Ups and Downs Plus Top News (QuickNews) November 12, 1999

Motley Fool QuickNews

Friday 11/12/99

Closing Market Numbers

DJIA          10769.32  +174.02    (+1.64%) 
S&P 500        1396.04   +14.58    (+1.06%)
Nasdaq         3221.15   +23.86    (+0.75%)
Russell 2000    449.69    +2.20    (+0.49%)
30-Year Bond  101 7/32   +22/32  6.04 Yield

Today's Market Movers:


CDMA wireless technologies developer Qualcomm (Nasdaq: QCOM) leapt $32 1/2 to $378 after J.P. Morgan analyst Gregory Geiling raised his 12-month price target for the firm to a non-split-adjusted $460 per share from $315 per share, citing higher expected earnings thanks to new products and increased royalties.

Takeover rumors breathed some new life into the shares of networking products maker Newbridge Networks (NYSE: NN) today, which jumped up $2 3/8 to $20 5/8. Alcatel (NYSE: ALA) and Ericsson (Nasdaq: ERICY) have been mentioned most often as potential acquirers.

It was an early Christmas for semiconductor process control metrology systems company Rudolph Technologies (Nasdaq: RTEC), which took flight for a $6 15/16 gain to $22 15/16 after selling 4.8 million shares in an initial public offering at a price of $16 per share. Fellow Friday IPO and TouchSense PC hardware and software firm Immersion Corp. (Nasdaq: IMMR) gained $6 5/8 to $18 5/8.

Several online brokerage firms got a boost today as Hambrecht & Quist analyst Greg Smith reportedly forecasted that the sector will report strong volumes in the short term, thanks in part to "extraordinary" online trading volumes in November. E*Trade Group (Nasdaq: EGRP) rose $5 13/16 to $36 3/4, Ameritrade (Nasdaq: AMTD) traded up $2 3/4 to $21 15/16, TD Waterhouse (NYSE: TWE) climbed $2 to $16 5/8, and Charles Schwab (NYSE: SCH) picked up $4 1/16 to $41.

Aircraft and electronic systems contractor Northrop Grumman (NYSE: NOC) ascended $3/4 to $53 5/16 after announcing plans to acquire Navia Aviation AS of Norway for $35 million in cash. The Oslo-based company makes instrument landing systems, digital voice switching systems, and air traffic control systems for commercial aircraft.


Go-go computer maker Dell (Nasdaq: DELL) slipped $1 11/16 to $41 3/4 as analysts at Bear Stearns, Merrill Lynch, and PaineWebber trimmed estimates for the fourth quarter despite a bullish forecast from the company yesterday. The analysts cited pressure on hardware margins as one of the reasons for the move.

Microchip component manufacturing leader Intel (Nasdaq: INTC) dropped $3 1/4 to $76 3/16 after Merrill Lynch analyst Joe Osha reduced his rating to "near term accumulate" from "buy" as a result of competitive pressure from rival Advanced Micro Devices (NYSE: AMD) and issues related to the introduction of a new memory chip product made by Rambus (Nasdaq: RMBS). Rambus fell $3/4 to $88 and AMD fell $1 11/16 to $26 9/16.

Hardee's, Taco Bueno, and Carl's Jr. owner CKE Restaurants (NYSE: CKR) coughed up $1 1/8 to $6 1/16 after the company reported that third-quarter earnings will fall below analyst estimates because of delays in the company's turnaround as well as seasonal trends. It also announced plans to cut about 150 jobs in the next eight months at Hardee's headquarters in Rocky Mount, North Carolina. The move is part of an effort to consolidate operations at CKE headquarters in Anaheim, California.

Today's Top Stories:

FOOL ON THE HILL An Investment Opinion
Home Field Advantage
By Bill Mann (TMF Otter)

OK, it's time for the three of you out there who still like me to finally have to turn on me. (And no, you don't count, Mom, you are required to like me. Even when you don't.)

I believe that 80% of the people who own Cisco Systems (Nasdaq: CSCO) should not.

Surely I don't mean you. Well, if you don't own Cisco, I certainly don't mean you. Otherwise, unless you are a person who actively understands the technology of routers and how the Internet works, why yes, I more than likely mean you.

I also include myself in this group of people who own Cisco, but probably should not.

I'd like to take you back to high school football, just to lay out the basis for this thesis.

Picture this:

Two teams are playing. They are evenly matched, with one having a star-studded offense and the other with a defense that has not yielded a touchdown all season. They have both won every game they have played.

Which team has the advantage? Well, common sense tells us that, all else being equal, the team playing at home does.

This is not to say that the home team will win, but they do have an intangible but quantifiable benefit from playing in a friendly environment, before their own crowd. It is as psychological as it is real. And it makes sense, doesn't it? The players are just that much more comfortable by virtue of the familiarity of their surroundings.

