More Triple R

If you like what we do here, please click on our sponsor's banner and check out our store. Thanks!

Laforza (LFZA - $4) 12/17/97 - A reader asked about this reseller of an Italian luxury sports utility vehicle. LFZA is buying the chassis (interior and exterior) of the Magnum SUV made by Italy's Magnum Industriale. LFZA is installing a Ford V8 engine and drive train and plans to sell them through dealers. LFZA descibes their vehicle as "the Rolls Royce of SUVs". LFZA also has a subsidiary, Monster Motorsports that does high end automotive customization.

The last 1989 model of the Laforza SUV had been the last sold in the US. The original Laforza went bankrupt a year later. The new company acquired some of the remaining '89 chassis' a couple of years ago and sold them after converting them. They then acquired the rights from Magnum to bring in the new '98 version. The new LFZA doesn't appear to have any connection to the original. The current company evolved out of an internet marketing company (don't ask me how that happened).

LFZA plans to sell 100 SUV's in '98, 200 in '99, and 300 in 2000. Based on a wholesale price of $45K and the company's estimate of costs, this would give a '98 PE of 20, a '99 PE of 9.5, and a 2000 PE of 6.3. Market cap based on 5 million shares is $20 million and '98 PS would be 4.4. LFZA claims assets of $263K and liabilities of $157K. All these estimates are the company's, from their website, www.laforza.com. There is no independent verification.

LFZA has signed up two dealerships, one in San Francisco, the other in Florida, to sell their SUVs. Each dealership has commited to selling two a month. LFZA states they plan to sign at least two more dealerships very soon. This gives the company a reasonable chance at making their planned '98 sales. The Hedgehog though can't recommend a company with no history and such limited info. I'm also skeptical of the accuracy of the company's estimates of cost (they seem very sketchy), even if they do make their revenue estimates. The company's low asset base also means they'll probably either take on debt or issue more stock (they may have already done this to pay for a new facility). While the concept sounds intriguing and there is a market for these kind of vehicles, the Hedgehog recommends waiting to see an SEC filing before buying.

Heritage Propane Partners (HPG - $24 1/8) 12/16/97 - A reader asked about this seller of propane, noting that it had been busily making acquisitions. HPG supplies 220,000 residential, commercial, industrial, and agricultural users of propane in 23 states. They distribute wholesale propane and sell propane and related equipment directly through retail outlets. They have acquired 40 propane companies since '89, 12 alone since 6/96, the date of their IPO.

In the year ended 8/97, HPG had a trailing PE of 37.5. Estimated PE for the year ending 8/98 is around 23 (note, I suspect this earnings estimate is from one analyst rather than the usual consensus). PS is 0.97 and market cap is $193 million. Estimating growth isn't easy, last year the company lost $5.5 million, in large part due to early debt retirement. Gross profit was up 19.2% while operating expenses were up only 15.4%. Looking at past years though, the company has continuously increased revenue but hasn't been consistently profitable. They have a heavy debt due to all of their acquisitions, 82% of market cap.

Now for the interesting part, HPG's dividend yield last year was a whopping 8.3%. Why? Because they are a publicly traded partnership, under the terms of that partnership, they have to distribute their "available" cash to the holders of about 4 million (all the publicly traded shares) of their approximately 8 million shares. If at all possible, they are required to make a minimum distribution of $0.50 a common share a quarter. This will continue until at least 2001, when all the stock becomes common and there is no mandated distribution. My concern with this distribution is that it's not just a dividend from earnings, it's a material reduction in the value of the company. If HPG hadn't taken on additional debt they would have had negative cash flow last year in part due to these distributions (the purpose of the IPO in the first place had been to retire debt).

HPG's strategy to future growth is through acquisition, since the propane market is mature. They believe there experience at acquiring operating propane companies, low operating costs through decentralization, and move into high usage markets will allow them to continue to grow. A Paine Webber analyst recently rated them as attractive. HPG's strategy might be worthwhile but the Hedgehog doesn't find them particularly compelling. HPG might be of interest to the conservative income oriented investor, but be sure to take a close look at this company's debt and the issues surrounding the partnership.

Young Innovations (YDNT - $15 1/4) 12/15/97 - A reader asked about YDNT, which just had its IPO on 11/5/97 at $12/share. YDNT designs, makes, and supplies dental supplies. Their main products are disposable and metal prophy angles, cups, and brushes. The Hedgehog has no idea what exactly a prophy is but all these products are used for cleaning and polishing teeth. YDNT has 53% of this market, up from 22% in '90. These products account for 78% of sales, the rest is from the sale of pastes, fluorides, fluoride applicators, and infection control products (some of these products come through acquisition of other companies). Their products are sold in the US, Canada, and 13 other countries through distributors (including Henry Schein, discussed here earlier) and the company's own sales force.

YDNT is still up over its IPO price, probably because unlike most IPO's, it has shown a profit for at least the last 5 years. Trailing PE is around 21. Estimated PE for the year ending 12/97 is 18.4 and for 12/98 is 18.2. Note that these estimates are probably based on only one analyst rather than the usual consensus. PS is 4.1. Market cap is around $98 million. Float is two million shares out of 6.4 million outstanding.

The company went public to pay off debt from their previous acqusitions and to provide operating cash. The company intends to continue to grow through acquisition, develop new products, and expand further internationally. YDNT believes that dental spending should increase at 5.6% per year. They believe that the market for preventive dentistry is growing worldwide and note that more insurers are supporting payment of preventive measures as a cost effective means of reducing total dental costs. YDNT's revenue is up 20.4% for the first nine months this year compared to last, and operating income is up 15.3%. Over the last 5 years, earnings have averaged about 15% yearly growth. The company notes that their new disposable prophy angles have been particularly well received. YDNT has pretty impressive 56% gross margin and 27% operating margin.

YDNT's plan sounds pretty intelligent to the Hedgehog. When you think about it, dentistry is something that should have a lot of growth potential here and abroad as more people are covered by third party insurers. Staking out a niche in preventive dental products is probably a good move. If one assumes a continued 15% earnings growth, YDNT isn't particularly cheap, but it probably will provide a longterm investor with moderate growth at low risk. The one analyst rating I saw was a buy from Robert W. Baird.

