Wednesday, August 5, 1998
DJIA             8546.78    +59.47      (+0.70%) 
 S&P 500          1081.43     +9.31      (+0.87%) 
 Nasdaq           1788.20     +2.56      (+0.14%) 
 Value Line ndx    858.26     -1.45      (-0.17%) 
 30-Year Bond   106 17/32    -16/32  5.66% Yield 


Life and health insurer Aetna (NYSE: AET) moved up $4 5/8 to $69 3/4 after reporting fiscal Q2 operating EPS of $0.95, compared to $1.27 a year earlier and beating the First Call mean estimate of $0.91. Total revenues increased 4% year-over-year to $4.8 billion, while net income rose 15.5% to $265.7 million. In an interview on CNBC, chairman and CEO Richard Huber said the company's fiscal 1998 earnings will come in "a little bit higher" than the $3.70 per share expected by the Street. Helping the results is Aetna's U.S. Healthcare managed care business, which was acquired in July 1996. The unit is attracting more corporate clients and the $8.2 billion deal is "beginning to pay off," according to Huber. Prudential Securities raised its rating on Aetna to "strong buy" from "hold."

Unisys Corp. (NYSE: UIS) bounced back $2 5/8 to $25 5/16 after falling 17% yesterday. The only news out of the company today was an agreement with Canada's Enghouse Systems Ltd. to market and support its GeoNet automated mapping and facilities management software around the globe. Unisys stock may also be drawing some interest from traders due to possibly renewed merger speculation. However, Chairman and CEO Lawrence Weinbach emphasized recently that the company is not for sale. Since coming on board last September, Weinbach has turned the sleepy Blue Bell, Pennsylvania-based computing firm into a lean, mean computer networking and services machine. The Street has appreciated the makeover, as Unisys' share price has more than doubled under Weinbach's watch.

QUICK TAKES: Electronic Data Systems Corp. (NYSE: EDS) gained $1 3/4 to $36 3/4 after the data services giant was selected to replace Western Atlas (NYSE: WAI) on the Standard & Poor's 500 Index. Western Atlas is merging with fellow oilfield services firm Baker Hughes (NYSE: BHI)... Procter & Gamble (NYSE: PG) tacked on $3 7/8 to $81 5/8 after the consumer products biggie said it will increase its $1 billion stock buyback plan by an unspecified amount... Computer workstations maker Sun Microsystems (Nasdaq: SUNW) picked up $2 3/8 to $47 13/16 on rumors suggesting a potential merger with PC maker and computing products giant IBM (NYSE: IBM)... Router maker Cisco Systems (Nasdaq: CSCO) advanced $3 5/8 to $96 3/4 after reporting fiscal Q4 EPS of $0.48 (before charges) after the bell yesterday, beating the First Call mean estimate by a penny. Today, Cisco was upgraded by Donaldson, Lufkin & Jenrette and Lazard Freres.

Business software developer Computer Associates International (NYSE: CA) gained $2 to $33 5/8 after acquiring privately held enterprise networking and systems integration services firm Realogic for an unspecified sum... Drugs and consumer health products maker Warner-Lambert Co. (NYSE: WLA) tacked on $2 13/16 to $71 3/4 thanks to a Gruntal & Co. upgrade to "strong buy" from "hold"... British candy and beverage maker Cadbury Schweppes (NYSE: CSG) added $2 1/16 to $55 3/4 after saying its first half earnings rose 9% on a pounds basis due to strong demand for its Dr. Pepper, A&W Root Beer, and Sunkist sodas... Financial planning software firm Intuit (Nasdaq: INTU) tacked on $4 19/32 to $48 5/8 after launching a print archive with privately held Transium Corp. that allows Quicken.com users to access articles from over 1000 print publications.

Video store operator Hollywood Entertainment Corp. (Nasdaq: HLYW) rose $1 1/16 to $14 15/16 after hiring former Walt Disney (NYSE: DIS) executive Jeff Jordan as its new executive vice president and CFO... Supply chain management software firm Manugistics Group (Nasdaq: MANU) added $11/16 to $20 1/2 courtesy of a Prudential Securities upgrade to "accumulate" from "hold"... Elderly healthcare provider Centennial Healthcare Corp. (Nasdaq: CTEN) bounced back $1 1/4 to $8 3/4 after falling nearly 50% yesterday following comments that a new payment system will raise expenses in fiscal Q3 and Q4... Workover rig and liquid services firm Dawson Production Services (NYSE: DPS) climbed $5/8 to $12 1/2 after oilfield services company Key Energy Group (NYSE: KEG) announced that it will start a cash tender offer for the company for $14 per share in cash.

