TheStreet.com's WEEKEND BULLETIN
September 18, 1999
Market Data as of Close, 9/17/99:
o Dow Jones Industrial Average: 10,803.63 up 66.17, 0.62%
o Nasdaq Composite Index: 2,869.62 up 62.90, 2.24%
o S&P 500: 1,335.42 up 16.94, 1.28%
o TSC Internet: 620.56 up 12.71, 2.09%
o Russell 2000: 434.45 up 4.20, 0.98%
o 30-Year Treasury: 100 31/32 up 12/32, yield 6.043%
For the week:
o Dow Jones Industrial Average: down 2%
o Nasdaq Composite Index: down 0.6%
o S&P 500: S&P down 1.2%
o TSC Internet: down 1%
o Russell 2000: down 1.5%
Companies in Today's Bulletin:
Stride Rite (SRR:NYSE)
Sun Microsystems (SUNW:Nasdaq)
In Today's Bulletin:
o Stock Mart: Stride Rite
o Editor's Letter: The Dastardly 'I' Word
o Evening Update: Sun Microsystems Sets 2-for-1 Stock Split
o Bond Focus: Bonds Rise on Dollar Strength and Breeze Through The Day
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Also on TheStreet.com:
The Coming Week: The Market, Fickle and Weak, Is Nevertheless Coping
Meanwhile, the Bank of Japan sits on the cusp of a financial faux pas.
Wrong! Dispatches from the Front: It's Getting Rough for the Big Computer-Equipment Makers
We can't tell how much of the pulldown in Hewlett-Packard and IBM is fundamental worry and how much may be options.
Truth Serum: Why You May Wish You Never Heard of Log On America
The stock's dropped by a third since it spiked on a seemingly promising
piece. Talk about it on our message board.
Wing Tips: US Airways, Still Losing Altitude, Hasn't Hit the Ground -- Yet
An airline with such high costs can only survive and prosper if it can generate high yields.
Stock Mart: Stride Rite
9/17/99 6:00 PM ET
After a rocky summer,
is finding its stride again.
The Lexington, Mass.-based shoemaker is streamlining its divisions, expanding its product lines and scouting for acquisitions.
"The thing we've always liked about it is they've got terrific brands," says Dennis Scannell, senior vice president and portfolio manager at Boston's
David L. Babson
, which owned 3.2 million Stride Rite shares on June 30, according to
First Call ShareWatch
"They've got a great brand name and a pristine balance sheet," adds Mariko Gordon, president of New York's
Daruma Asset Management
, which owned 589,000 Stride Rite shares at June 30.
Indeed, Stride Rite is best known for brands like
, as in
, the sneaker staple; and
, the kids' line. It also makes shoes for
For bargain hunters, the stock, which closed up 1/16 Friday at 8, looks cheap. Analysts expect it will earn 60 cents a share this year, according to
First Call/Thomson Financial
, giving it a price-to-earnings ratio based on the 1999 consensus of about 13. That's less than the expected 25% earnings growth when compared with last year's 45 cents a share. In 2000, analysts expect it to earn 81 cents, giving it a P/E based on that estimate of less than 10. But the expected earnings growth rate is 35%.
Meanwhile, it trades at just above its book value of $5.52 a share, and its price-to-sales ratio is about 0.6. Value investors look for price-to-sales ratios below one.
Stride Rite isn't a newcomer to Wall Street. It was founded in 1918 under the name
Green Shoe Manufacturing
and changed its name to Stride Rite in 1972. When it went public in 1960, it was the first company for which a brokerage firm exercised the overallotment option, giving rise to the Wall Street term "green shoe" for the clause in an underwriting agreement that allows the issuer to authorize additional shares.
But the stock has been beaten down after a management shakeup and a slowdown in sales of Keds.
This summer, Joanna Jacobson, who was responsible for revitalizing the Keds line with
Ready to Wear
lines, decided to step down to spend more time with her children. She remains in an advisory position. Then CEO Jim Eskridge resigned after a mere seven months with the company.
"It just wasn't a good fit between him and the company," says John Kelliher, Stride Rite's chief financial officer. Eskridge, who came from
, had made big promises to acquire new brands and expand the company.
Eskridge was here, a lot of attention was directed at doing an acquisition," says Kelliher. "Once we get a new CEO in place, that'll be something the company will restart. We'll finish the year with $60 million in cash, and we have no debt at all. It's a balance sheet that really has to be put to work."
Diane Sullivan, who worked at Stride Rite in the '80s and came back in 1995 to turn around the Stride Rite children's division and Tommy Hilfiger men's line and launch the Tommy Hilfiger women's line, stepped in as president and chief operating officer.
