midday07-08-99

Author:
Publish date:

TheStreet.com's MIDDAY UPDATE

July 8, 1999

http://www.thestreet.com

INVESTools

Investment adviser Richard Band picks two undervalued small-cap investments to beat the S&P 500 for the next 3 years or more. Learn their names with a FREE, no-risk offer at:

http://subs.mypi.com/cgi-bin/go/XBPI/STREET-ptipD?s=S610

Market Data as of 7/8/99, 1:32 PM ET:

o Dow Jones Industrial Average: 11,162.67 down 24.69, -0.22%

o Nasdaq Composite Index: 2,759.79 up 16.75, 0.61%

o S&P 500: 1,397.10 up 1.24, 0.09%

o TSC Internet: 662.10 up 8.25, 1.26%

o Russell 2000: 452.95 up 0.26, 0.06%

o 30-Year Treasury: 89 11/32 up 10/32, yield 6.013%

In Today's Bulletin:

o Midday Musings: Home on the Range: Rock-Solid Bond Launches a Mild Stock Rally
o Herb on TheStreet: Is Culture as Important as Fundamentals at IDT?

Also on TheStreet.com:

Wrong! Dispatches from the Front: Toys in the Basement

Consolidated Stores is blaming its plunge on slow video game sales. This father of two thinks differently.

http://www.thestreet.com/comment/wrong/762784.html

Telecom: DSL Gets the Gift of Gab

Competitive local exchange carriers, or CLECs, are branching out from data transmission into phone calls.

http://www.thestreet.com/tech/telecom/762605.html

Options Buzz: Options Traders Leery of Short Squeezes

And some big plays in Apple and, of course, Philip Morris.

http://www.thestreet.com/stocks/optionsbuzz/762828.html

Dear Dagen: Dear Dagen: What's a Good Substitute for the Exclusive DFA Funds?

DFA's index-like funds are available only through carefully screened financial advisers.

http://www.thestreet.com/funds/deardagen/762746.html

Midday Musings: Home on the Range: Rock-Solid Bond Launches a Mild Stock Rally

By

Justin Lahart

Senior Writer

There's a school of thought, prevalent among strategists not only on Wall Street but at the

Federal Reserve

as well, that by looking at earnings and bond yields you can come up with a pretty good idea of where stocks should be. Most people who take that line of thinking see stocks as overvalued by 30% or more.

While there may at some point be some sort of reversion to the mean that brings valuations in line -- either through a quick selloff or a long and grinding market that doesn't get much of anywhere -- in day-to-day trading on Wall Street, where bond yields happen to be isn't nearly as important as what bonds happen to be doing.

"The market's in a frame of mind that as long as the (long) bond yield is in a range of 6%, plus or minus 0.1%, that's OK," said Jon Olesky, head of block trading at

Morgan Stanley Dean Witter

. "It isn't necessarily a negative for the market as long as it stays within that range."

Stocks have shown just how much they're keying off that range today, falling at the open this morning when the bonds sold off, pushing the 30-year's yield up to 6.1%, and then recovering as the bonds bounced back.

Still, the market is pretty tentative as investors try to handicap how much of what is expected to be a good earnings was discounted in the recent rally. "It's going to be a good quarter," said Richard Cripps, chief market strategist at

Legg Mason

. "How much this is in current stock prices is the question we're all asking. If the market doesn't respond favorably to earnings, we're probably in for a lower third quarter for stock prices."

This concern, and worries about valuation levels, prompted Cripps to cut his stock allocation to 55% from 60% earlier this week, going to what for him is a neutral stance.

With the yield lately at 6.03%, the

Dow Jones Industrial Average

was lately up 11.09 to 11,198.45. The

S&P 500

was up 5.5 to 1401.36 and the

Nasdaq Composite

was up 26.64, or 1%, to 2,769.68.

TheStreet.com Internet Sector

index was up 13.67, or 2.1%, to 667.52 and the

Russell 2000

was up 0.1 to 452.7.

Decliners were outpacing advancers 1,484 to 1,238 on the

New York Stock Exchange

, with 423 million shares changing hands. There were 79 new highs against 23 new lows. In

Nasdaq Stock Market

action, advancers led decliners by a slight margin on 560 million shares. There were 111 new highs against 19 new lows.

Thursday's Midday Watchlist

By Heather Moore
Staff Reporter

Stocks of retailers announcing June same-store sales were mixed in reaction to the reports.