Racing Champions (RACN - $8 1/2) 12/12/97 - A reader asked about this maker of collectable die cast vehicle replicas. RACN makes licensed replicas of race cars and motorcycles from pro race series, particularly NASCAR. They also make pewter figurines of comic book characters and sports personalities. Their products are sold through retailers such as Kmart and Toys R Us. They just bought Wheels (WHEL ~ $6) for around $23 million in RACN shares. Wheels is a distributor of licensed NASCAR merchandise. Currently, RACN is trading at more than 50% below its high and well below its 6/97 IPO price.

RACN's projected PE for the year ending 12/97 is 11.8 and for 12/98 it is 9.9 against an estimated 20% growth rate. PS is 1.62. Market cap is $98 million. Earnings are up about 36% in the first 9 months of this year compared to last year. I'm a little unsure what the effect of the Wheels acquisition will be. The company has stated they expect $30 million in revenue in '97 from WHEL and $55 million in '98. Year to date though, WHEL has only $4.5 million in sales so they must be expecting a lot of growth over Christmas.

The short term effect of RACN's acquisition of WHEL could be problematic on earnings. The Hedgehog isn't an expert on NASCAR or its fans, but is none to sure of the reliability of the collectors market or how big that market would ultimately be. The Hedgehog also suspects the market will not assign too high a PE multiple to this kind of company. However, if RACN can make its numbers and if the company is correct in its projections for WHEL than it should experience solid share price appreciation. A wait and see attitude might be the best approach here.

Washington Gas Light (WGL - $26 15/16) 12/11/97 - A reader asked about WGL, a natural gas provider that serves 800,000 customers in DC, Maryland, and Virginia. WGL distributes, stores, and sells gas to residential and commercial customers. They also have a subsidiary that designs heating, ventilation, and air conditioning systems, and another subsidiary that develops real estate.

For the year ending 9/98, WGL's projected PE is 14.1; for the year ending 9/99, PE is projected to be 13.2 against a long term earnings growth rate of 6%. PS is 1.13. Market cap is $1.2 billion. Yield is 4.3%. WGL lost money in the last quarter, but that appears to be typical for the summer quarter. This year's earnings are the same as last year's.

Based on recent new articles, WGL may be angling to get into electricity sales in Virginia when and if deregulation occurs. Analysts rate WGL between a hold and a moderate buy. WGL is probably a good stock for the low risk, income oriented investors. If the market continues to have problems, it may even see some share price growth as investors look for a safe place to put their money. Those interested in this sort of investment should also consider the larger and more diverse Duke Energy and The Southern Company, which we recently profiled.

Metacreations (MCRE- $10 1/2) 12/10/97 - A reader asked about MCRE, a maker of graphics software. MCRE makes plug-ins to extend the capabilities of other companies' software, such as Adobe's Photoshop, as well as stand alone graphics software. Their products are used by publishers, computer game designers, websites, and film studios. The company formed in May 97 as the result of the merger of Meta Tools with Fractal Design. The company has also been dealing with the recent acquisition of two software development companies.

MCRE's share price has dropped almost in half in the last two months. Due to the mergers and acquisitions costs, MCRE has lost money YTD, but showed positive earnings ($0.15 a share) in the last quarter. Projected PE for the year ending 12/97 is 26.9, for '98 it is 15.4, this against a long term growth estimate of 34%. PS is 4.7 and market cap is $258 million. MCRE has a high gross margin but marketing, admin, and R&D expenses also all up.

MCRE trades at a discount to projected growth, but it probably should. The nature of its contracts with the OEM software companies that MCRE software is bundled with mean that revenue and cash flows can show a lot of volatility quarter to quarter. What is more, in their most recent 10Q, MCRE stated that further acquisitions may be possible which could result in future short term losses.

While there should be a lot of growth potential in graphics software due to the expansion of the internet and the current movie and TV interest in animation, a growth rate of 34% seems somewhat optimistic given the company's earnings history and volatility. However, based on last quarter earnings, next year's projection seems very plausible. Analysts following the stock rate it between moderate and strong buy. I'm a bit less enthusiastic but agree that it has good growth potential and may be slightly undervalued.

Amgen (AMGN - $51 1/8) 11/30/97 - A reader asked about AMGN, the world's largest biotech company. AMGN's two money making products are Epogen, an antianemia drug, and Neupogen, an immune system simulator. A third drug, Infergon, is just now being marketed for treatment of hepatitis C. A quarter of AMGN's revenue goes toward research on blood cell production, inflammation, autoimmunity, neurobiology, and soft tissue repair. They have alliances with companies around the world that do research and/or market drugs.

AMGN's projected PE for the year ending 12/97 is 18.8 and for 12/98, it is 17.2, against an estimated growth rate of 15%. PS is 5.68 and market cap is $13.6 billion. For a biotech company, AMGN seems to be trading at a fairly low PE, which makes its recent price drop from May and the wide range of analyst recommendations on this stock somewhat surprising. Maybe it has something to do with all the legal battles.

AMGN had to take a large charge against earnings in the last quarter because of money they will probably owe Johnson & Johnson over infringements of past licensing agreements. Both Biogen and Genentech are suing AMGN, claiming that Neupogen infringes on their patents. However, the biggest concern for AMGN may be their patent battle with Elanex to keep Elanex's Hemax, a drug that does the same thing as Epogen, out of the US market. Elanex may have just won a round by getting US patent approval for a fragment of the gene (I don't claim to understand the technical stuff here) used by both companies in the development of their respective drugs. Elanex claims that in the foreign markets where Hemax has been allowed to compete with Epogen, Hemax has captured a significant percentage of market sales. Epogen is a billion dollar revenue earner for AMGN, strong competition could significantly cut into AMGN's earnings. As is, the company is predicting slowing growth in sales for both Epogen and Neupogen. Since Infergon already has competition, it may not make up a loss in revenue from the other two.

If AMGN traded for less, I might be inclined to recommend it, but it still trades at a premium to projected earnings growth. Nor, with mixed analysts recommendations, will it have much momentum, and if you aren't going to get momentum or high earnings potential, what's the point in investing in a biotech stock?