This translates to most aspects of life, not just sports. Machiavellian business executives speak about the psychological advantage of conducting negotiations on home turf. Restaurants breed customer loyalty through familiarity. Children grow uneasy when their parents leave them at home with a baby-sitter. We all remember the chaos that reigned when we had substitute teachers in school. Was it because they were "bad" teachers? Nope, it was because their presence broke the familiar pattern to which we were accustomed.

Human beings almost always operate better when they are dealing with a "known quantity." Why would investing work differently?

Why, in investing, do we insist upon handing over the one major advantage we have? Why do the boo-bears decry the greatest investor of our generation, Warren Buffett, as "old-fashioned" or "behind-the-times" because he resists investing in high technology because he does not understand the financial model?

Warren Buffett and Peter Lynch have always espoused, especially for individual investors, that we buy what we know. The rules under which Lynch had to operate when he managed the Fidelity Magellan Fund made this simple rule not practical for the amount of funds he had under management. But in the case of Buffett, a look at the companies held by Berkshire Hathaway (NYSE: BRK.A) gives us a perfect view into his circle of competency. Restaurants. Sundries. Candy. Super-catastrophe re-insurers.

The last item, in particular, speaks volumes about a complicated business where Buffett feels he holds a distinct advantage of direct, intimate knowledge. His basis for investing does not rest upon the notion that "reinsurance is a growth industry, so companies in the industry are bound to go up." No sir -- he understands float, capital costs, risk assessments, and all of the other ways in which the individual insurance companies differentiate their performance.

Do you "know" routers? How will you be able to see in advance that Cisco is becoming the next Wang or Digital or Hayes Corporation (Nasdaq: HAYZQ)? For those of you for whom Hayes does not ring a bell, five years ago it was so dominant in its industry that modems from other companies were at a disadvantage if they were not labeled as "Hayes Compatible." This former standard bearer is now bankrupt, having frittered away its dominance in a tremendous growth market.

What is it that you know? Cosmetics? Are Estee Lauder (NYSE: EL) products superior to those of Revlon (NYSE: REV)? The last time you were at the department store, was one booth active and the other deserted? This is direct information that you have that the Wall Street analysts may lack. Why aren't you basing your investment on your direct knowledge?

What about consumer electronics? You hear that Hitachi's (NYSE: HIT) next generation DVD player is far superior to Sony's (NYSE: SNE)? Did you know early on that DIVX, sponsored by Circuit City (NYSE: CC), was doomed to be a bust? In retrospect, this company would have been a great short during the DIVX debacle, as it shed nearly half its value during the latter course of 1998.

If either of these things are your bag, this is your home field! Got a bunch of kids who go through Band-Aids (Johnson & Johnson) and Neosporin (Warner-Lambert) like it's going out of style? Well, then that's an industry you know about.

But how on earth will you know that a competitor has introduced a superior technology to Cisco's? When the stock tanks? The reason I'm pounding this issue is that it has happened to other industry darlings before, and Cisco's celebrated status and high-flying stock in no way make it immune. How do those who do not understand the underlying economics know when to get off the bus? Trust other people? Guess? Tirelessly study the industry?

Unfortunately, in the long run, the last answer is the only one giving the individual investor any kind of sustainable advantage. If you buy what you know, you have the luxury of not having to trust anyone else's instincts.

Corporate finance does not run by a different set of natural laws. Cisco, for example, is not a company that has a stock that is destined to go up just because it has a history of doing so. No company is immune to the laws of the marketplace. If your products don't sell, you don't make money. You don't make money, you die. Simple.

But who among us has ever seen a Cisco router? Do you, Cisco investor, know specifically what a router does, how it works, where it sits on a data network, or even what it looks like? Of course, there are millions of people worldwide who know and understand this technology, and if you are one, I am not talking to you. You likely know the reasons that Cisco products have come to dominate the router industry, as well as the flaws its products have. In this realm, you hold the advantage. Over analysts, over me, over everybody else. You KNOW Cisco.

I am thinking about this in part because of the announcement yesterday by Nortel Networks (NYSE: NT) that it has an agreement with Intel (Nasdaq: INTC) to include its new open Internet components to Intel's Web offering and will offer its routing products at 50% below the prices of Cisco's.

Now, I'm sure that many Cisco (and Nortel and Intel) investors have read the press releases on Nortel's new assault on the router king. I could likely produce several articles worth of deeply technical analysis on how this is a threat to Cisco, how it is not, and how Cisco's position as a closed-source dominant player on the Internet give it a natural incumbency.

The unfortunate reality is, the vast majority of investors in Cisco might as well be reading Chinese as technical descriptions of chipsets, network bottlenecks, and the benefits of open/closed source. The remainder of the readers would quickly expose me as the technical poseur I am, since, when it comes down to it, I cannot possibly understand the full technical or financial implications of what may happen by Nortel making its routers open-source.

My point (and I do have one), is that we place ourselves at a disadvantage by investing in companies that we do not deeply understand. Will it turn out OK? There are millions of Cisco investors with billions of dollars of stock who could attest that, in this case, so far it has. But we as Foolish investors would be wise to remember that the marketplace can turn on a dime, and if we don't see the bend in the road coming, we will be hard-pressed to react to it before a potential crash.