Municipal bond and asset-backed securities insurer MBIA Inc. (NYSE: MBI) rose $3 7/16 to $65 on a Morgan Stanley Dean Witter upgrade to "outperform" from "neutral"... Foodservice and bakery products distributor International Multifoods Corp. (NYSE: IMC) picked up $1 11/16 to $22 7/8 after saying late yesterday that it will sell its Venezuela Foods unit to Archer Daniels Midland Co. (NYSE: ADM) for an undisclosed sum... Automobile finance company AmeriCredit Corp. (NYSE: ACF) added $1 3/4 to $32 7/16 after reporting fiscal Q4 EPS of $0.53, beating the Street's mean estimate by $0.02.

Cement producer Southdown (NYSE: SDW) hammered out a $2 5/8 gain to $60 1/16 after Merrill Lynch named the company its "focus 1 selection"... Online travel services provider Preview Travel (Nasdaq: PTVL) added $3 1/16 to $26 15/16 after announcing a marketing alliance with credit card firm MasterCard International... Microwave signal distribution networks developer Anaren Microwave (Nasdaq: ANEN) beamed up $3/8 to $11 1/2 after reporting fiscal Q4 EPS of $0.22, a penny below last year's results but $0.02 ahead of the Street's estimate.


Aerospace, engineered materials, and automotive parts maker AlliedSignal (NYSE: ALD) dropped $3 to $37 in active trading after late yesterday announcing a hostile bid to acquire electronic connectors maker AMP Inc. (NYSE: AMP) for $44.50 a share, or $9.8 billion, in cash. AMP was down $4 7/16 to $38 1/8. AlliedSignal's shares were driven down on concern that it had a tough row to hoe and may even have to make a higher bid. The problem is that the state of Pennsylvania, where AMP is based, has tough anti-takeover laws that require a company's board of directors not only to consider the interests of shareholders -- as is normally the primary concern -- but also the interests of employees, creditors, suppliers, and the community when considering acquisition offers. Investors' fears may be unwarranted, however, because it looks like AlliedSignal has prepared for all-out war. It has said it is willing to wage a proxy fight and is suing AMP to make sure shareholders get a chance to vote on the offer. Plus, in its press release yesterday, AlliedSignal specifically stated that the proposed merger will "address positively" considerations under Pennsylvania law and stressed its ability to "offer employees a wide range of career opportunities" and education programs. To pay for the acquisition, the company is prepared to sell up to $2 billion in assets, to raise $1.5 billion by issuing more shares, and to stop its stock buyback program.

Memphis, Tenn.-based Promus Hotel Corp. (NYSE: PRH), owner of the Doubletree, Embassy Suites, and Hampton Inn chains, lost $5 to $29 1/8 after late yesterday announcing that Chairman and CEO Raymond Schultz and President and COO Richard Kelleher -- along with two other directors (including the former chairman of Promus) -- will leave the company as soon as replacements have been named. Coming just eight months after what was one of the hotel industry's biggest mergers, the resignations result from disagreements over corporate philosophies and approaches to growth. While the former Promus (as in "promise") stressed quality, acquisition-hungry Doubletree was more interested in quantity. Schultz and others from the old Promus were conservative in signing up new franchisees, for instance, for fear of allowing inferior hotels to dilute their brands. The resignations likely won't affect the company's day-to-day operations, but it does leave a giant question mark regarding its future and long-term strategy. The unexpected news led to a string of downgrades, including cuts by Goldman Sachs, CS First Boston, and Credit Lyonnais.

QUICK CUTS: The world's largest automaker, General Motors (NYSE: GM), dipped $1 1/8 to $68 3/8 after July U.S. sales dropped 38% as two strikes paralyzed North American car and truck production... CBS Corp. (NYSE: CBS) fell $2 to $31 11/16 after reporting Q2 EPS of $0.01, up from a loss from continuing operations of $0.04 in the year-ago period and a penny short of estimates. The TV and radio broadcast company also announced that it was increasing its stock buyback plan by $2 billion to a total of $3 billion... Several athletic shoe retailers tanked on worries that Venator Group's (NYSE: Z) Foot Locker and Champs Sports stores are cutting prices to drive sales. Finish Line (Nasdaq: FINL) tripped for a $6 1/16 loss to $13 7/16; Footstar (NYSE: FTS) fell $3 1/16 to $32 15/16; and Just For Feet (Nasdaq: FEET) was pounded for a loss of $3 1/8 to $17 5/8.

