analyst Mark Edelstone reiterated his "strong buy" rating on the stock, saying the company will see revenue growth in the second half of the fiscal year as the recent PC glut starts to work its way through the distribution channel. The positive comments reverberated throughout other sectors with close ties to the PC industry, such as disk drive makers and the box makers themselves. Western Digital Corp. (NYSE: WDC) rose $1 3/16 to $12 1/2, Seagate Technology (NYSE: SEG) gained $1 3/8 to $25, and Quantum Corp. (Nasdaq: QNTM) advanced $1 27/32 to $20 31/32. Among PC makers, Gateway (NYSE: GTW) tacked on $3 1/4 to $59 3/4, Dell Computer (Nasdaq: DELL) picked up $5 3/8 to $96 3/8, and Micron Electronics (Nasdaq: MUEI) added $13/16 to $12 3/4.

Food distributor and grocery store operator Richfood Holdings (NYSE: RFH) climbed $3 1/4 to $23 after Donaldson, Lufkin & Jenrette raised its rating to "buy" from "market perform." The upgrade comes a day after reports surfaced suggesting Richfood may sell its 52% stake in bookseller Crown Books (Nasdaq: CRWN) to a New York-based liquidator. Crown was halted yesterday after more than doubling and did not reopen today. However, the bookseller did say it will "likely" file for Chapter 11 bankruptcy protection "within the next several days." Richfood picked up Crown through its May acquisition of Dart Group. The focus of that deal, however, was gaining control of Dart's 37 Shoppers Food Warehouse grocery stores -- not Dart's interests in Crown, the Total Beverage chain of discount beverage stores, and auto parts supplier Trak Auto (Nasdaq: TRKA).

Shares of number-one automaker General Motors Corp. (NYSE: GM) rose $3 3/8 to $73 3/16 on speculation that the company is close to a deal with United Auto Workers officials to end a nearly one-month long strike by union workers at two Flint, Michigan parts plants. Officials for GM and the UAW declined to comment on the discussions, which reportedly continued well into last night. However, some industry analysts predict the strike could be called off as soon as tomorrow or Friday. The strike, which has idled 26 of the company's 29 North American assembly plants, is expected to knock about $1.2 billion (or $1.79 per share) off of GM's fiscal Q2 earnings. While GM would like to end the work stoppage as soon as possible, any deal with the UAW will probably do little to address the job cuts some observers believe are needed to stop the automaker from losing market share in the U.S.

QUICK TAKES: Travelers Group (NYSE: TRV) rose $4 11/16 to $69 1/4 and Citicorp (NYSE: CCI) gained $11 3/8 to $171 7/8 after Merrill Lynch apparently put its stamp of approval on the two companies' proposed merger by raising both firms' intermediate-term ratings to "buy" from "accumulate"... Macintosh and computing products maker Apple Computer (Nasdaq: AAPL) picked up $2 1/16 to $32 9/16 after interim CEO Steve Jobs said the company will report its third consecutive quarterly profit when it releases fiscal Q3 results next week... Life sciences research products supplier Life Technologies (Nasdaq: LTEK) rose $7 1/2 to $38 1/2 after specialty materials supplier Dexter Corp. (NYSE: DEX) agreed to buy the 48% stake in the company it does not already own for $37 per share in cash.

Hotel operator Marriott International (NYSE: MAR) gained $1 1/8 to $32 15/16 after reporting fiscal Q2 EPS of $0.37 versus $0.31 a year ago, which was a penny above the First Call mean estimate... Database software developer Oracle Corp. (Nasdaq: ORCL) climbed $11/16 to $23 9/16 after Prudential Securities reinitiated coverage of the company with a "buy" rating and a 12-month price target of $30 per share... Knight/Trimark Group (Nasdaq: NITE), which executes electronic stock orders for online brokers such as E*Trade Group (Nasdaq: EGRP), rose $1 3/8 to $15 7/8 after it sold 10 million shares in an initial public offering at $14 1/2 per share.

Medical device maker Cardima Inc. (Nasdaq: CRDM) exploded $6 13/32 to $8 31/32 after the Food and Drug Administration approved the firm's Vueport guiding catheter, which uses a balloon to help view the venous system in the heart... PC and computer products direct marketer PC Connection (Nasdaq: PCCC) climbed $3 2/4 to $18 after reporting a 43.5% year-over-year increase in net sales in fiscal Q2 to $174.3 million. Average order size in the period rose 18.6% to $600... Computer network security products developer Network Associates (Nasdaq: NETA) moved up $4 15/16 to $53 11/16 after receiving certification from the Chinese government to sell its anti-virus products in the country... DST Systems (NYSE: DST) gained $3 7/8 to $63 1/2 after Merrill Lynch started coverage of the provider of financial processing software with a "buy" rating.