Curtis Mathes Holding (CRTM - $11/32) 11/30/97 - A reader asked about CRTM, a holding company for several consumer electronics businesses. At one time, CRTM's main business was building and selling large screen direct and projection televisions. Within the last year, they've completely abandoned the business in an effort to become an internet based company. Their main focus is their uniView system to allow customers to use their TVs to surf the net, talk on the phone, send and receive faxes and email, program a VCR, and access online TV guides. The company hopes that the additional features of their system will give it a competitive advantage over systems such as Sony's Web TV. CRTM's other products are Xpressway, the internet access service for uniView, and ownership of patents for 10' TVs for malls, sports arenas, and airports.

CRTM's revenues for last quarter dropped all the way to $74K. They lost $0.31 a share in the last year. Losses are increasing due to the marketing and development costs for CRTM's new direction. PS is 29.3 and market cap is $14.3 million. The company's lack of cash flow has required it to sell more shares of stock and borrow money (current cash on hand is down to a quarter of a million dollars). Their own 10K acknowledges that the company will continue to require outside funds to remain an ongoing concern.

CRTM doesn't appear to ever have done well throughout its existence. They're in the red since coming out of bankruptcy in '92. The Hedgehog doubts that CRTM is going to cut it in the TV internet access market against the high powered, well funded companies pursuing this business. While a buy out is always a possibility, I would avoid CRTM.

Bell South - (BLS - $55 3/16) 11/26/97 - A reader asked about this Baby Bell. With strong interest in the new areas of opportunity open for these companies, their stock prices have been surging. BLS provides local telephone service in nine southeastern states. They provide cellular service for 3.5 million national and another 1 million international (mostly in Latin America) customers. BLS also publishes phone directories and with deregulation, is moving into cable, the internet, and (trying) to obtain permission to offer long distance service within their region.

Providing local service accounts for 70% of revenue. As part of deregulation, BLS is supposed to allow competition for this business within their region. In return, they can move into the long distance business in their region. So far though, BLS has been unsuccessful in getting permission to offer long distance service in Florida and South Carolina because the Justice Department and competitors such as MCI claim that BLS hasn't done enough to open up their systems to allow competitors to enter the local market. BLS claims that competitors aren't really trying to enter the market to provide residential local service, because providing business local service is more profitable and because they can then claim BLS is keeping them from competing, thereby keeping BLS out of the long distance market. Resolution will probably be a while in coming.

BLS has an estimated PE for the year ending 12/97 of 19.5 and a PE for 12/98 of 17.8 against a long term earnings growth estimate of 10%. Market cap is 54.2 billion. PS is 2.71 and yield is 2.64% a share. Most of BLS' revenue growth recently has come from their local service accounts and from wireless, particularly foreign. BLS expects 100% growth a year in foreign markets. BLS has also publicly stated that they are comfortable with analysts earnings estimates for the next year and even implied that they might be low. BLS expects double digit earnings growth next year.

BLS is not particularly cheap relative to its estimated growth potential ('98 PEG of 1.78), but their confidence in meeting numbers and the potential boom in foreign markets and the opportunity to move into long distance, cable, and internet markets probably justifies a premium. BLS is also protected on the downside (from foreign currency problems for example) by their dominance in local phone service. BLS will probably provide reasonable returns for the long term investor though the current runup will probably not continue for long.

Premisys (PRMS - $27 1/4) 11/26/97 - A reader asked about PRMS. PRMS makes the Integrated Multiple Access Communication Server (IMACS) which allows telecomm carriers to offer various switching and transmission technologies to business customers through a single access device. They've added to their system to now allow carries to manage their customers' internet connection and provide a variety of internet services. Their product is distributed through telecomm vendors such as Lucent.

For the year ending 6/98, PRMS has an estimated PE of 54.5; for 6/99, PE is estimated to be 36.8 against a long term earning growth of 30% a year. PS is 9.2. Market cap is $674 million. Earnings are up sequentially for the last quarter but are down from last year. The stock price is also down quite a bit from its high.

The analysts covering PRMS come out as a moderate buy on the stock. The company still trades at a premium to growth estimates so I'm not sure it's justified until PRMS can reliably increase earnings. There will probably be solid growth in telecomm going forward so it's possible PRMS will be able to justify its price but I tend to lean toward valuations particularly for the long term so I'm remaining neutral toward this company's stock.

Immunex (IMNX - $55 13/16) 11/25/97 - If there is a sector of the market as highly priced as the internet companies, it would be biotech. At least in biotech some lives might be saved. A reader asked about Immunex, the maker of anticancer drugs. IMNX has doubled in value over the last year, though it has dropped some recently (more on why in a bit). IMNX's main FDA approved products are Leukine to treat patients undergoing bone marrow transplants and Novantrone to treat acute non-lymphocytic leukemia and ease the pain of prostate cancer. While the sale of these two drugs increased significantly this last quarter, the reason for the strong interest in IMNX is because of the potential of a third unapproved drug, Enbrel, which shows promise in reducing the pain and swelling of arthritis. If successful and if approved, analysts have estimated that Enbrel could generate sales of $500 million to $1 billion a year within a few years.

IMNX recently signed a deal with American Home Products (AHP) to distribute Enbrel worth $100 million. The $15 million up front payment allowed IMNX to show a profit this quarter. The deal will give IMNX another $20 million on filing for FDA approval (early next year), and $30 million upon FDA approval, which typically takes 6-12 months. The rest will be given upon making certain sales goals and obtaining broader FDA approvals. Currently, IMNX is expect to lose $0.42 a share in 1997 and $0.16 a share in 1998. Long term growth is estimated at 50% but this will vary tremendously based on how Enbrel does. PS is 14.4. Market cap is $2.5 billion.

A Montgomery Securities analyst recently raised a red flag on IMNX, rating it a sell. He questioned whether Enbrel would receive FDA approval. He also questioned the accuracy of recent clinical trials showing Enbrel to be effective in reducing pain and swelling where other treatments weren't.

