TheStreet.com's DAILY BULLETIN
July 28, 1999
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Market Data as of Close, 7/27/99:
o Dow Jones Industrial Average: 10,979.04 up 115.88, 1.07%
o Nasdaq Composite Index: 2,679.33 up 60.14, 2.30%
o S&P 500: 1,362.84 up 15.08, 1.12%
o TSC Internet: 570.81 up 6.29, 1.11%
o Russell 2000: 446.48 up 3.61, 0.82%
o 30-Year Treasury: 89 16/32 up 8/32, yield 6.006%
Companies in Today's Bulletin:
Advanced Fibre Communications (AFCI:Nasdaq)
In Today's Bulletin:
o Networking: Interest In Advanced Fibre Grows With Cerent Investment
o Wrong! Rear Echelon Revelations: Watch Out for False Tells
o Evening Update: drugstore.com's 5 Million-Share IPO Priced Above-Range at $18
o Bond Focus: Treasuries Break Four-Day Losing Streak Thanks to a Few Buyers
Cramer's Online Brokerage Speech
On Monday, Jim Cramer spoke at the Friedman Billings Ramsey 4th Annual Technology Investor Conference. Find out what the attendees did: Read the text on TSC, presented in four parts.
Cramer's Online Brokerage Speech, Part 1
When the Net is finished with the brokerage business, you won't recognize it.
Cramer's Online Brokerage Speech, Part 2
E*Trade and DLJ Direct are the financial answer to Home Depot, helping do-it-yourselfers build a fortune.
Cramer's Online Brokerage Speech, Part 3
The public has decided that it can do a better job in managing its money than the brokerage firms and the mutual funds. And the public is right.
Cramer's Online Brokerage Speech, Part 4
The ideal 21st-century brokerage would have no brokers, just a Web site, the trader says.
Also on TheStreet.com:
Biotech/Pharmaceuticals: Defiant Spirit Doesn't Set on Sunrise
The company is sounding off after an advisory panel to the FDA unanimously rejected its application for a farsightedness laser.
Brokerages/Wall Street: Archipelago Forces Trading Industry to Take Stock
The firm's push for exchange status sparks an alliance with Instinet and threatens the continued dominance of the big boys.
Tech Savvy: Opportunity Ahead: Donning the Red Hat, Part 2
Can Red Hat make money distributing free software? Will Redmond retaliate? To find out, read on.
The Chartist: Bulls Rush Out
The Chartist says the recent bearish sentiment is what we need to put in a decent bottom.
Networking: Interest In Advanced Fibre Grows With Cerent Investment
SAN FRANCISCO --
Advanced Fibre Communications
may not see a boost in business from its 5.5% stake in
, but it may win more investor applause when the startup goes public.
Cerent subleases offices from AFC in Petaluma, Calif. That degree of proximity doesn't extend into their respective businesses, however. Cerent's boxes, which younger carriers use to plug voice and data calls into the widest network pipes, aren't closely tied to AFC's products, which allow older phone carriers to pack more customers onto their local networks. But analysts expect Cerent's IPO, which will likely come later this summer, to add $150 million or more to AFC's market capitalization of $1.1 billion and give it cash to expand its business, perhaps through acquisitions.
"It's really more of a cash investment for them," says analyst Chandan Sarkar with
, an investment bank in Stanford, Conn. SoundView has no banking relationship with either company.
Cerent, citing an
-enforced quiet period, declined to comment for this story. AFC officials didn't answer any questions about its investments or make executives available for interviews.
It's All About Cash
Corporations are finding that the kind of me-too venture capitalism AFC is testing with Cerent pays off, whether the startup becomes a useful partner or not. When
in a stock transaction, Cisco rival
year-old investment in Fibex turned into $100 million in Cisco stock. According to an SEC filing last month, Ascend may sell those shares into the open market.
Many in the technology and venture-capital industry expect to see more corporations invest in startups, regardless of whether they make good partners.
