Publish date:

TheStreet.com's DAILY BULLETIN

October 26, 1999


Market Data as of Close, 10/25/99:

o Dow Jones Industrial Average: 10,349.93 down 120.32, -1.15%

o Nasdaq Composite Index: 2,815.95 down 0.57, -0.02%

o S&P 500: 1,293.63 down 8.02, -0.62%

o TSC Internet: 731.94 up 15.83, 2.21%

o Russell 2000: 417.76 down 0.93, -0.22%

o 30-Year Treasury: 97 00/32 unchanged , yield 6.350%

Companies in Today's Bulletin:

Best Buy (BBY:NYSE)

Computer Sciences (CSC:NYSE)

Estee Lauder (EL:NYSE)

Sycamore Networks (SCMR:Nasdaq)

In Today's Bulletin:

o Retail: Competition Means Best Buy May No Longer Be the Best Bet
o Wrong! Dispatches from the Front: It Might Seem Simplistic, but Buy a Stock When It's Going Up
o Evening Update: Computer Sciences Agreement Highlights Earnings-Heavy After-Market
o Bond Focus: Treasuries Pare Losses in Technically Driven Trading

Also on TheStreet.com:

Online Investing: Nasdaq Starts After-Hours Reporting, but Has Some Kinks to Work Out

It began Monday evening, but it's uncertain how many broker/dealers and ECNs are participating.


Consumer Products: Lauder Seeks New Sales Outlets Without Alienating Traditional Partners

Sales through traditional channels are slowing, so the cosmetics giant is looking at other options, including the Internet and its own stores.


The Invisible Mouth: A Cold, Hard Look at the Employment-Cost Crystal Ball

Making the case for a bigger-than-expected ECI print Thursday.


Mutual Funds: Even at Its Lofty Price, Sycamore's a Keeper, Fund Managers Say

A quartet of managers say they never considered flipping the networking company stock, even as it soared 612% on Friday.


Retail: Competition Means Best Buy May No Longer Be the Best Bet


Suzanne Kapner

Senior Writer

10/25/99 7:05 PM ET

It's shaping up to be the Christmas of consumer electronics. But

Best Buy

(BBY) - Get Report

, one of the largest retailers of things digital, may not be the live wire investors had hoped.

Best Buy, which has profited greatly from consumers' growing penchant for surround sound, has trained investors to expect sales and earnings to exceed analysts' estimates. And investors have rewarded it, giving the stock a forward price-to-earnings ratio of 38, well above the average of 26 for other consumer-electronics retailers.

But as electronic goods become commodities and competitors rush in to offer the lowest possible prices, investors face the possibility that Best Buy's amplified performance will be unplugged by slowing sales growth and profit-margin growth.

Loud and Clear
Best Buy shares sharply outperform those of Tandy, Circuit City over two years

Peter Caruso, a

Merrill Lynch

analyst whose 12-month price target on Best Buy is $95, says investors would make a mistake to bet against the 356-store chain. "Long term, people who are negative on Best Buy will be wrong," says Caruso, whose firm hasn't done underwriting for the company. "They will be shorting the place where a lot of technology will be sold to consumers." Best Buy shares recently traded around 59.

But David Strasser, a

Salomon Smith Barney

analyst who downgraded Best Buy to neutral from buy in September after second-quarter sales failed to live up to his estimates, thinks the stock's outperformance (see chart above) can't last. Since September, Best Buy's stock has tumbled around 20%. Strasser's 12-month price target is $55.

"We are concerned that the competitive environment this Christmas could impact the company's ability to achieve sales and earnings that justify current valuations," Strasser wrote in a recent research note. (He declined to be interviewed for this story. His firm has no underwriting relationship with Best Buy.)

Best Buy spokeswoman Susan Hoff says the Eden Prairie, Minn., company already goes head-to-head with discount chains on items such as VCRs. Best Buy's niche is in higher-tech products like home theaters, where people need more assistance than a cashier at the local


(WMT) - Get Report

can provide, Hoff says. However, she declines to specify how much of Best Buy's sales are derived from these more expensive items. In the latest year, $2.7 billion of Best Buy's $10.1 billion in sales came from consumer electronics, making the sector its second-biggest after that of home-office.