Basically, by buying this stock you are betting on whether Enbrel will be a successful drug or not. If the analysts' estimates of Enbrel's sales potential are come true, then IMNX's current high price probably isn't at all unreasonable. If Enbrel flops though, IMNX is extremely overvalued. Short term, look for a lot of volatility, particularly on any news good or bad about Enbrel.

Keystone Energy (KESE - $8.25) 11/24/97 - A reader asked about KESE, which has also received some interest on the newsgroups. KESE claims to be the fastest growing electric service provider in the nation. Essentially, they act as a reseller of power, using group buying power, and management of ordering and scheduling to obtain a lower price for their customers than they would get directly from their local utility. KESE's current target is California which is undergoing deregulation of their electric utilities.

All power produced in California will go to a Power Exchange, only larger customers will be able to get the lowest rates. This is where KESE comes in; they claim to be able to sell power at savings of 10-25% over local utilities due to their grouped buying power and alliances with out of state energy suppliers. Californians pay rates 50% above the national average so KESE should find an interested market. KESE claims to currently be the only company certified by the state of California to provide this service. As deregulation spreads across the country, KESE plans to expand into other high cost markets.

KESE currently has $5 million in contracts signed to supply power. They estimate that 1998 revenues will be over $177 million (1% of the California market) with a net income of over $12 million (PE of 10.1). An unverified newsgroup analysis projected 1999 revenues at $288 million and income of over $20 million for a PE of 5.9. Current market cap is $121 million (KESE has had some speculative runup recently). The total value of markets KESE eventually hopes to infiltrate is $100 billion.

In addition to their energy business, KESE has plans to build a plant to recycle tires and manufacture crumb rubber. ( I have no idea why they'd want to mess around with this if they can crack into the big money California energy market.)

If KESE can come close to carrying out their plans then yes, they are a great buy. However, $5 million in contracts is a long way from $177 million in one year, nor are there any independent evaluations of KESE's operation available. KESE does have one of the better stories the Hedgehog has heard recently so this stock may be of interest to the investor who likes a high stakes gamble.

First American Scientific Corp. (FASC - $0.1406) 11/22/97 - A reader thought FASC's story and technology were promising and asked our opinion. FASC has obtained license to technology to recycle rubber and glass, and process minerals such as gypsum, limestone, and sulfur (both raw and recycled). Their process uses sonic waves to pulverize materials into a fine powder. They originally formed to recycle rubber but in their most recent 10Q they stated that they were instead focusing on the processing of minerals for use in agriculture. The advantage of FASC's process is that by grinding the minerals to a fine powder, they can be delivered through irrigation systems rather than by mixing with the soil. Actual production only began last March and has focused on the processing of gypsum.

So far the company's principle source of cash has been from the continuing sale of stock. From a look at their most recent filings, it appears that they sell more stock every couple of months. According to the financial statements available at their web site (www.fasc.com), they lost $0.08 a share for the year ending 6/97 (the last 10Q they filed was in May and was incomplete). Even at their current low market cap of an estimated $2 million, PS was around 20.

The Hedgehog can't recommend a company whose finances don't seem to be sound no matter how interesting the technology. I would be very careful about making an investment in this company.

Travelers (TRV - $51 1/8) 11/21/97 - A reader had done well with Travelers recently and asked our opinion. Travelers is a massive financial services/insurance company. Through Smith Barney, they provide retail security brokerage. (Smith Barney will be combined with Salomon, which TRV is in the process of buying.) TRV sells property and casualty insurance and is merging this business with the recently acquired Aetna Property & Casualty. TRV also provides consumer loans, issues credit cards, and runs mutual funds.

In the last couple of days, TRV settled a sexual harassment suit for $15 million in diversity programs plus an agreement to allow an outside arbitrator decide on the value of the claims of the women involved. While how much this will eventually cost TRV remains unknown, so far the market has judged this preferable to a costly and embarrassing legal battle.

TRV's earnings for the past 12 months are $3.98 a share. The estimated PE for the year ending 12/97 is 12.6; for 12/98 it is 10.6. This is against an estimated growth rate of 15%. PS is 1.87 and market cap is $32 billion. Yield is 0.98%.

TRV trades at a nice discount to earnings growth and has shown regular increases in earnings. TRV's PE is less than such competitors as Morgan Stanley Dean Witter (14.4), Merrill Lynch (15), and Hambrecht & Quist (23.4). Most analysts have rated TRV a moderate to strong buy. The Hedgehog agrees. As America ages, the financial services sector should be strong as should the insurance industry. TRV's price has gone up fairly steadily recently (partly because of a strengthening bond market that helps these kinds of companies), but it is still not overvalued and should have good growth prospects ahead.

Fix-Corp International (FIXC - $3.80) 11/20/97 - A reader had heard good things about this company and asked our opinion. FIXC recycles plastic to make high density polyethylene (HPDE) plastics resin. The company bought their one plant in Ohio within the last year for $3.4 million and have been undergoing significant expansion. Currently, they produce between 33-36 million pounds of HPDE plastic resin a year; they've just added a second production line and soon hope to double production. They claim to be sold out through '98.

In addition to this business, they are building a plant to manufacture pallets (if you dont know: pallets are used to set cargo on so the cargo can be moved with a forklift and stacked for shipment). FIXC has also obtained a license on technology to recover unused motor oil from plastic motor oil bottles which they are recycling for HPDE. Apparently, there is an estimated one ounce of oil remaining in each used bottle (don't ask me who goes and figures these kinds of things out).

The company estimates revenues of $15 million with $2 million in pre-tax income. For '98, projections are for revenues of $40 million with $15 million coming from the pallet business. The company expects the pallet business to eventually generate $30 million a year. With about 20 million shares, if we give them the entire $2 million, and double that for '98, we obtain PE's of 38 and 19 respectively. This is pretty high for a commodity chemicals company but maybe not outrageous if FIXC can sustain these kind of growth rates for a few years.

The only problem with this is that there are no earnings statements available for FIXC and most of the news about the company comes through their own PR releases. The company seems to be aggressively moving but their pallet production hasn't even begun; will they find customers to buy $15 million in pallets next year? Who knows. FIXC's price has gone up a lot recently (the float is apparently around 5 million) so it might make a nice momentum play and if reports are true, even a good long term buy, but with the sketchiness of the information available, I can't recommend the stock.