Healthcare management software provider HBO & Co. (Nasdaq: HBOC) rose $1 7/8 to $36 7/8. Yesterday, financial services giant American Express (NYSE: AXP) disclosed in a federal filing that it held a 4.5% stake in the company... Eye care and specialty pharmaceutical products maker Allergan Inc. (Nasdaq: AGN) gained $1 9/16 to $49 after saying higher sales of its Botox and Alphagan eye disorder drugs will result in fiscal Q2 earnings higher than the First Call mean estimate of $0.37 per share... Newspaper and lumber company Bowater Inc. (NYSE: BOW) rose $1 11/16 to $49 1/4 after Donaldson, Lufkin & Jenrette upgraded the firm to "top pick" from "buy."


Motorola (NYSE: MOT) fell $2 13/16 to $52 3/16 after reporting late yesterday second quarter earnings of $0.01 per share (before extraordinary items), which beat the analysts' revised mean estimate of a loss of $0.04 but was far below the $0.64 profit the telecommunications equipment maker posted in the year-ago quarter. Not surprisingly, analysts had lowered estimates after the company early last month issued an earnings warning and announced it will cut 15,000 jobs, or 10% of its workforce, in a restructuring to take place over 12 months. In a conference call with analysts and reporters yesterday, Motorola said it had reduced its workforce by about 2,200 jobs in Q2 and plans to eliminate 6,700 more in Q3. The company said it expects a more or less breakeven third quarter about the same as this quarter. Weakness in the semiconductor industry and in the Asian economies is expected to continue to adversely impact the company's business for the rest of the year. Motorola projects that its global semiconductor revenues will fall 8% to 12% this year but grow 6% to 10% next year. Meanwhile, cellular infrastructure results were a bright spot but orders declined for coming quarters, killing that good news. Lagging Chinese sales also hurt the paging business, where North American activity was down, as well.

Online book and music retailer Amazon.com (Nasdaq: AMZN) dropped another $15 to $107 1/8 after The Wall Street Journal's "Heard on the Street" column questioned the high valuation of the company's stock and emphasized the difficulty of valuing Internet stocks. The article points out that while currently not making profits, Amazon has a market capitalization that is almost as much as that of competitors Barnes & Noble (NYSE: BKS) and Borders Group (NYSE: BGP) combined, despite the fact that its estimated 1999 revenue is less than a tenth that of its rivals. Separately, NationsBanc Montgomery downgraded Amazon to "hold" from "buy," while ABN AMRO started coverage of the company with a "hold" rating. For more on Amazon, see today's "Fool on the Hill" column below.

Several Internet stocks tumbled today alongside Amazon.com. In advance of reporting earnings after today's close, Internet portal company Yahoo! (Nasdaq: YHOO) lost $4 13/16 to $186 3/16. Competitor Excite (Nasdaq: XCIT) shed $4 7/8 to $91 3/8; and Lycos (Nasdaq: LCOS) sank $7 1/2 to $77 1/2. Internet advertising firm DoubleClick Inc. (Nasdaq: DCLK) was undone for a $5 7/8 loss to $56 1/8, and Internet access provider Rocky Mountain Internet (Nasdaq: RMII) dropped $1 5/8 to $16 7/8. Internet software developer Inktomi Corp. (Nasdaq: INKT) gave back $3 to $73 1/2 after a two-day surge that pushed its share price to $76 1/2 yesterday from $48 at the end of last week -- a 59% increase.

RJR Nabisco Holdings (NYSE: RN) was smoked for a $1 3/16 loss to $22 3/4 on concern that second quarter earnings from its international tobacco business will drop about 20% due to the difficulty in selling cigarettes in economically depressed Russia. Nearly half of the 7.6 million shares traded today came in a single 3.55 million share block trade. Philip Morris (NYSE: MO), the nation's largest tobacco company and subject of this week's Dueling Fools, fell $1 5/16 to $38 1/4, even though it supposedly has been immune to Russia's economic problems. But for RJR, the earnings shortfall in Russia will mean a higher tax rate and could cut profits by around $0.08 per share in Q2 and $0.15 for the year, according to an A.G. Edwards analyst who spoke with the company. Not only is the Russian ruble weak against the U.S. dollar, a tight credit market prohibits wholesalers from stocking up on RJR's Camels or Winstons.