"We're seeing all kinds of corporate investors these days," compared to just two or three years ago, says general partner Promod Haque with
, an investor in Cerent. SEC rules restricted Haque, also a director of Cerent, from discussing Cerent in particular. However, he says he encourages startups to enlist both VC firms and corporations as backers. "Sometimes it can give you perspectives on strategies that other corporations are employing," he says.
A Jewel Called Cerent
In addition to the undisclosed amount that AFC invested in Cerent in September 1998, AFC chairman Don Green sits on Cerent's board. And two former AFC execs have signed with Cerent since the company was founded in January 1997.
Now Cerent is planning to raise $100 million in an IPO that
Credit Suisse First Boston
is underwriting. Cerent doesn't state its market capitalization in its initial SEC documents. But judging from the recent performance of networking IPOs such as
, Cerent could easily top AFC in dollar market value once it goes public.
Cerent, which started shipping commercial product in early 1999, posted revenue of $9.9 million and a net loss of $29.3 million in the first six months of this year, compared with an $8.7 million loss a year earlier. AFC, by contrast, posted second-quarter revenue of $68.8 million, down 19% from the same quarter a year before; and a $4.5 million net profit excluding a restructuring charge, down from a $7.2 million profit a year ago.
And while Cerent expects to lose money for the foreseeable future, its promising contracts with high-profile carriers such as
could boost revenue and enhance its image on Wall Street in coming quarters.
After cresting at 44 3/4 in April 1998, Advanced Fibre sunk to 4 by last October thanks partly to curbed spending plans by international carriers and lost business with
. Since then, a long-anticipated contract with Baby Bell
has nudged the stock back up to 16 3/16 at Tuesday's close.
Only now is Wall Street starting to size up the Cerent jewels. Analyst Conrad Leifur with
US Bancorp Piper Jaffray
upgraded Advanced Fibre to buy on July 20, citing the SBC contract, the recent hire of telecom veteran John Schofield as CEO and the planned Cerent IPO.
"AFC's stake in Cerent could be worth $150 million or more, roughly $2 per
AFC share," wrote Leifur in his report, when AFC was trading at 15 3/16. For comparison, AFC now counts $143.2 million in cash, cash equivalents and marketable securities. Initial SEC filings do not state whether AFC will sell shares in the offering, but Leifur sees little technological cooperation between the companies and expects AFC to take profits.
"The eventual monetization of its Cerent stake would enhance AFC's ability to pursue the acquisition strategy that is part of Schofeld's game plan," Leifur says. He did not comment further. Piper Jaffray has no underwriting or banking ties to either company.
One potential acquisition target, according to an equity analyst who asked not to be named, is
, a yearling in Santa Clara, Calif. that in June started shipping bandwidth-boosting network systems to carriers. Anda couldn't be reached for comment.
Regardless, AFC can use proceeds from the sale of its Cerent stake to expand its wallet considerably while continuing its own turnaround effort. One Silicon Valley CFO, who asked not to be named, says numerous small companies such as AFC are making these minority investments without having to disclose them to investors.
"It's so cheap that they can make a bet and then write it off," says the CFO. Investors learn of the investment if it blooms and becomes material. "You only have to have one success to justify all the others," the CFO says.
Wrong! Rear Echelon Revelations: Watch Out for False Tells
James J. Cramer
After a vicious selloff like we just had, I like to look over the game films to see what I should have done differently. As my goal is simply to lose less -- or even profit if I can -- from downturns, I have to analyze everything.
I know of very few fund managers who are ever short enough or have sold enough stock to time a quick correction perfectly. Instead, you just try to weather the pain or position yourself as lean as possible for the hurricane.
What we try to do is have minimum exposure to the market ahead of these selloffs. We were, and are, pretty underinvested relative to the mutual funds out there, but we still had more inventory than we should have because of one peculiar event that led us astray: the
Each earnings period has its own momentum that is usually set by the companies that report first. In this case, it was Motorola and
. The latter reported a just-OK number but issued a sunny outlook and the stock ramped. That showed we were in a forgiving, forward-looking market.