Fighting the Holiday Crowds

Fueled by a healthy economy and new products, retail sales of consumer electronics jumped 11% last year to $61 billion, compared with a 5% year-over-year gain for total retail sales, according to the

Census Bureau

. Also on the rise: the number of retail outlets that sell DVD players, digital cameras and home theaters.

Hot new technology products have long been the province of specialty chains such as Best Buy. But a shortening technology cycle, which has compressed the time it takes for products such as DVD players to go from luxury to mass market, is allowing just about anyone to sell these products at cut-rate prices.

"People consider consumer electronics commodities, and they will increasingly go to a mass merchant to purchase them," says Lisa Fasold, a spokeswoman for the

Consumer Electronics Manufacturers Association


Wal-Mart has told analysts that sales of DVD players will increase 30-fold this year. And the discount chain recently added consumer electronics to its Web site.


, a division of

Dayton Hudson


, made similarly enthusiastic comments to analysts regarding sales of digital products. And


(S) - Get Report

is expected to expand its offerings, analysts say.

Then there are online retailers such as


(AMZN) - Get Report

, which sells some 26 different types of home theater systems, ranging in price from $79.99 to $1,199.99.

Tangled Web

Meanwhile, Best Buy, which started selling CDs online in 1998, has lost its early e-commerce lead. Its expanded Web site won't launch until next year, later than analysts had expected. For the all-important holiday season, Best Buy online, in addition to CDs, is only offering DVD players and music that consumers can download for free. This despite the fact that its nearest competitor,

Circuit City

(CC) - Get Report

, has a Web site that's fully integrated with its stores and offers a vast array of products.

"We'd like to have a new Web site functional for the holidays, but we didn't want to rush it and risk not being perfect," says Hoff, the Best Buy spokeswoman. Four months ago, Best Buy hired John Walden as its e-commerce division president. He's pursuing strategies like integrating the Web site with retail stores so customers can check inventory in nearby locations, Hoff says.

While external competition heats up, Best Buy also faces internal hurdles. The easy sales and margin gains that made Best Buy stock such a winner the past two years are largely behind the company. Since fiscal 1997, Best Buy has examined everything from how the placement of, say, digital cameras near computers can induce customers to spend more money in Best Buy stores to calculating the return on advertising to ensure that newspaper circulars translate into higher sales. The result: Best Buy's gross margin is approaching 19% of sales for the current fiscal year, compared with 13.5% in fiscal 1997. Likewise, sales at stores open at least a year averaged double-digit increases for the past year.

Now, even by the company's own admission, those gains will slow. Hoff, the spokeswoman, says that margin growth will be less rapid than it has been in the past. And she adds that last year's third- and fourth-quarter same-store sales gains of 17% and 24%, respectively, "will be difficult to match." Best Buy expects sales growth in the mid-to-high single digits for the remainder of the year.

The competitive threat, however, remains the real wild card. Despite Merrill analyst Caruso's insistence that Best Buy continues to have a lock on higher-end products such as satellite TVs, at least one Best Buy shareholder remains concerned.

"The competitive landscape is what I'm worried about," the money manager says. "Who will make these sales? If it's Wal-Mart, it will kill me as a Best Buy shareholder."

Wrong! Dispatches from the Front: It Might Seem Simplistic, but Buy a Stock When It's Going Up


James J. Cramer

10/25/99 5:43 PM ET

Sometimes my email presents the greatest questions, questions that I know must be answered if there is to be any rigor or pattern or consistency to the often -- at times -- irrational investing process.

Cramer's Latest: Join the discussion on


Message Boards.

Over the weekend I got an email from someone who wondered why he should possibly buy


(KMB) - Get Report

, now in the high 50s, when he passed on it when it was cheaper in the 40s.

I think this question is at the heart of a lot of confusion about stocks in general. I want to approach this by first considering two incredibly simple, some would say simplistic, answers, and then delve more deeply into this particular situation.

One simple, clear way of looking at things is to say, "I missed it, and I am going to wait for another Kimberly to come along."