QUICK CUTS: Johnson & Johnson (NYSE: JNJ) fell $1 1/2 to $73 1/16 after the drug and healthcare products maker announced it will add a warning about the use of alcohol to labels for its over-the-counter painkillers Motrin and Tylenol... Analog and mixed-signal semiconductor products maker Semtech Corp. (Nasdaq: SMTC) plunged $4 1/16 to $10 3/8 after announcing it expects Q2 EPS to be about 40% to 50% lower than in the prior quarter before charges. In addition, the company announced it will take a one-time pre-tax restructuring charge of $2.5 million... Following the announcement of preliminary Q2 results yesterday, Harbinger Corp. (Nasdaq: HRBC) lost $1 15/16 to $12 13/16 as J.P. Morgan lowered its rating on the electronic commerce software company to "long-term buy" from "buy."

Family apparel retailer Stage Stores (NYSE: SGE) shed $2 7/8 to $39 after announcing it expects lower-than-expected Q2 EPS of $0.27 to $0.30, short of analysts' mean estimate of $0.32... Litigation and claims management consulting company FTI Consulting (Nasdaq: FTIC) sank $2 3/4 to $8 3/4 after announcing it expects Q2 EPS of $0.09 to $0.10, below the $0.15 in the year-ago period and the $0.22 expected by analysts... PC banking software developer CFI ProServices (Nasdaq: PROI) was cut $3 3/8 to $13 1/2 after announcing it expects its fiscal Q2 EPS to be between $0.17 and $0.18, compared with the First Call mean estimate of $0.24, because "several sales opportunities slipped into the third quarter."

Following a flurry of downgrades yesterday, Vantive Corp. (Nasdaq: VNTV) lost $1 7/16 to $11 13/16 after Donaldson, Lufkin & Jenrette cut its rating on the front-office automation software company to "market perform" from "buy"... Specialty coatings company RPM Inc. (NYSE: RPM) dipped $1 to $16 1/2 after announcing the acquisition of Coventry, England-based intumescent fireproofing coatings manufacturer Nullifire Ltd. for an undisclosed sum... Holt's Cigar Holdings (Nasdaq: HOLT) tumbled $1 1/16 to $5 after Prudential Securities lowered its rating on the cigar distributor to "hold" from "buy"... Disinfecting products maker Alcide Corp. (Nasdaq: ALCD) lost $3 to $44 after reporting Q4 EPS of $0.29, down from $0.43 the year before.

An Investment Opinion
by Louis Corrigan

Time to Sell Amazon.com?

Prior to the last two trading sessions, shares of online retailer Amazon.com (Nasdaq. AMZN) had swelled to overflowing, rushing to a record close of $139 1/2 on Monday, up 217% since the beginning of June. That's been good news for the Fool Portfolio. Managed by David Gardner and Jeff Fischer, the Fool Port's stake in Amazon was purchased back in September at a split-adjusted $19.11 per share and so was up 630% as of Monday's close. Since the portfolio's initial buy report projected Amazon shares to do a bit better than double by 2001, this investment has performed much better than expected. Indeed, with a market cap of $6.8 billion as of Monday, Amazon was worth more than bookselling rivals Barnes & Noble (NYSE: BKS) and Borders (NYSE: BGP) combined.

Yet on Monday, Fischer eloquently explained why the market-trouncing portfolio has no plans to sell its Amazon stake. The portfolio managers are looking five to ten years out and considering the possibility that the company will become a "mini Wal-Mart of the Internet." Confident that they have bought into a company they know and understand, Fischer and Gardner plan to act as patient long-term business partners in the manner of a Warren Buffett.

That means they don't care if the stock drops precipitously (and it has the past two days, plunging as much as 27% to $102). Indeed, when Fischer writes that "Amazon could very well fall 50% next week," or Gardner posts to the message board, "I hope it falls $20 in order to take out the momentum players," it's clear that these portfolio managers are holding on to a stock they believe could or even should plummet. Are they crazy?

From their perspective, no. As Fischer stated, "[S]hould the stock fall 40% the next few years, we'll still be winning the long-term game." In other words, the goal is beating the market in the long term, and the best way to do that is with businesses with great potential that an investor can understand. For the Fool Port managers, Amazon.com fits that bill.