The former, however, gave us a quarter that we thought was just plain not-so-hot given the run MOT had had. While Jeff and I were on the call, we had the stock pegged for a 4- or 5-point decline. Yes, it was just that murky. Many of our compadres on the buy-side agreed.
Strangely, however, Motorola then proceeded to go down a bit and then rally like mad, getting to the high 90s. This action was, in retrospect, a "false tell." We didn't know it at the time, though. Instead we "read into" the MOT action that not only was the market going to be generous with companies that stumbled, but that it would be ecstatic about really great quarters.
That caused us to be longer than we should have been going into a bunch of semiconductor earnings, including
. We remain long those stocks, but they got crushed along with the whole group.
Remember, we look for patterns. We extrapolated MOT to the sector and it failed us.
What happened here? Where did we go wrong? I think the answer has to do with some overexuberant institutions that loved Motorola in spite of itself. Sometimes, but not often, stocks have the wrong reaction to news. If we had it to do over again, we would have stuck with our gut that MOT wasn't that good a call, and said that the market was simply nuts in the way it took MOT up.
As so much of the market is positioning, we allowed MOT to influence our positioning incorrectly, which caused us to be longer than we should have.
The moral: Don't let the actions of any one stock dictate your decision toward others. On any given day or two, a stock may head in the wrong direction, just like on any given Sunday the wrong football team can win. That doesn't mean you should change your game plan because of that action.
James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund was long Intel. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column at
Evening Update: drugstore.com's 5 Million-Share IPO Priced Above-Range at $18
John J. Edwards III and
(DSCM:Nasdaq) 5 million-share IPO priced above-range at $18 by
Morgan Stanley Dean Witter
. The price range for the online drugstore's offering initially was set for $9 to $11 and then was raised to $15 to $17.
In other postclose news (earnings estimates from
; earnings reported on a diluted basis unless otherwise specified):
Earnings/revenue reports and previews
reported second-quarter earnings of 49 cents a share, including a 27-cent pre-tax gain from the sale of about 640,000
shares. The three-analyst view called for operating earnings of 25 cents vs. the year-ago 16 cents.
reported second-quarter earnings of 33 cents Canadian a share vs. the year-ago 26 cents Canadian. The company did not provide U.S.-dollar-denominated results, but according to current exchange rates, the second-quarter earnings were 22 cents a share. That's a penny better than the 11-analyst estimate and up from the year-ago 17 cents.
reported first-quarter earnings of 48 cents, in line with the 16-analyst estimate and up from the year-ago 40 cents. In a
interview, CEO Van Honeycutt backed the 18-analyst estimate of $2.54 a share for fiscal 2000.
posted second-quarter net income of 90 cents a share, including a pretax gain related to its remaining 32% interest in
. The six-analyst estimate called for an operating loss of 5 cents vs. the year-ago loss of 3 cents.
reported second-quarter earnings of 33 cents a share, 2 cents better than the seven-analyst outlook and up from the year-ago 32 cents. The company said it plans to cut 1,600 positions from its workforce of 11,000 and would lower its dividend 71%, in an effort to boost profitability. Foster Wheeler said it expects to take a $35 million third-quarter charge for the cost-cutting program.
warned its second-quarter earnings will come in around 22 cents to 24 cents a share due to slower sales growth. The five-analyst view called for earnings of 27 cents vs. the year-ago 32 cents.
reported a second-quarter loss from continuing operations of 31 cents a share, 6 cents narrower than the four-analyst view. The year-ago profit of $40.27 a share included a $24.8 billion gain on MediaOne's separation from
U S West
said its first-quarter results will miss the Street's forecasts because of lower net sales and increased operating expenses. The 12-analyst outlook called for earnings of 33 cents a share vs. the year-ago 28 cents.
, the publisher of this Web site, reported a second-quarter operating loss of 30 cents a share vs. the year-ago loss of 61 cents. The four-analyst estimate called for a loss of 37 cents.
reported a second-quarter loss of 31 cents a share, 2 cents narrower than the four-analyst expectation but wider than the year-ago 30-cent loss. The company said its third-quarter ticket sales might fall behind its strong second-quarter results but would still be strongly higher year over year.
reported a second-quarter loss of $1.39 a share including a charge, compared with a year-ago operating loss of 59 cents. The company did not provide a per-share operating figure. The 14-analyst estimate called for an operating loss of 81 cents.