Western Digital (WDC - $24) 11/17/97 - A reader asked about WDC. He felt the companies extremely low PEs might make it a good value. WDC makes hard drives mainly for desktop PCs, but also for workstations and servers. 70% of sales are in the US with the bulk of the rest in Europe. The drives are manufactured in Malaysia and Singapore. The company is currently in a transition between producing drives using thin film inductive head technology to drives using magneto resistive heads.

Costs associated with the transition, competitive pricing pressures, and higher production costs associated with the company's final disk drives using the old technology has caused WDC to announce a significant reduction in expected earnings for this quarter. This, on top of a failure to meet earnings last quarter has caused the stock price to tank. Projected year ending 6/98 PE is 11.6; projected 6/99 PE is 8.4 against long term estimated earnings growth of 20%. PS is 0.39 and market cap is $1.7 billion.

On the face of it, WDC sells at a significant discount to its estimated growth. Of course, so do all the other disk drive makers and they probably will continue to do so until they can show consistent earnings growth. On the plus side WDC has low Asian exposure, in fact the current problems could benefit them since they are exporting from the region and may obtain lower costs. The product transition cycle should end soon and growth of computer sales is still expected to be strong. Competitive pressures though will probably always remain high in this sector but eventually a forward PE of greater than 10 will probably be justified. WDC stock will probably provide good returns for the patient, long term investor who is willing to ride out the short term problems.

Apple (AAPL - $18) 11/13/97 - Everyone else in the world seems to have given an opinion on Apple, since a reader asked, I guess I now have an excuse to give mine. The reader thought Apple might be ready for a turnaround now that it’s coming out with its new Power PC that is supposedly faster than a 266 MHz Pentium II and priced at $2K, and of course you can still find people who will tell you how the ’84 Mac’s operating system is still better than Windows 98.

Apple has managed to cut costs during a recent reorganization. They’ve also announced plans to go to the built to order model of Dell and have just started selling online. In fact, Apple claims that it is going to take on Dell. Of course Dell is hardly Apple’s real problem, but after Michael Dell recently said that if he were in charge of Apple, he’d shut it down and return the money to the shareholders, it at least makes good publicity.

It is actually possible that these kind of moves will lift Apple’s price in the short term. Apple’s price has held pretty well during the recent tech stock crash. If Apple can come up with an impressive CEO (after an endless performance of Hamlet by founder Steve Jobs), the price would probably get a quick jolt, just as it did after Microsoft made their recent investment in the company. Longer term though the outlook is a lot more questionable. Year to date, the company has lost more than $7 a share. In the most recent quarter losses increased 69% from the same quarter last year but were much less than in the previous quarter this year. For the year ending 9/98, Apple has an estimated PE of 75; for 9/99, a PE of 18 ($1.00 a share) against estimated long term growth of 10% a year. PS is 0.36. By comparison, Dell (a company that is profitable right now) has an estimated year ending 1/98 PE of 30.6 and estimated 1/99 PE of 23.1 against an estimated 20+% growth rate. PS is 2.64. IBM has an estimated year ending 12/97 PE of 16 and 12/98 PE of 14 against an estimated 12% growth. PS is 1.25. In other words, Apple is not cheap relative to its profitable competitors except in terms of price to sales.

More importantly, one has to be skeptical of Apple’s ability to go from a loss of $7 a share to earnings of a $1 a share in less than two years. Slightly more than 50% of Apple’s sales are international. If the other tech companies will have problems due to currency issues, so should Apple. In their most recent 10Q, Apple acknowledged that gross margins (20% this year) were going to come under pressure. Even if they maintained current margins, an increase in earnings of this magnitude would require revenue to go up about 50%. If margins dropped to 15%, revenue would have to double (these are my estimates). Of course, if Apple’s new computer really takes off, that’s certainly possible, but I’m not sure a faster computer alone is enough. Apple doesn’t have a sub $1,000 computer, they don’t have the software that a PC does, and they haven’t shown an ability to actually follow the Dell model. The Hedgehog believes that there are better computer companies out there, at better values, particularly now. I wouldn’t buy Apple unless I wanted to make a short term bet on the company moving up on some positive news.

The Gold Miners 11/12/97 - A reader asked us about two mining companies and a battle in Venezuela over mining rights at a place called Las Cristinas. The first company is Crystallex (KRY - about $4.5). KRY thought they had won the right to mine a portion of the Las Cristinas gold fields for $30,000,000 over two years. Supposedly, there is as much as 9 million ounces of gold.

Unfortunately for KRY, a company called Maymac Petroleum (MMA on the Vancouver exchange - $11/256)claims that they had right of first refusal. MMA had previously refused an offer to buy the mining rights for around $34,000,000. They claim they should have been offered the right to buy at the lower price. The battle is being fought over this in the courts right now. The Hedgehog couldn't find much out about MMA but suspects it wants a payoff more than taking the rights back from KRY, a penny stock company probably can't handle this kind of operation.

Even if KRY gets the rights, the Hedgehog doesn't know if it matters that much. KRY lost a $0.05 a share last quarter versus $0.07 for the same quarter a year ago, but KRY has about two-thirds more shares now. Losses are increasing and the cost of KRY's gold sales are a significant percent of revenue, though it has decreased some. If KRY gets a piece of that 9 million ounces, it will probably mean a big increase in KRY's $2,000,000 in sales for the past six months, but it could be a long time before they actually dig out any gold and it strikes me as a big risk. (If you're a real gambler you might make a short term bet on the stock going up if KRY wins the mining rights, but that would be a pure gamble.)

The other company is Placer Dome Inc. (PDG - $12 7/8), now trading at its low for the year. PDG is a lot more solid and it has an actual mine operating at Las Cristinas. They plan on hauling out 315,000 ounces of gold a year. While a lot, this isn't that huge compared to PDG's $1.2 billion in annual revenue for the last year. Even with the stock price drop, PDG trades at an estimated '97 PE of 71.1 and '98 PE of 41.3 against estimated earnings growth of 15%. Obviously, PDG is still pretty nicely valued.