My whole trading being is predicated on a belief that such a view is both shortsighted and wrong.

The reason, coincidentally, is because of an equally simple belief my wife taught me during the years when she ran the trading at my hedge fund: "You should buy a stock if you think it is going to go up, no matter where you are getting in."

In other words, the mere fact that you missed it in the 40s shouldn't even be a part of the equation. It is meaningless. Think about all of the great moves, the companies like




America Online




(MSFT) - Get Report



(INTC) - Get Report


General Electric

(GE) - Get Report

that you would have missed with that same illogic.

It simply has no place in the investing firmament to factor in that you missed Kimberly-Clark in the 40s.

Now, if you don't think that way, let's delve into the specifics. In the 40s, Kimberly was reeling from an acquisition of



Al Dunlap


The fear in the 40s was that Kimberly-Clark had so overspent that it could never recover. Plus there were rampant fears of tissue price wars and of a suddenly aggressive

Procter & Gamble

(PG) - Get Report

taking share in diapers. Europe was also a drag. So was Asia and Latin America, by the way. Things looked quite bad in the 40s.

Now, in the 50s, the price war seems to have abated. The diaper market has gotten less difficult. The overseas markets have all improved. And the company has whittled down debt to the point that it wants to start buying stock back aggressively.

To me, the question is not whether the stock should have been bought in the 40s; it is whether all of these positives are reflected in the 50s.

I think not. That is why I bought the stock.

Investing is an imperfect game. People screw up all of the time. I should have seen the positive changes in Kimberly-Clark. But I didn't. I could kick myself about it. Or I could try to reason whether all of those changes are in the stock.

I bought the stock because I think it will go higher. I think it will go higher because things are getting better at Kimberly. Sometimes that is all there is to it.


James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund was long Kimberly-Clark, Procter & Gamble, America Online, Microsoft, Intel and Yahoo!. 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: Computer Sciences Agreement Highlights Earnings-Heavy After-Market


Tara Murphy

Staff Reporter

10/25/99 9:36 PM ET

Computer Sciences


said it inked an outsourcing agreement with

United Technologies

, tacking on an additional $900 million to their current $1.2 billion deal with United Technologies'

Pratt & Whitney

division. According to the deal's terms, Computer Sciences would restructure United Technologies' corporate headquarters, research center and five business divisions, which include Pratt Whitney,



Otis Elevator


Sikorsky Aircraft


Hamilton Sundstrand

. In addition, roughly 300 United Technologies employees and 100 contractors would join Computer Sciences workforce.

Separately, Computer Sciences posted second-quarter earnings of 55 cents a share, in line with the 15-analyst estimate and up from the year-ago 45 cents a share.

Hambrecht & Quist


posted fourth-quarter earnings of $1.63 a share, which includes investment gains. The report trounced the two-analyst estimate of $1.20 and the year-ago 14 cents a share.


(NCR) - Get Report

announced its plans to slash its workforce by 1,500 and assume a $200 million to $250 million restructuring charge in the fourth quarter. NCR said the reduction is part of an effort to leave the computer hardware business and concentrate on supplying business software.

Island ECN, owned by Datek Online, offers trading, mainly in Nasdaq-listed stocks, from 8 a.m. to 8 p.m. EDT. Prior to Sept. 15 Island offered trading from 8 a.m. to 5:15 p.m. EDT


MarketXT, formerly Eclipse Trading, offers after-hours trading to retail clients of Morgan Stanley Dean Witter's (MWD) Discover Brokerage and Mellon Bank's (MEL) Dreyfus Brokerage Services. Clients can trade 200 of the most actively traded New York Stock Exchange and Nasdaq Stock Market issues, 4:30 p.m. to 8 p.m. EDT Monday through Thursday. Prior to Oct. 11, MarketXT traded issues from 6 to 8 p.m.

In other postclose news (earnings estimates from

First Call/Thomson Financial

; earnings reported on a diluted basis unless otherwise specified):

Mergers, acquisitions and joint ventures


(JEF) - Get Report

said it has forged a pact with the U.S. securities division of

Credit Lyonnais

to provide collaborative investment banking services. The deal calls for Credit Lyonnais to serve as Jefferies' global bank, while Jefferies provides investment-banking services to the French bank.