Morgan Stanley Dean Witter
, which rates Stride Rite a strong buy, praises Sullivan's strategy for revitalizing the Keds line by developing a broader collection around the basic product line -- a strategy that proved successful for Stride Rite and Tommy Hilfiger lines.
"The CEO search doesn't concern me," says Josephine Esquivel, an analyst at Morgan Stanley, which hasn't performed underwriting for Stride Rite. Morgan Stanley has a 12-month price target of 17.
Portfolio managers seem willing to wait. "We still think it's cheap, and they have a helluva franchise," says Scott Abernethy, portfolio manager for
, a private investment firm in Philadelphia. Glenmede had 234,000 Stride Rite shares at June 30.
Scannell of David L. Babson agrees, saying, "It's certainly not without its risks, but we've added to the position, so we're definitely sticking there."
Editor's Letter: The Dastardly 'I' Word
9/17/99 5:50 PM ET
It's a strange September. Feels more like late summer than early fall. The hurricane that pelted Manhattan with rain made a Thursday feel like a Friday and the markets are acting like it's late August on most days.
Times like these make me warm to old chestnuts. Like Stephen Roach, the economist at
, and his Ahab-like obsession with global growth. For several years now, Roach has opined that we're on the brink of global synchronous growth, the kind of broad economic action that could strain New Era concepts of low inflation coupled with steady, stable growth.
In the past, the Roach thesis has gotten unwelcome surprises from a Mexican blowup, an Asian blowup and a Russian blowup. But now, he believes that his long-held faith will finally get its reward. In a recent report, he argues that the long run of disinflation -- temporarily sustained by global crises in recent years -- will give way in the coming year to strong growth and inflationary pressures.
Could the inflation bogeyman be around the corner? Certainly our fire-breathing economist
believes that the good times of low inflation are behind us. And rising long-term interest rates along with the Fed's more concerned posture indicate that the experts are warily searching for inflation's return. Obviously, the return of inflation in any meaningful way would severely undercut the stock market's strength, bringing with it the required tough medicine of rising interest rates from the Fed.
But is such a scenario on the horizon? Despite higher oil prices, commodity prices remain anemic at best. And even as the globe -- especially Asia -- gurgles back to life, there remains enormous untapped capacity still available for increased economic strength. Despite Roach's "optimism" concerning his thesis, and despite Padinha's conviction about his own thoughts, the inflation scenario hardly looks like a lock. And I can't help but recall that only a few months back the concern was deflation. Steady, stable noninflationary growth will give you such a world -- alternating attempts to decipher unseen change.
We've launched message boards on
and you shouldn't hesitate to weigh in on the Topic du Jour. Everything from
best. Lots of good chatting.
Check it out!
Uh-Oh for GE?
, expert contrarian indicator this past year (oil prices, net shares,
, etc.), weighs in this week with a cover of
Jack Welch. Could this era's equivalent of the
cover jinx do its dirty magic again? Unlike oil, Jack can actually think. It'll be interesting to see what unfolds. For the recordkeepers, the cover appears on newsstands Friday and GE closed up 2 3/4 to 120. We'll check back on that in a few weeks.
The truth hurts.
column. This week he examines
Inside Wall Street column. Good, crackling reading.
season has started and my
look just as good as ever. Super Bowl-bound for sure this time. And unlike the last four times, I'm betting on a Minnesota winner in winter.
Evening Update: Sun Microsystems Sets 2-for-1 Stock Split
9/17/99 7:43 PM ET
said it has set a 2-for-1 stock split to be paid on Dec. 7, to shareholders of record Nov. 11. After the split, Sun will have 1.561 billion outstanding common shares. /
In other postclose news (earnings estimates from
First Call/Thomson Financial
; earnings reported on a diluted basis unless otherwise specified):
Earnings/revenue reports and previews
warned investors that it would report third-quarter earnings between 31 cents to 34 cents a share, missing the four-analyst earnings estimate of 38 cents a share. The company attributed the poor earnings to highway construction and soft demand for its Salt Lake City hotel.
cautioned that, due to higher fuel expenses, it would post third-quarter earnings between 14 cents to 18 cents a share, greatly missing both the 9-analyst estimate of 34 cents and the year-ago 30 cents. The company also said it would divide its van truckload business into two divisions.
alerted investors that it will post third-quarter earnings 25% to 30% below the seven-analyst earnings estimate of 57 cents. Kaydon said the disappointing earnings are a result of slowness in four key markets.
Mergers, acquisitions and joint ventures
said it has forged a deal to be bought by an affiliate of
. The children's outfitter said the affiliate would pay $12 a share for all publicly held shares of the company. Happy Kids management would receive $7.16 a share for 88.7% of its interest in the company, while maintaining a 23.6% stake.