Considering the state of foreign markets, the Hedgehog would be reluctant to recommend any foreign stock, but neither of these two strike me as a good deal even in normal times.

United Technologies (UTX - $71 7/8) 11/11/97 - A reader asked about UTX. UTX operates in a number of different areas through some well known sub divisions: Carrier, the #1 maker of heating and AC systems, Otis, the #1 maker of elevators and escalators, Pratt & Whitney, a maker of aircraft engines, Sikorsky, a helicopter manufacturer, and Hamilton Equipment, a flight systems manufacturer.

UTX has an estimated '97 PE of 17.5 and '98 PE of 15.1 against an estimated earnings growth rate of 13%. PS is 0.71. Market cap is 17.4 billion, and the dividend yield is 1.7%. In the most recent quarter, earnings rose 20%, including a 4% earnings surprise (exceeding expectations). Most of UTX's current strength is due to the aircraft businesses. Sales by Pratt & Whitney were up sharply, while cost cutting by Hamilton and Sikorsky increased the profitability of those two units in spite of a small drop in revenues. The other parts of UTX showed slight decreases in profitability.

While not trading at a discount to growth potential, it is not as highly valued as such competitors as GE. UTX 's diversication should provide it with long term stability, though short term the performance of Otis and Carrier could be a drag. The Hedgehog is also impressed by the company's ability to cut costs. UTX should be a good long term investment with fairly low risk.

National Technical Systems (NTSC - $6 9/16) 11/7/97 - A reader bought NTSC as a momentum buy, but it's dropped recently. The reader requested our opinion of the company. NTSC has three segments. The first, and far and away largest contributor to revenue, is the Technical Services business which provides engineering and testing services to such industries as aerospace, defense, nuclear, and computers. They do testing of components such as testing nuclear safety equipment for integrity against shock and vibration. Other services include performing finite element analysis of structural components, doing qualification of plant equipment, and engineering design. The second segment is Technical Staffing which is basically a temp. service for technical people for both short and long term projects. The third, and newest segment, is Quality Registration Services, which acts as a third party examiner to evaluate companies for ISO 9000 certification.

In the 2nd quarter of '97, NTSC income was up 90% from the same quarter of '96 to $0.10 a share. For the first six months, NTSC earned $0.19 a share. I don't have any growth estimates since no analysts appear to be following this stock too closely; market cap is only about $44 million. If we simply double earnings, NTSC would have a '97 PE of 17, with a PS of around 0.87. With solid earnings growth though, NTSC's PE for '97 could be in the range of 15.

All of NTSC's segments are profitable and showing double digit growth. As the aerospace business has picked up, NTSC's Technical Services business has benefited. Also, while the Hedgehog has never really been sold on the value of ISO 9000, it does seem to a requirement that more and more companies expect of their suppliers. I won't give this company an unqualified recommendation, but based on relatively low valuations and good earnings growth prospects, it's probably worth keeping. Remember though, with such a small market cap, the company may not get rewarded too quickly and it could be subject to large swings in share price.

Glenayre Technologies (GEMS - $13 1/8) 11/6/97 - A reader asked about GEMS. GEMS provides telecommunications equipment and software for the wireless communications industry. They are #1 in the US in sales of switches, controllers and transmitters used for paging, voice messaging, and message management. This accounts for nearly 90% of sales. GEMS also provides expanded cellular and paging services through service providers. They are currently selling a division that provides rural radio telephone systems and microwave communications.

On the surface, GEMS numbers look very promising. Estimated PE for the year ending 1997 is 14.4, for '98 it is 13. This is against an estimated long term earnings growth of 25%. PS is 1.81 and market cap is $784 million.

The company appears to be trading at a significant discount to growth potential but there are some things that are holding it back. A little over a year and a half ago, GEMS was trading at about quadruple its current price, but 3rd quarter '96 earnings were significantly less than 3rd quarter '95 and the stock started to plummet. Apparently, higher costs and customers delaying expected orders cut into earnings. In the most recent quarter, earnings were once again up, but earnings for the first three quarters of '97 were still below that of the first three quarters of '96. Fourth quarter earnings are predicted to be below fourth quarter '96 earnings as well. Recently, concerns about Motorola's earnings hit GEMS as well.

GEMS also has a large interest in Asia. They declined to give numbers out for what percent of sales come out of Asia but in '96, 40% of sales were outside of the US. GEMS recently had a lawsuit against the company and the board dismissed. The company declined to comment on the nature of the suit but one would expect that it probably had something to do with the sharp stock price decline.

Long term GEMS is probably a good deal. They have a leadership position in an industry that is probably going to experience solid growth worldwide for a number of years to come. Middle term, the company needs to show an ability to keep earnings moving upward. Short term, Asian worries will probably keep the stock from moving much until the regional concerns are resolved.

Lowes (LOW - $41 5/8) and Home Depot (HD - $55 3/4) 11/2/97 - A reader asked about LOW, I'm throwing HD in for free as a comparison. Both sell hardware, building materials, and home improvement items mainly through massive superstores. Lowes also sells appliances and some electronics. HD is the larger of the two chains with a market cap of over $40 billion to LOW's $7.3 billion, though HD has been given a price to book of about double LOW.

LOW has a projected PE for the year ending 1/98 of 21 versus a 34.4 for HD. LOW's PE for 1/99 is 17.5 versus HD's 27.9. Analysts estimate LOW's long term earnings growth at 20%; I don't have the estimate for HD but expect it would be similar. LOW's PS is 0.77, HD's is 1.86. HD has a slightly higher return on equity at 18.5% versus 16.5%. LOW reported a 2% same store sales increase last month, modest, except for the fact that many retailers were down for that period.

The Hedgehog has shopped in both of these companies' stores and thinks they're both impressive but amazingly similar. LOW does have an appliance and electronics section but they have a lot more competition in these areas even in the smaller markets (mainly in the Southeast US) they've staked out. This lower profile is probably why LOW is selling at a significantly lower PE than HD. This fact may have been noticed as LOW seems to be getting more buy recommendations from analysts. The Hedgehog believes retail will do well this Christmas and should do well as long as the economy maintains its current steady pace. Either of these stores will probably do well for the long term investor looking for a solid, stable investment. LOW though appears to be the better bargain.