Eatertainment restaurant Rainforest Cafe (Nasdaq: RAIN) rained down $1 1/16 to $11 1/4 after reporting that Q2 same-store sales fell 7%... Permanent mold and sand aluminum castings manufacturer Turbodyne Technologies (Nasdaq: TRBD) sank another $1 5/8 to $8 3/8 a day after short-seller Asensio & Co. trashed the company by saying the company has "no valuable technology"... Electrical and automotive parts maker Cooper Industries (NYSE: CBE) lost $3 1/16 to $48 1/16 after announcing plans to buy back up to $500 million in shares and register to sell up to 19% of its auto parts business... Drug developer Shire Pharmaceuticals (Nasdaq: SHPGY) shed $7 5/16 to $16 9/16 after saying that earnings will be negatively impacted by a fire at Arenol Inc., a company that supplies some of its drug ingredients.

Eyeglass lens maker Sola International (NYSE: SOL) was hit for a $9 5/8 loss to $17 1/2 after forecasting a slowdown in earnings growth due to a drop in U.S. sales, return of old inventory, and slower sales to laboratory customers... Demand chain management solutions company Industri-Matematik International (Nasdaq: IMIC) dropped $2 to $7 after announcing that it expects a loss of $0.09 to $0.11 a share for fiscal Q1 as well as a loss for Q2. Analysts had expected EPS of $0.03 for Q1 and $0.12 for Q2... Oil refinery Tosco Corp. (NYSE: TOS) was ditched for a $2 3/16 loss to $24 5/16 on news that the company has reduced production at its San Francisco Bay area refineries following a brief power outage... Immunex (Nasdaq: IMNX) was down $2 3/8 to $63 5/8 after NationsBanc Montgomery Securities reiterated a "sell" rating on the company's shares based on uncertainty over FDA approval of the company's Enbrel drug for rheumatoid arthritis.

Die-cast and injection-molded collectible products maker Zindart Ltd. (Nasdaq: ZNDTY) plunged $3 5/8 to $7 7/8 after reporting fiscal Q1 EPS of $0.35, up from $0.27 and right in line with estimates. But the company warned that some of its die-cast business is migrating to Asian countries with troubled currencies, which may impact revenues... Telecommunications equipment maker Teledata Communications (Nasdaq: TLDCF) trailed down $13/16 to $9 3/8 after posting a wider-than-expected Q2 loss of $0.22 a share thanks to lower sales in Asia and higher marketing costs... Specialty underwriter and commercial insurance products distributor Paula Financial (Nasdaq: PFCO) plummeted $5 5/8, or 31%, to $12 1/2 after reporting a Q2 loss of $1.26 per share compared with a profit of $0.34 a year ago and analysts' expectations of a profit of $0.40... UBICS Inc. (Nasdaq: UBIX) was cut $1 5/8 to $8 38 after reporting Q2 EPS of $0.09, down from $0.10 in the prior-year period. The single estimate listed in First Call was for EPS of $0.10.

An Investment Opinion
by Louis Corrigan

The New Nifty Fifty Correction?

Reasons abound as to why the market has swooned of late. Some of them are technical. Computer program selling sank stocks late yesterday after a change of heart by Prudential's formerly bullish director of technical research, Ralph Acampora. Once known as "Mr. Dow 10,000," Acampora said he now believes the Dow Jones Industrial Average (DJIA) could drop 15% to 20% from its July 17 high. That would sink it to somewhere between 7,470 and 7,937. (It closed Tuesday 9.1% off the 9,338 high.) This technical breakdown reflects certain legitimate fundamental problems: weak corporate profits, indications of a slowing economy, renewed signs of inept Japanese leadership perpetuating Asia's troubles, Kenneth Starr's reinvigorated crusade against President Clinton, and so on.

Yet for those of us who believe that prolonged bear markets don't begin with inflation and interest rates edging ever lower -- or with an entire generation pumping their retirement money into the stock market like never before -- all of these good reasons amount to little more than excuses for institutional money managers to lock in what should be some healthy 1998 profits.

Many investors, I believe, have actually greeted the stock market's recent losses with a sense of relief and wouldn't mind seeing a bona fide capitulation sell-off that drove the Dow down further. That's because keeping up with the large-cap averages has required that money managers buy those new Nifty Fifty stocks that already trade at ostensibly fat premiums to their long-term earnings prospects. Those are the big, safe, liquid stocks that have been moving the averages and so had become almost the only ones that kept going up. Of course, that rationale is as circular as it sounds. The resulting merry-go-round has left investors so dizzy that many are happy they can now leap to the comfort of bonds or cash without having to go further into the business of paying earnings multiples that discount, as the saying goes, not just the future but the hereafter.