  • Consolidated Stores (CNS) - Get Report was falling 7 7/16, or 31.8%, to 15 15/16 after saying it expects to post a second-quarter loss of 2 cents to 4 cents a share, below the 13-analyst estimate of earnings of 6 cents. Its sales figures, up 3.5% over the year-earlier period, didn't seem to matter much.
  • Federated Department Stores (FD) was falling 1 1/16 to 55 13/16 despite sales that rose 8.4%.
  • Gap (GPS) - Get Report was rising 1 1/4 to 50 7/8 on a 13% sales gain.
  • Kmart (KM) was falling 1/8 to 16 1/4 despite sales up 9.2%.
  • Sears (S) - Get Report was falling 13/16 to 46 3/16 despite sales up 1.9%.
  • Wal-Mart (WMT) - Get Report was rising 3/16 to 48 3/16 on sales up 6.5%.

Salomon Smith Barney

announced its "10-plus exceptional names" list -- 15 stocks the firm considers to be attractive investment opportunities for the coming year. They are:

Earnings/revenue reports and previews

General Electric

(GE) - Get Report

was down 5/16 to 117 5/8 after posting second-quarter earnings of 85 cents a share, beating the 13-analyst estimate by a penny and moving up from the year-ago 74 cents.

Airborne Freight

(ABF)

was down 2 3/16, or 8.1%, to 25 after last night saying it sees second-quarter earnings of 45 cents to 55 cents a share, lower than both the 12-analyst prediction of 62 cents and the year-ago 66 cents. The company cited a lack of growth in domestic shipments. Today,

Morgan Stanley Dean Witter

downgraded it to neutral from outperform and

PaineWebber

lowered it to attractive from buy.

Bergen Brunswig

(BBC) - Get Report

was down 1, or 6.2%, to 15 3/16 after last night saying it expects to report third-quarter earnings of 25 cents to 27 cents a share, below the 14-analyst forecast of 31 cents. The company, which made 27 cents in the year-ago period, attributed the expected shortfall to negative industry trends hurting its PharMerica long-term care unit. Today,

Merrill Lynch

cut the stock to long-term accumulate from buy.

Biogen

(BGEN)

was up 3 to 68 before announcing what analysts think will be a stronger-than-expected quarter after today's closing bell. In a note this morning, Salomon Smith Barney analyst Meirav Chovav said she expected the company's multiple sclerosis drug,

Avonex

, to show $150 million in sales in the quarter, above her previous estimate of $143.6 million. She also thinks the biotech concern could earn 34 cents a share, above her 32-cent estimate.

Computer Horizons

(CHRZ)

was down 1 9/16, or 12%, to 11 7/16 after last night saying it expects to report second-quarter earnings of 23 cents to 25 cents a share, which would be below both the six-analyst forecast of 31 cents and the year-ago 34 cents. The company blamed a greater-than-expected market slowdown.

Epicor Software

(EPIC)

was down 1 5/8, or 23.2%, to 5 7/16 after last night saying it expects to post break-even results or a slight loss in the second quarter, citing continuing merger-related sales performance issues and a general slowdown in demand for resource planning software. The two-analyst view called for earnings of 12 cents a share vs. the year-ago 19 cents.

Gymboree

(GYMB)

was down 2 11/16, or 28.7%, to 6 11/16 after last night saying it expects to post a second-quarter loss of 20 cents to 25 cents a share and that quarterly revenue will be flat to 2% below year-ago figures. The 13-analyst prediction called for a loss of 2 cents vs. the year-ago loss of 3 cents. The company, which said its June same-store sales fell 33%, also said it will take a $13.5 million charge in the second quarter after revamping its brand and updating its stores.

Minntech

(MNTX) - Get Report

was down 1 5/8, or 11.7%, to 12 1/4 after last night saying it expects to post first-quarter earnings of 16 cents to 18 cents a share due to flat revenue. The three-analyst view called for 24 cents vs. the year-ago 21 cents. Today, PaineWebber dropped the stock to attractive from buy.

Yahoo!

(YHOO)

was up 3 15/16 to 171 after last night reporting second-quarter earnings of 11 cents a share, topping the 21-analyst estimate by 3 cents and moving ahead of the year-ago 1 cent. Today,

Credit Suisse First Boston

raised its 1999 earnings view to 41 cents a share from 38 cents and its 2000 view to 67 cents from 58 cents.

Offerings and stock actions

Interliant

(INIT)

was up 5 5/8, or 56.3%, to 15 11/16 after Merrill Lynch yesterday priced its 7 million-share IPO midrange at $10. The company is a Web site management company.

Miscellany

Tobacco names were gettin' smoked following yesterday's Florida court ruling. The

American Stock Exchange Tobacco Index

was down 2.7%. In the first class-action lawsuit brought by smokers ever to go to trial, a jury found that cigarette makers are liable for producing a defective product (which one?) that causes emphysema, lung cancer and other illnesses.

Mylan Laboratories

(MYL) - Get Report

was down 1 1/16 to 29 3/16 after a federal judge last night denied its motion to dismiss charges, saying Mylan violated antitrust laws by raising prices up to 3,200%. But the judge did dismiss some state charges.