There are a few points worth making here. First, investing requires that you determine fair value for a stock. That's how you know if the price is right. The Fool Port managers think that Amazon can create more long-term value than the market is currently discounting. That may be. Yet different assumptions provide plenty of room for argument. Amazon's market cap of $6.8 billion as of Monday may have been just 15 times potential FY98 sales six months away, but it was 31 times trailing twelve-month sales of $219 million, or double the multiple the Fool Port paid last September. (At $108, the multiple is 23). Investors must also realize that this price-to-sales multiple will contract over time, almost certainly to the mid-to-low single digits. Dell Computer (Nasdaq: DELL) operates with a similar high-turnover, low-inventory asset management model. It pulls down similar 22% gross margins. But it now trades for less than five times sales.

Second, even by Fischer's logic, an investor who bought Amazon at $139 might encounter years of crushing market underperformance before eventually turning in a market-beating result. So unless your time horizon is five to ten years and you have the stomach to watch the price of your business cut in half before eventually making money, the Fool Port's devotion to Amazon ought not to infect you.

The final point, though, is the one I find most interesting. In The Motley Fool Investment Guide, David and Tom Gardner offer this concise rationale for when an investor ought to sell a stock: "When you find a better place for your money, put it there." What's their criteria for better? The Gardners wrote that an investor should make room in her portfolio for an exciting new investment by "shedding whichever of your holdings looks to be most fully valued (i.e., appears to have the least room for more near-term appreciation)." By this logic, a better investment is one that promises to offer more capital appreciation more rapidly than one you already own, regardless of how great that tried and true stock might be.

Such a sell discipline suggests practical questions regarding valuation. Is there really no better place for the Fool Port to put its money than in a stock that has great long-term prospects but could and perhaps should collapse in the short term? Granted, taxes could eat into profits if the shares were sold today. Just holding the stock for another nine months, even assuming it held steady at $139, would allow for a market-beating result simply due to the lower tax rate on long-term capital gains. But if you assume that Amazon could indeed give back 50% of its gains and not top $139 again for another three years, even paying taxes and sticking the money into the Dow Four or S&P 500 Spiders would produce much better results.

So is it possible to reconcile the investment philosophy implied by the Gardners' stated sell discipline with the Fool Port's actual investment practice in regard to Amazon? Selling stocks can only make sense in the context of one's investment philosophy, in light of what one hopes to attain by buying them in the first place. Has something about the Gardners' philosophy actually changed or evolved?

As I've written before, even a legendary investor such as Peter Lynch saw investing as akin to stud poker, as "simply a gamble in which you've managed to tilt the odds in your favor." The goal of that gamble is to maximize the appreciation of one's capital. Buffett, on the other hand, has bluntly stated that maximizing returns is not his overriding goal. In his fascinating dialogue with Bill Gates, for instance, Buffett said he's turned down otherwise decent business deals because he didn't like the people he'd have to work with.

Investing is a means of taking care of financial necessities that will support our happiness. Most of us are willing to eschew potential excess returns if, for example, the process of attaining them detracts from that happiness. It seems to me that's where Fischer and Gardner are with the Fool Port. As anyone who has thought of investing as buying an ownership stake in a business can attest, there's a satisfaction in participating, even distantly, in a successful enterprise. Even better is to buy into such an enterprise at a price where, regardless of what happens to the stock this year or next, you will enjoy market-beating results in the long term. Amazon could fall to $30 over the next three years and the Fool Port would still have enjoyed a 12% compound annual return since purchase.

In my view, Amazon has attained the status of America Online (NYSE: AOL) for the Fool Port. It's been blessed as a core holding with such vast potential that the managers can essentially forget about it. Indeed, I believe that with these stocks, the managers have tossed out the sell discipline articulated in the Gardners' book. No matter how high these stocks go, the Fool Port won't consider selling them and the portfolio managers will always find good reasons why the price can be justified.

That makes perfect sense within the context of producing long-term market-beating results in the most satisfying, least troublesome way possible. Letting your winners run is just a lot easier than looking for other investment candidates, most of which won't pan out. But does that mean Amazon is worth buying or selling at $139 or even $108? In a sense, I think that's the question the Fool Port managers are least interested in and thus least capable of answering.

[Correction: The "Fool on the Hill" column in the June 3 Evening News said that insiders at online CD retailer N2K (Nasdaq: NTKI) sold 1.25 million shares in a recent secondary offering and suggested that this might indicate a lack of confidence in the company's prospects. However, the prospectus clearly notes that N2K's current executives and directors did not sell any holdings (indeed, they still own 26.9% of the outstanding shares). Poly Ventures II, a high tech venture capital fund, did sell 196,250 shares. While N2K director Susanne Harrison is a general partner of this fund, she disclaims beneficial ownership of its N2K holdings. The Fool regrets the error.]


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