Of course, it's not so much that Coca-Cola (NYSE: KO), for example, is overvalued at the 54 times trailing earnings it traded for last week. (It may not be.) But there are simply very few multibillion-dollar companies that can even arguably justify such multiples. Yet, as the Wall Street Journal's Greg Ip and Aaron Lucchetti reported last week, just 78 stocks had accounted for all of the gains in the S&P 500 index this year up to last Tuesday. With the likes of Microsoft (Nasdaq: MSFT) and Pfizer (NYSE: PFE) sporting price-to-earnings (P/E) ratios above 60 and Cisco (Nasdaq: CSCO) and Lucent (NYSE: LU) carrying triple-digit P/Es, it's clear that a very small group of stocks trading at many times their annual growth rates were responsible for the overall S&P 500 trading at 28.1 times trailing earnings. Meanwhile, the vast mid-to-small cap arena appears to offer bargains a dime a dozen.

Indeed, the Ip-Lucchetti article, "For Thousands of Stocks, Bear Market Is Here," clearly laid out the market's problematic undercurrents and suggested that if trouble wasn't brewing, it ought to be. The line charting the ratio of advancing stocks versus declining ones peaked on April 3, long before the major averages hit new highs. The line charting the ratio of new highs versus new lows has been declining since late May. These technical readings reflect a remarkable divergence between the major averages and the average stock. A week ago, the average New York Stock Exchange (NYSE) stock was 24.3% off its high whereas the average Nasdaq stock was 35% below its high. A drop of 20% or more is usually considered a bear market.

As the Journal reported, the smaller a company's market cap, the worst the average performance. NYSE companies valued at less than $250 million were, on average, 43.3% off their highs. Businesses in the $250 million to $2 billion range were off by 25.4%, with stocks in the $2 billion to $5 billion off 19.8%, and stocks in the $5 billion to $20 billion range off 16.3%. Even companies with market caps over $20 billion were down 11.7% on average. With the DJIA down just 9.1% from its high even after yesterday's bloodbath (and still up 7.3% for the year) and the S&P 500 just 9.7% off its high (and still up 10.5% for the year), it's pretty clear that the market averages have been led higher by almost literally a handful of behemoths. Meanwhile, the Russell 2000 index of small-cap stocks was, as of yesterday's close, down 18.3% from its high and actually down 8.1% for the year.

To be fair, not all of this divergence is irrational. Many of the largest multinational firms have the access to cheap debt and equity capital as well as the infrastructures and market positions to continue producing solid growth partly by buying up or licensing new products developed by others. Think of Microsoft's purchase of WebTV or the way the top pharmaceutical companies profit from deals with small biotechs. To a degree, these giants are simply in a position to get more out of a given set of resources than smaller companies can. Moreover, they have more moving parts than their small-cap cousins so they have more room to manage expenses to ensure steady profits when times get tough.

Also, the idea that these market leaders are overvalued simply because of high P/Es is silly. As Dale Wettlaufer has discussed, Jeremy Siegel's analysis of the original Nifty Fifty stocks shows that, as a group, these stocks really weren't overvalued when they peaked in December 1972 at a collective P/E of 41.9. Indeed, the best of the lot were still significantly undervalued based on the returns they would generate over the next 25 years. Coke topped out at 46.4 times earnings at the time but needed to trade at 92.2 times earnings to be fairly valued, in retrospect. Pfizer had a P/E of 28.4 but could have merited a multiple of 54.9. Arguably, today's multiples are even more benign given the current outlook for tame inflation and interest rates.

On the other hand, a dollar in quality earnings is the same no matter what company generates it. While one should be willing to pay more for companies perceived to have a comparatively safer stream of future earnings, one can't help but feel that the market has for a while now been misallocating capital by simply declaring thousands of American businesses unsuitable terrain for equity investing. So much money seems to be in the hands of paranoid institutional investors who want performance but only when safety and liquidity are also part of the equation. The feverish pursuit of these stocks presumed to be safe simply may have created the kind of excess that makes them unsafe, especially compared to other opportunities.

Therefore, a 10% or even greater drop in the major large-cap players would seem to be literally a correction, an instance of capitalism's market system readjusting investors' perspectives so they may deploy capital more sensibly going forward. Hopefully, the correction will turn more eyes toward the wallflower small- to mid-cap stocks that have been so long ignored by fund managers anxiously looking to put billions of new cash to work as quickly as possible in order to keep up with the market averages.

If that doesn't happen, it seems possible that the baby boomer money machine that's helped fuel the rising averages could create even more dire problems as managers of multibillion dollar funds chase fewer and fewer stocks. The reckoning then might be postponed until Asia hits the inevitable upswing, and international money that's been flowing into the dollar and U.S. multinationals starts heading back home. Personally, I think most long-term investors should be cheered by the recent market jitters and perhaps should even hope we see another leg down.

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