Herb on TheStreet: Is Culture as Important as Fundamentals at IDT?

By

Herb Greenberg

Senior Columnist

Thursday thud:

Yesterday's item on

IDT

(IDTC)

, the telecommunications company and parent of

Net2Phone

, set the Hostile React-O-Meter in motion. (Outa control, I tell ya,

outa control

.) "What's your point?" groused more than one emailer. "I wouldn't exactly call this journalism, responsible or otherwise," griped another. "I hope I didn't pay a subscription to have articles like the above written," e-scribbled still a third.

Why, they all wanted to know, did I dare question a $25 mil loan by the company to

Lermer Overseas Telecommunications

, a seemingly related party that, as far as anybody knows, doesn't technically exist, when that's such a small part of the company's overall story?

Because (as I told the company, which asked the very same question) relationships and deals like IDT's speak volumes about the culture of the company. And culture plays perhaps

the

most important role in every company's fundamentals, or lack thereof.

Here's a company making one of, if not the largest loans it has ever made to any company. Don't you think it would've looked into whether the company legally existed? If IDT was this sloppy in checking out Lermer, what about other transactions?

Further, was a loan to Lermer the best thing the company could do with $25 million? It's a big question, considering the cozy relationship between IDT founder Howard Jonas and Lermer founder Simon Lermer? (You can't trust

anyone

these days.)

Makes me wonder what Lermer really does. Neither Simon Lermer nor his attorneys have returned my calls.

No domino theory:

When one company in an industry implodes, it's often a matter of time before its competitors suffer the same fate. Yet money manager Scott Turkel of

TCM Partners

in Rowayton, Conn., no stranger to this column, doesn't expect that to be the case with

TSI International Software

(TSFW)

, which is considered by Wall Street to be a direct competitor of

New Era of Networks

(NEON) - Get Report

. Yesterday New Era's stock tanked 56% to 19 7/16 after the company warned of an unexpected loss in the second quarter. TSI also slipped, but by only 9% to 23 1/4; Turkel says he had hoped it would have fallen more so he could have bought more.

Why should we care about what what Turkel says? He's on this column's

honor roll with A-pluses for his past mentions

here of

Verity

(VRTY)

and

Unify

(UNFY)

, when both were Wall Street outcasts. (They both have since zoomed.) He tends to like underdogs in arcane industries.

TSI's claim to fame, for example, is a software that helps other software applications within a company to talk to one another as well as to databases and other platforms. In the old days of five or six years ago, companies had to hire programmers to link each program. Now this form of middleware, as it's often called, does it.

"When you're looking for companies, you want to look at someone that three years from now will be a $700 million company where the market opportunity is enormous," he says. "What would I want to buy

Colgate

(CL) - Get Report

for?"

Fine, but what makes Turkel so confident that TSI won't go the same route as New Era? An important reason: He believes TSI has taken marketshare from New Era. TSI CFO Ira Gerard will only say that TSI has "replaced" Neon on several accounts, and that TSI only sees New Era on about 15% of its prospect list. TSI officials also say that unlike New Era, which has grown aggressively through acquisitions, most of TSI's growth has come from internally generated sales. New Era declined to comment on the market share issue.

As a result, Turkel believes, TSI's revenue growth, operating margins and earnings growth will be sharply higher than most analyst estimates (52%, 15%, 61%, respectively, versus 44%, 13.2% and 50%.)

To which Gerard says (I'm paraphrasing): No comment.

Auditing Anxiety:

An item here

earlier this week on

Computer Associates'

(CA) - Get Report

nixing of

Ernst & Young

, its longtime auditor, prompted

Dave Smith

, who identifies himself as a retired CFO of a public company, to write: "I applaud the change of auditors for any company which has had a long-term relationship with one auditor. I was taught that it is GOOD to change auditors at least every five years in order that a new and different look and attitude can be disclosed to management and the public through the change.

"I believe that CA may have had an overlong relationship with these auditors and that a fresh approach is appropriate.

"Remember that accounting is a picture of only one day in the operating life. And that essentially the accounting profession is a bankrupt profession subject only to its ability to conform to arbitrary rules devised mainly to protect the accountants and not the corporation, business or public it is supposed to serve.

"Public corporations are dynamic organizations always (hopefully) changing and heading in new directions designed to improve and enhance profits. Let's hope that CA management believes that they have made a change which will facilitate further positive growth."

Time will be the final arbiter.

Herb Greenberg writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, though he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at

herb@thestreet.com. Greenberg also writes a monthly column for Fortune.

Get in the trenches with James Cramer... Invest a cool $500,000 without the risk - register for TSC's Investment Challenge and play for prizes, including a trip to NYC and a morning with James Cramer! Pre-registration - June 21. Game begins - June 28.

http://www.activefactory.com/thestreet

Copyright 1999, TheStreet.com