Liberty Media


said it has forged an agreement to assume a 31.6% interest in


. The transaction calls for Liberty, the TV programming division of AT&T, to invest $425 million in the wireless broadband venture, boosting its total equity stake to $1.325 billion.

Earnings/revenue reports and previews

Airborne Freight


reported third-quarter earnings of 44 cents a share, well below the 16-analyst estimate of 59 cents a share, and the year-ago 65 cents. The company said the latest results were hurt due to lower domestic shipping rate growth and higher jet fuel costs.

American Medical Security

posted a third-quarter loss of $1.57 including a charge of $1.45 a share. The four-analyst estimate called for a loss of 2 cents a share, while the year-ago earnings were 14 cents a share.

Arden Realty

(ARI) - Get Report

posted third-quarter funds from operations of 65 cents a share, missing the nine-analyst estimate by a penny but up from the year-ago 61 cents.

Armstrong World


posted third-quarter earnings of $1.78 a share, which included an after-tax loss for a sale. The report beat the 12-analyst estimate of $1.76 and up from the year-ago $1.53 a share.

CEC Entertainment


reported third-quarter earnings of 44 cents a share, beating the 10-analyst estimate and the year-ago 31 cents. The per-share figures were adjusted to reflect a 3-for-2 stock split in the form of a 50% stock dividend of the company's common stock on July 23.



posted a third-quarter pro forma loss of 9 cents a share, narrower than the five-analyst expected loss of 13 cents a share, and the year-ago loss of 10 cents.



reported a third-quarter pro forma loss of 23 cents a share, a penny narrower than the three-analyst expected loss of 24 cents a share and smaller than the year-ago loss of 28 cents a share.

Midway Games


reported first-quarter earnings of 29 cents a share, beating the four-analyst estimate of 22 cents. The year-ago figure was 19 cents.



posted a narrower-than-expected pro forma loss of 47 cents a share. The three-analyst estimate called for a loss of 57 cents, while the year-ago pro forma loss was 63 cents.



posted a first-quarter pro forma loss of 13 cents a share, narrower than the three-analyst expected loss of 19 cents a share.

Power Integrations

(POWI) - Get Report

reported third-quarter earnings of 47 cents a share, beating the four-analyst estimate of 32 cents and the year-ago 33 cents. The company also set a 2-for-1 stock split.



reported third-quarter earnings of 27 cents a share including a 2-cent gain. The four-analyst estimate called for earnings of 24 cents a share, while the year-ago EPS was 20 cents a share.



reported third-quarter earnings of 30 cents including items, beating the seven-analyst estimate of 24 cents and the year-ago 21 cents a share.


(SANM) - Get Report

reported fourth-quarter earnings of 55 cents a share including items. The 15-analyst estimate was for 54 cents a share, while year-ago earning were 40 cents a share including items.

Sealed Air

(SEE) - Get Report

reported third-quarter earnings of 43 cents a share, missing the eight-analyst estimate of 46 cents, but up from a year-ago 29 cents. The company said it named William Hickey as CEO, effective March 2000, while T.J. Dermot Dunphy, the current CEO will remain chairman.

Voicestream Wireless


reported a third-quarter loss of 97 cents including a $6.6 million charge to restructure the company's employee stock option program. The 15-analyst expected loss was 85 cents a share, while the year-ago loss was 64 cents.

Offerings and stock actions


New York Stock Exchange

said it has requested that

Dollar General

(DG) - Get Report

comment on its unusual stock activity. Dollar General ended the trading session down 3 13/16, or 13.4%, to 24 5/8.

Power Integrations

(POWI) - Get Report

said it has set a 2-for-1 stock split.


Digi International

(DGII) - Get Report

said that Joseph Dunsmore would become president and CEO. Dunsmore would replace John Schinas, who served as the interim president and CEO.

Dun & Bradstreet


said Volney "Terry" Taylor has stepped down from his roles as chairman and CEO. The company said it has tapped Clifford Alexander as an interim replacement.



said it has made a pact with

Day Runner


to create an Internet Web organizer. The companies would offer the organizer on the

Go Network

, which is run by Infoseek and


(DIS) - Get Report

and on Day Runner's site later this year.

