<THE LUNCHTIME NEWS>

Wednesday, May 19, 1999
THE MARKET MIDDAY
DJIA 10863.20 +26.25 (+0.24%) S&P 500 1338.97 +5.65 (+0.42%) Nasdaq 2561.05 +2.69 (+0.11%) Russell 2000 445.46 +3.01 (+0.68%) 30-Year Bond 91 31/32 +13/16 5.82 Yield

FOOL PLATE SPECIAL
An Investment Opinion
by Warren Gump

What's Priced Into A Stock?

This morning we had an interesting interplay of earnings releases from two technology bellwethers. Dell Computer (Nasdaq: DELL), the darling of the personal computer industry, posted earnings per share (EPS) of $0.16, in line with expectations and up 45% from the prior year. In response, the stock disconnected $4 5/16 to $39 3/4. Applied Materials (Nasdaq: AMAT), the leading semiconductor equipment maker, posted fiscal Q2 earnings of $0.36 per share. Despite being down a penny from last year's results, this number was well ahead of the $0.27 consensus earnings expectations. In addition, the company announced that it anticipates Q3 EPS to be in the $0.50-$0.54 range, stomping the current $0.35 estimate. The stock fabricated a $2 1/2 gain to $65 5/8.

Obviously, today's reaction in Applied Materials' stock indicated that investors look prospectively when valuing the stock. Who cares what happened in the past when the value of a stock is based on future performance? Much more important than beating expectations for the quarter, Applied Materials demonstrated to investors that it has emerged from the recent slump in the industry. While this quarter's results were basically flat (ending deep double-digit declines), the company is projecting strong growth next year, which will more than recuperate last year's stiff earnings decline. Many investors were still worried that the company would not quickly emerge from the industry's troubles, but today's news should alleviate those fears.

What's up with this Dell situation, though? The company met published consensus earnings expectations and experienced 45% EPS growth. The company's 41% sales increase was caused because it grew about 2 1/2 times as quickly as its industry. Unfortunately, that wasn't good enough. Over the past few years, the company has significantly beat published expectations and many investors were expecting that to happen again. When the company "only" met expectations last quarter, many thought it to be an aberration. This quarter's results raise the concern that a trend may be starting. Although still rapid, Dell's growth may finally be slowing down below 50%. Many people have been assuming that wasn't about to happen.

One of the oldest adages of Wall Street is that investors consistently overreact to news, both on the upside and downside. This statement's validity is never more evident than when a well-established trend comes into question. When a stock is doing well, an investor's tendency is to expect that trend to continue indefinitely. On the other hand, a poorly performing stock is often projected to continue floundering forever. Only when clear evidence of a shift occurs does it become apparent how optimistic or pessimistic the market has been. Successful investors will be the ones who look through short-term financial performance and determine whether a stock is underpriced or overvalued relative to underlying long-term business fundamentals.

UPS

Online services company America Online (NYSE: AOL) bagged $3 to $137 1/16 after announcing plans to launch Shop@AOL this summer. The e-commerce initiative involves a drastic redesign of its shopping area; AOL plans to roll out Shop@Netcenter and Shop@CompuServe later this year.

Subprime residential home mortgage lender Long Beach Financial Corp. (Nasdaq: LBFC) surfed up $2 1/8 to $14 7/16 after Washington Mutual (NYSE: WM) agreed to buy the company for $15.50 per share in either cash or stock. The offer represents about a 26% premium to yesterday's closing price.

International telecommunications and Internet telephony services firm IDT Corp. (Nasdaq: IDTC) rang up gains of $1 3/8 to $28 5/8 after its Net2Phone subsidiary filed for an IPO. Net2Phone, which allows customers to make long-distance telephone calls over the Internet, did not mention the number of shares or a price range for the offering. It intends to trade on the Nasdaq with the symbol "NTOP."

Medical products company Mentor Corp. (Nasdaq: MNTR) picked up $1/2 to $17 7/8 after the company authorized a buyback of up to four million shares of company stock on the open market, about 16% of the total outstanding. Mentor has bought back and retired more than one million shares over the past 12 months.

Web portal operator Lycos (Nasdaq: LCOS) advanced $7 5/16 to $120 1/4 this morning. After yesterday's closing bell, the company turned in a fiscal Q3 loss of $0.02 before items, a penny better than expected. The company's board approved a 2-for-1 stock split effective late next month..

Semiconductor automatic test equipment manufacturer Teradyne (NYSE: TER) moved up $2 7/8 to $56 7/8 after National Semiconductor (NYSE: NSM) bought test systems for its single-chip scanner and DVD-on-a-chip devices. No terms were mentioned. In addition, Credit Suisse First Boston upped its full-year 1999 and 2000 EPS targets for Teradyne this morning.

German enterprise software company SAP AG (NYSE: SAP) rose $1 7/8 to $35 1/2 after Lehman Brothers upgraded its rating on the company's stock to "buy" from "neutral." The brokerage set a 12- to 16-month share price target at about 40% above current levels.

DOWNS

Telecom-equipment maker PairGain Technologies (Nasdaq: PAIR) retreated $13/16 to $14 after it disclosed in an SEC filing that the company and two top officers, including Chairman Charles Strauch, have been identified as targets of a federal criminal investigation into losses by a Beverly Hills money-management firm.

Data network storage device maker Network Appliance (Nasdaq: NTAP) moved back $2 7/8 to $51 after reporting fiscal Q4 EPS of $0.13, better than last year's $0.09 but flat with market estimates. Operating margins fell slightly to 18.7% from 19.5%.

Department store chain Nordstrom (Nasdaq: NOBE) lost $2 3/16 to $31 15/16 this morning. The company announced plans to list its stock on the New York Stock Exchange beginning in June. Nordstrom will trade with the symbol "JWN," the initials of founder John W. Nordstrom.

Broadband Internet access company Redback Networks Inc. (Nasdaq: RBAK) gave back $5 1/4 to $78 7/8 this morning after the company shot up $61 1/8 -- a nifty 266% -- in the company's first day of trading yesterday. Redback sold 2.5 million shares to the public at $23 each.

Floorcoverings retailer Maxim Group (NYSE: MXG) slid $15/16 to $8 1/8 as the company delayed the filing of its annual report, guiding investors to a filing date of May 25 at the latest. The company also said it will revise results for Q2, Q3, and Q4 1999 downward because of revenues that should have been deferred. The results of the restatements aren't yet available.

Health-care and deathcare firm Hillenbrand Industries (NYSE: HB) gave up $3 7/16 to $44 1/8 this morning after the company guided investors toward fiscal Q2 EPS that could be as much as $0.12 below First Call's $0.71 consensus estimate. Hillenbrand expects record sales and earnings for the second half and said it is working to shore up costs and productivity at its Hill-Rom subsidiary, the primary culprit of the Q2 shortfall.

High-rise heating and cooling systems company Dualstar Technologies (Nasdaq: DSTR) dimmed $21/32 to $5 25/32 this morning. Fiscal Q3 EPS jumped to $0.10 from $0.01 last year but revenues fell 12.5% to $20.3 million as the company said it was "more selective in bidding new work in order to meet certain profitability criteria."

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Editing
Brian Bauer (TMF Hoops), another Fool
Bob Bobala (TMF Bobala), a Fool's Fool
Jennifer Silber (TMF Amused), Fool at last