Mergers, acquisitions and joint ventures
Massachusetts Department of Telecommunications and Energy
approved the planned $950 million merger of
Commonwealth Energy System
agreed to buy
for $12 a share, or about $240 million, in cash.
Offerings and stock actions
Credit Suisse First Boston
American National Can's
(CAN:NYSE) 30 million-share IPO below-range at $17. In other new issues,
(LBRT:Nasdaq) 6.25 million-share IPO was priced above-range at $16 by CSFB.
National Medical Health's
(NMHC:Nasdaq) 2 million-share first offering midrange at $7.50. Elsewhere,
BancBoston Robertson Stephens
(PKTR:Nasdaq) 4 million-share IPO above-range at $15. The company is a software provider, and the price range for its offering was raised to $12 to $14 from $10 to $12.
(QKKA:Nasdaq) 5 million-share initial offering midrange at $12. The company is an online sports entertainment programmer.
set a 2-for-1 stock split effective Aug. 12.
set a buyback of up to $75 million worth of its common stock. The plan is a continuation of a $25 million buyback program authorized last year.
said it hired
for advice on future strategic alternatives.
National Computer Systems
was awarded a five-year contract valued at $122.5 million to provide assessment and testing services to the
Florida Department of Education
asked a federal judge to find
in criminal and civil contempt for allegedly violating a 1994 court order to allow the merger of
FOR FURTHER EARNINGS NEWS, SEE:
Bond Focus: Treasuries Break Four-Day Losing Streak Thanks to a Few Buyers
Treasuries improved for the first time in five sessions, but volume was very light and interest was minimal, because everything going on this week starts tomorrow.
to deliver his
testimony to the
. The Fed today confirmed that, per usual, his prepared text will be
the same one he delivered to the
last week. But there's still the chance that in the Q&A portion of the testimony Greenspan will say something to help traders handicap the possibility that the Fed will raise interest rates again at its next meeting on Aug. 24.
Tomorrow also brings an important economic report --
durable goods orders
for June -- but the more important economic news comes on Thursday in the shape of the second-quarter
Employment Cost Index
. The ECI, which measures wage pressures, is more important than durable goods,
senior economist Richard Yamarone said, because "the economy has proven that it can run solid and strong in the absence of inflation." Order durable goods till the cows come home; until your tireless ordering starts putting upward pressure on wages, it's not necessarily something to worry about.
Today's only major indicator, the
Consumer Confidence Index
for June, was bond friendly, easing to 135.6 from 139 in May, which was a 31-year high. A less-confident consumer presumably doesn't order quite so many durable goods.
The benchmark 30-year Treasury bond finished the day 8/32 higher at 89 17/32, trimming its yield 2 basis points to 6.03%. Shorter-maturity note yields fell by anywhere from 1 to 4 basis points.
Scott Graham, co-head of government bond trading at
, attributed the strength in Treasuries, such as it was, to hedging activity related to a corporate new issue (upon placing a corporate new issue with investors, underwriters may buy back Treasuries they had sold as a hedge against a market selloff) and to Germany's planned sale of 10-year notes tomorrow. Accounts that plan on buying Germany's new notes tomorrow sold them today and bought 10-year Treasuries, Graham said, a trade that "might be partly unwound tomorrow."
A sufficiently strong durable goods report could also put pressure on Treasuries tomorrow. The average forecast among economists surveyed by
is for a 1.0% gain, and Yamarone said it will get a boost from orders for air conditioners during the July 4 weekend heat wave.
But attention will probably shift quickly to Greenspan and the ECI. Unless Greenspan says something to shift the mood, Graham said an ECI gain over 0.9% (the
consensus forecast is for a gain of 0.8%) "is going to be construed as very negative." It would lift the odds of an August rate hike, he said, from 60% currently to 75%.
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