Fool on and prosper.

Related Link:
Cisco Message Board

Dell Just Keeps on Pleasing
By Richard McCaffery (TMF Gibson)

Dell Computer (Nasdaq: DELL), the world's largest direct sales computer company, last night reported net income (excluding charges) of $483 million, or $0.18 per share, for the third quarter, compared to $384 million, or $0.14 per share, a year ago. The results were in line with reduced analyst estimates, according to First Call.

A 72% increase in sales of enterprise products helped grow revenue to $6.7 billion. Operating expenses decreased to 10.6% of revenue from 11.4%, and net margins fell to 7.1% from 8% as a result of a 25% increase in the cost of memory products. Dell still managed to generate $1.1 billion in cash from operations, up from $586 million a year ago. A portion of the cash was used to repurchase 15 million shares of stock.

Wait a minute. According to Bloomberg, Dell reported net income of $289 million, or $0.11 per share, down 25% from net income of $384 million, or $0.14 per share, a year ago.

What's an investor to do when the numbers look different? In this case, it's pretty clear cut. The decrease in net income is due to a $194 million charge for the acquisition of ConvergeNet Technologies, a privately held storage network company based in San Jose, California. Dell spelled it out in the press release and Bloomberg explains it farther down in its story.

Nevertheless, Bloomberg gave prominence to Dell's actual earnings after the acquisition charge, which resulted in negative earnings growth for the quarter. It's a perfectly accurate view of the company's finances. Dell and Reuters, on the other hand, excluded those charges at first glance and underscored a much higher number.

Is that an inflated view of where the company stands? Not at all. It's standard operating procedure. The idea behind excluding charges is not to obscure financial reality. Rather, it's an effort to give investors a look at the real earnings power of a company.

To see what's really there, investors need to separate one-time charges, extraordinary items, and unusual items. It's like the 40-yard dash at football camp. The coaches don't put a tackler on the field because they want to see the player's pure speed.

Unfortunately, it can get complicated quickly as companies report all kinds of different numbers that they believe illuminate the income statement. Some companies exclude options expenses, others want investors to focus on earnings before interest, taxes, depreciation, and amortization (EBITDA), others report cash earnings.

In addition, it can get tricky figuring out which items are really extraordinary. Suppose a large manufacturing concern with lots of factories closes a plant and takes a restructuring charge. That "unusual" item would be excluded, but manufacturers close factories all the time so how unusual is it?

There are many different viewpoints on these matters. On the whole, the issue illustrates one of the best reasons for buying and holding stocks. Over time, investors become very familiar with their company's sales cycles, earnings, business needs, etc., and it gets much easier to assess the numbers in context.

Oh, and once again, a great quarter for Dell.

More of Today's Best:

Healthcare at the Speed of Light?
By Richard McCaffery (TMF Gibson)
-- Internet healthcare services company Healtheon/WebMD (Nasdaq: HLTH) worked quickly to sign partners, land customers, and build its brand name during the third quarter, but losses exceeded First Call estimates by four cents per share. The Santa Clara, California company reported a net loss of $17.1 million, or $0.24 per share for the third quarter, compared to a net loss of $13.5 million, or $0.26 per share a year ago. Since Healtheon just yesterday completed its mergers with WebMD, MEDE America, and MedCast, third quarter results include only Healtheon's operations. Revenues grew 128% to $28.7 million, up from $12.6 million a year ago. On a pro forma basis (looking at the newly combined companies), Healtheon's third quarter revenue hit nearly $50 million.

FOOL PLATE SPECIAL An Investment Opinion
Is Sterling Software Ready to Shine?
By Brian Graney (TMF Panic)
-- Application development and network management software firm Sterling Software (NYSE: SSW) turned in its fiscal fourth quarter results late yesterday, posting EPS of $0.47 (excluding charges) in line with the First Call mean estimate. That sounds good initially, until it's remembered that the company had guided investors to lower their expectations back in September when analysts were forecasting EPS of $0.52. Nonetheless, Sterling's shares rose about 10% this morning. Investors reacting to the news are likely looking well beyond the most recent quarter's numbers, focusing instead on President and CEO Sterling Williams' view that the firm is "well positioned for an outstanding 2000." Positioning has been the key word around Sterling's Dallas headquarters this year, as it adjusts its application management business to focus on the hot area of e-business applications.

McDermott on Its Back
By Brian Graney (TMF Panic)
-- Investors who had figured on a quick recovery this year for beaten-down oil and gas industry subsea contractor McDermott International (NYSE: MDR) have received a rude awakening over the past two days as the company's shares have sunk to new depths. Despite rising oil and gas prices and improved investor sentiment toward the energy sector in general, McDermott's core J. Ray McDermott marine construction services business has seen dismal results. Yesterday, the company said fiscal Q2 EPS was $0.06, down from last year's $0.85 and substantially below the First Call mean estimate of $0.19. In turn, investors have unloaded the stock, sending its share price down a wrenching 55% in the last two trading sessions.