Mindspring Enterprises (MSPG - $27)10/31/97 - A reader asked about MSPG. MSPG is an internet service provider serving 200 cities. Their main focus is on business customers. They provide commercial web hosting and a full line of web host services. They have grown a lot through acquisitions.

MSPG is projected to lose $0.56 a share in '97; they lost $0.08 a share in the third quarter of this year. This was a significant reduction in their losses from the previous quarter and from third quarter '96. Revenues were up 20% from second quarter '97 and the number of subscribers was up 22%. They are estimated to make $0.82 a share in '98 for a projected PE of 32.9. Long term growth is estimated to be 40%. Current PS is 6.25 and market cap is 220 million. The company's share price is off a little over 10% from its all time high, set about a week ago.

The Hedgehog is always a little hesitant about companies that are losing money and most internet companies (including this one) seem overpriced. However, MSPG seems less over priced than say AOL (though it lacks AOL's brand name recognition or size). If MSPG can grow without relying on acquisitions and if it can continue to meet its growth expectations it will probably continue to go up in price as it would than be slightly undervalued relative to its estimated growth and internet companies are still hot properties. Since this is an internet company, if you are interested, you should go to their web site at www.mindspring.com and kick the tires before buying.

Equity Marketing - (EMAK - 28) 10/29/97 - A reader asked about EMAK. EMAK makes toys, gift products, and promotional items based on popular TV and movie characters such as the Simpsons, Looney Tunes, and Disney's Beauty and the Beast. These toys are sold to fast food chains, toy stores, and companies doing marketing promotions. The company recently obtained a license to market products based on the new Godzilla movie.

The estimated '97 PE is 17.9; '98 PE is estimated at 14.8. Long term earnings growth is projected at 20% a year. The most recent quarter showed a 15% increase in per share earnings. PS is 1.3. Market cap is around $170 million. The co-CEOs own 60% of the company.

The company's share price has been flat the last couple of months but it has held up well during the recent turmoil. The big increase in the number and quality of animated movies and TV shows and the renewed popularity of sci-fi blockbusters should provide this company with a lot of opportunities. If the reception to the film's trailer is any guide, Godzilla, for example, could be a huge hit with a lot of marketing potential. The company's ability to make deals with both the Disneys and the Burger Kings of the world also speaks well of them. The stock currently trades at a discount to long term earnings growth. To some degree this is justified due to the commodity nature of the business and the company's size, also a big push on a movie that didn't pan out (such as last summer's Batman and Robin) could add to the potential for earnings instability. On the whole though, the Hedgehog sees nothing wrong with this company, and views it as a potentially worthwhile long term buy.

Hollywood Park - (HPRK - 20 1/8) 10/26/97 - A reader asked our opinion of HPRK. HPRK owns thoroughbred and greyhound racetracks and casinos, including Hollywood Park Casino, the only non-Indian owned card casino in California.

The projected '97 PE is 35.9, '98 PE is 24.8. Current PS is 3.49 and market cap is about $500 million. The estimated long term growth in earnings is 35%, though recent earnings reports have bounced around a bit. Almost 50% of the company is owned by institutions and the company's debt is 35% of market cap. A subsidiary, Sunflower Racing, is currently reorganizing under Chapter 11.

HPRK is trading at a discount to its projected growth ('98 PE of 24.8 versus growth of 35%). However, a 35% growth rate could be pretty optimistic. There are signs that the growth of the gambling industry has gone too far. Projects in Louisiana and states outside Nevada have run into financial trouble. Meanwhile, Las Vegas is jammed full of new, high priced casinos (with more planned). The Hedgehog is also unsure about the popularity of horse racing. It certainly doesn't seem to be increasing. The Hedgehog is therefore giving a HPRK a neutral recommendation. (Investors interested in a more conservative gambling investment may want to look at Mirage (MIR), with a '97 PE of 33.8, '98 PE of 21 against an estimated growth rate of 20%).

Xylan - (XYLN - 21 1/16) 10/25/97 - A reader noticed that XYLN was down quite a bit and wondered if it was a good short term buy. XYLN make inexpensive switches to replace hubs, bridges, and routers in the design of computer networks. They also sell products that allow network managers to arrange their network users into logical groups.

XYLN has a '97 estimated PE of 50 and a '98 PE of 32. Long term earnings growth is estimated to be 50%. PS is 5.5 and market cap is over $900 million. XYLN trades at a discount to its long term growth potential but the earnings comparison with third quarter '96 results are flat and it has a high current PE. Earnings growth in the networking sector has repeatedly been estimated in the %30 range. This should spell good opportunity for XYLN but it has extremely powerful competition, companies like Cisco and 3Com seem very aggressive (of course if XYLN were compatible, they could be a buy out candidate, but that would be sheer speculation at this point). If the Hedgehog were to pick a networking company to own, he would favor these two (in fact we do own shares of both 3Com and Cisco).

Also, while we don't see anything wrong with Xylan, conditions are a bit too volatile in tech as a whole right now for us to recommend making short term plays in this sector.

Informix - (IFMXE - $6.75) 10/23/97 - A reader asked if IFMXE would be a good turnaround candidate as they had very good products. IFMXE makes database software for large companies to store and manipulate their data on computer networks. The Hedgehog will have to take the reader's word about how good the company's product is because it had better be. There are extremely serious concerns surrounding IFMXE. In late September the NASDAQ began to take action to delist the company because it still hadn't filed its 2nd quarter 10Q (the company has requested an extension). The reason for the delay is that the company apparently has been doing some questionable recording of sales. The company may have to retract more than $250 million in sales over the last two years.

To put this in perspective, IFMXE had recorded earnings for '96 of $97 million. In other words, all earnings would be wiped out more than twice over. More importantly, the 1st quarter '97 10Q, recorded a whopping loss of $164 million or $0.93 a share. Also, the company has apparently accepted barter in lieu of cash for some sales. This could indicate trouble moving the product.

The Hedgehog is aggressive but not a gambler, while IFMXE may turn this around, we wouldn't go near this company until we actually see the missing 2nd quarter 10Q (heck, the 3rd quarter 10Q is probably due soon) and can get a much better idea of this company's true financial situation.