Offerings and stock action
announced a spinoff of its fully owned
division and said it plans to add its
Decorative & Building Products
businesses to OMNOVA. According to the spinoff's terms, GenCorp has set a dividend of one share of OMNOVA for each share of GenCorp common stock to be issued on Oct. 1, to shareholders of record Sept. 27. On Oct. 1, GenCorp's chairman and CEO John Yasinsky will become chairman and chief executive officer of OMNOVA.
announced plans for a secondary offering of 2.25 million common shares.
Banc of America Securities
U.S. Bancorp Piper Jaffray
will serve as the deal's underwriters.
advisory committee voted unanimously to recommend that the FDA deny approval for
. FDA adviser David Johnson said the studies on the drug were "highly questionable."
said that it has tapped Walter Lowenbaum II to serve as the company's chairman. Lowenbaum will replace Arthur Sims, who will continue to sit on the its board. The company also said it has hired
Regent Pacific Management
to help 3D's management improve performance. Regent's Brian Service will act as 3D's chief executive.
U.S. Air Force
said it gave
an initial stipend of $2 million which could progress into a $2.7 billion deal to technically support the U.S. fleet of 21 B-2 stealth bombers for 15 years. The Airforce said the $2 million marked the beginning of a six-year contract, which calls for Northup to technically support the aircrafts. The agreement carries three renewal options of three years each, which could bring the firm $2.7 billion over a 15-year period.
Bond Focus: Bonds Rise on Dollar Strength and Breeze Through The Day
David A. Gaffen
9/17/99 4:46 PM ET
For the last couple of weeks, fear of
was holding the Treasury market back. Each economic release was another obstacle to overcome heading into the Fed's Oct. 5 policy meeting. But now that the bond market has finally
walked the wall, it can rally on other issues.
Such as today. Dollar/yen rebounded today, as the markets began pondering more seriously the possibility of U.S. intervention in the currency market. The 30-year Treasury bond was lately up 10/32 to trade at 101 1/32. The yield fell 3 basis points to 6.05%, ending the week 1 basis point higher than last Friday's 6.04% close.
"The market was paralyzed by the Fed," said Dennis Hynes, chief investment strategist at
. "Fed funds traders are still pricing in some kind of tightening by year-end, but they're relieved to not have to focus on it."
Overnight, dollar/yen rallied as much as 107.27 before retreating to its current 107.13. The U.S. is reportedly considering intervening in the currency markets, as the
Bank of Japan
did earlier this week. A strengthening dollar is anti-inflationary because it decreases the prices of the U.S.' goods and services, and it makes our financial assets more attractive when viewed against other countries' assets.
But analysts said the only reason the bond market was able to focus on such issues is because the fear of the Fed has moved to the second stage, for the time being. Despite Tuesday's strong
release, on Wednesday the
Consumer Price Index
showed only a 0.1% increase in the core rate of consumer inflation, less inflationary than expected. That put the market's fears of a potential rate hike on Oct. 5 to bed. A story today by
Fed watcher John Berry said the Fed was unlikely to raise rates at this meeting.
The article "produced a little bit of a pop, and we just sat around the rest of the day," said Jim Kochan, senior bond market strategist at
Robert W. Baird
. "It was a bit of relief. The consensus now really seems to be that there won't be a Fed move."
speech went by without the market really flinching. The Fed chairman
spoke in Washington on what affect Y2K may have on the economy, and for once he didn't really move the market. Greenspan's comments echoed
statements by Fed Governor
, the Fed's point man on these issues. Greenspan believes the dislocations in the economy are going to be minor, but warned that "bottlenecks" could occur if major businesses build up inventories rapidly in the days heading up to the date change.
At this point, Greenspan's next scheduled speech is at an
meeting in Washington Sept. 27.
Next week there's very little on the calendar. The
report for July will be released Tuesday, and the Fed's sixth
is scheduled for release Wednesday afternoon. This anecdotal survey of economic conditions around the country hinted of rising wage pressures prior to the June Fed meeting, and it seems to have been a factor in the Fed's June 30 decision to hike the funds target to 5%.
"If you see some discussion of price pressures that's significantly different from the prior month then maybe it's something meaningful," said Kochan. "But usually it's ham on rye ... it's going to take some real inflation scare for the Fed to do anything now."
With those fears having temporarily subsided, Hynes believes continued appreciation in dollar/yen will buoy the bond market in the coming week. He thinks the 30-year's yield could fall as low as 5.95% but ultimately is expecting higher yields due to continued strength in consumer demand and the labor markets. "Only aggressive investors need apply -- all others can step aside," he intoned.
TO VIEW TSC'S ECONOMIC DATABANK, SEE:
Chat with John J. Edwards III on AOL's MarketTalk at 3:30 p.m. EDT, Monday, Sept. 20. MarketTalk is hosted by Sage Online. (Keyword: PF Live)
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