Sealed Air

(SEE) - Get Report

said it has selected William Hickey to become the company's CEO as of Mar. 1, 2000. Hickey will replace the retiring T.J. Dermot Dunphy, who will continue to serve as chairman.

Bond Focus: Treasuries Pare Losses in Technically Driven Trading


Elizabeth Roy

Senior Writer

10/25/99 4:37 PM ET

The Treasury market pared its early losses today in what market analysts labeled a short-covering rally. The rally began when prices dropped to levels that brought some of the highest yields Treasuries have offered in more than two years.

No major economic indicators were released today, but among the other factors that can influence bond prices (such as the dollar, oil and commodities in general), gold provided some decisive support, closing below 300 an ounce for the first time since Sept. 27.

The market: Join the discussion on


Message Boards.

The benchmark 30-year Treasury, after trading down as much as 24/32 shortly after 11 a.m. EDT, ended the day down just 2/32 at 96 31/32, its yield unchanged at 6.35%. Shorter-maturity notes didn't fully participate in the rebound. Their yields rose by a basis point or two on the day.

"It was basically a technical rally,"

Stone & McCarthy Research Associates

Treasury market analyst John Canavan said. The rally started, he said, when the long bond rose beyond 96 16/32 and the corresponding December futures contract

listed on the

Chicago Board of Trade

surpassed 110 20/32. "Both small technical moves set off some short-covering stops, and the rally just fed on itself in thin trading." Translation: Those were price levels at which traders with short positions had previously decided to unwind those positions by buying them back.

At the same time, the rally began at some nice, round yield levels at which some investors had likely flagged as entry points: 6.40% on the long bond, 6.25% on the 10-year note, and 6.00% on the two-year note. "We've come an awfully long way in a fairly short period of time," Canavan said of the rising yields.

Also supporting the market today was analysis of the latest biweekly

Commitments of Traders

report from the

Commodity Futures Trading Commission

, released Friday after the bond futures market's 3 p.m. EDT close, said Tony Crescenzi, chief bond market strategist at

Miller Tabak Hirsch

. The

report showed a new record high level of short interest in the bond futures contract on the part of speculators, who Crescenzi says historically have tended to take extreme positions in the direction the market has been moving shortly before it reverses course. "It could be a sign of excessive pessimism," he said.

But while bond and note prices rebounded this afternoon, the fed funds futures contracts listed on the CBOT priced in a slightly higher likelihood of another rate hike by the


at its next meeting on Nov. 16. The implied odds rose to 69%, from 64% on Friday, in spite of weaker-than-expected performance by the day's only economic indicator, September

existing home sales

. Existing home sales slipped to a 5.13 million pace, the slowest since May, from 5.24 million in August.

Hawkish comments by

European Central Bank

chief economist Otmar Issing overnight contributed to the shift in sentiment about the Fed.

Reiterating comments he made earlier in the month, Issing said the risks to price stability in the Eurozone are "slowly changing from the downside to the upside." Higher interest rates in Europe to control inflation could weaken the value of the dollar, an inflationary development that could prompt the Fed to hike U.S. rates.

The fact that today's action in Treasuries was on light volume highlighted the fact that the market is in vigil mode for key economic data and a speech by Fed Chairman

Alan Greenspan

on Thursday. The data are the

Employment Cost Index



, both for the third quarter. The ECI is the government's most comprehensive measure of wage inflation, and a stronger-than-expected reading could justify a rate hike, the thinking goes. Greenspan will speak after the markets close.

"Thursday is definitely a 24-hour period that should stand out as the center of the market's focus this week,"

Goldman Sachs

senior money market economist John Youngdahl said.



Street Sightings

James J. Cramer will chat on AOL Tuesday, Oct. 26 at 5 p.m. EDT. (Keyword: Live)

Gary B. Smith will chat on MarketTalk Wednesday, Oct. 27 on AOL's MarketTalk, hosted by Sage at 4:30 p.m. EDT. (Keyword: AOL Live)

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