Update - Creative Technology (CREAF - $25.00) 10/22/97 - A good call by the Hedgehog, a better one by a Hedgehog reader. A few days earlier, we evaluated CREAF (see below) based on a reader request and found that it had a lot of promise. Well, CREAF just reported blow out earnings, a 250% improvement from this quarter last year. The price has risen about $5.00 today. CS First Boston raised its earnings estimate for '98 to $2.53 a share, which gives CREAF a '98 PE of 10 even after the price jump. BF Goodrich (GR - $45.5) 10/22/97 - A reader asked about GR. He felt the company's low PE might make it a good value. GR has two business lines, the first is the manufacture of specialty chemicals for use in the plastics and polymer industries. The second is in providing aerospace services. This includes building aircraft landing systems, contract aircraft maintenance, and aircraft repair. The company is merging with Rohr, Inc., an aerospace system manufacturer. GR is no longer in the tire business; Michelin has licensed the Goodrich name for tires.

GR has an estimated '97 PE of 21.3, and '98 PE of 15.5. (The reader had lower PE estimates; our estimates come through Quote.com. Without knowing the reader's source, we can't comment on the discrepancy.) Long term growth is estimated at 15%. PS is 1.04. Rohr has an estimated '97 PE of 14.3, '98 PE of 11.1. Rohr's current market cap. is about a third of GR's.

GR had a large earnings jump in the last quarter for its continuing operations, specifically the aerospace business. The chemical business was flat due to weaknesses in the textile market and unfavorable currency exchange rates (this is becoming an increasingly popular explanation for poor earnings). GR's improvement in its aerospace business is promising and the company seems to be moving strongly to expand further in this area. GR should be a reasonably safe investment, but it appears to be fully valued based on its estimated '98 PE. While aerospace is currently stong, it is a cyclical business and GR's chemical business is a commodity business; the market will probably not pay a premium for GR. The Hedgehog expects GR to advance in price pretty much with the market, which is not strong enough for us to recommend buying it.

QLT Phototherapeutics (QLTIF - $18.25) 10/21/97 - A reader asked about QLTIF, the only maker of an approved light activated drug for use in photodynamic therapy for cancer treatment. The reader wanted to know about the company's problems obtaining FDA approval in the US. QLTIF's drug accumulates in tumors and produces cancer destroying oxygen when exposed to laser light. Currently, their drug is only approved for use in esophageal cancer in the US. In other countries (in Europe and Japan) the drug has been approved for lung, gastric, and cervical cancer. Recently, an FDA advisory panel recommended approval of the drug for use in treating early stage lung tumors, but declined to recommend it for use in advanced treatments such as relieving airway blockage. The panel felt there was no evidence that the QLTIF treatment was superior to conventional treatments.

The FDA has always been a tougher hurdle for drug approval than what exists in many other countries, though it has sped up the process in recent years. In this case, QLTIF may have hurt itself. The panel was critical of the company's trial for use of the drug in unblocking airways. The panel felt the test was biased and that data was missing. The FDA will decide whether to accept the panel's recommendation to approve the drug for early stage lung cancer treatment by 2/98.

QLTIF is estimated to lose $0.36 a share in '97 and $0.11 a share in '98. PS is a very high 41. The Hedgehog feels that more questions need to be answered about the effectiveness of the company's drug treatment. Also, while the Hedgehog believes this sort of drug has a great deal of longterm potential and wishes QLTIF every success, we cannot recommend a company that is losing money and will continue to lose money for some time to come.

Henry Schein, Inc. (HSIC) 10/21/97 - A reader asked us to look at this maker of health care products for dentists, doctors, and veterinarians. HSIC makes X-ray products, anesthetics, generic pharmaceuticals, vitamins, and surgical supplies. With their upcoming aquisition of Sullivan Dental Products, they will become the biggest supplier of dental equipment in the world.

The company's '97 PE is estimated to be 33.3; '98 PE is estimated to be 24.5. Long term earnings growth is estimated to be 21%. Earnings growth for the last quarter was 20%. PS is 0.88.

With the increasing demand for medical products, HSIC should be well positioned for continued growth. HSIC should also benefit from increasing demand from emerging markets. However, HSIC is basically in a commodity business. They have a very large and diverse group of customers who will be amenable to competition. Since HSIC trades at a premium to its long term growth ('98 PE greater than 20), the Hedgehog rates the stock as a hold.

Hooper Holmes (HH - $14) 10/20/97 - A reader asked about Hooper Holmes, a company that does medical exams for the life and health insurance industry for use in evaluating applicants. HH's projected PE for the year ending 12/97 is 24, for '98 it is 20. PS is 1.26. Long term earnings growth has been estimated at 25%, so HH trades at a slight discount based on the '98 PE.

The most recent financial statements show that revenues were up 4% but costs were flat, allowing the company to nearly double earnings. The ability to control costs is a very positive indicator. The company has an estimated 25% market share in its business. It currently has 200 offices in all 50 states. Based on this, HH appears to have a lot of room for growth and is in a field that should continue to grow as the population ages and health care costs rise and are managed more aggressively. While not particularly undervalued at the moment, HH appears to be a good long term prospect and the Hedgehog gives it a provisional recommendation.

All American Food Group (AAFG) 10/17/97 - A reader asked about AAFG, which owns and franchises bagel restaurants. AAFG currently has 30 odd stores, but has big expansion plans. They plan to double in size within 90 days and have just signed a deal with a food services company to add outlets nationwide in 'non-traditional' locations.

So far though, AAFG is losing more and more money. They lost $0.40 a share in the last quarter, $0.91 a share or $8 million total for the past 9 months. This is against total assets of only $3.8 million. Revenues are up 21% from the same quarter as last year but that's only to be expected as they expand the number of stores.

The Hedgehog took a bit of hit once by investing in a bagel company and that company (NYBS) had stronger financials than AAFG. While bagels have been hot and their popularity as a food item will increase, that doesn't necessarily bode well for restaurants selling them. Its a cheap business to get into and there is a lot of competition. Its also a low margin business. With the recent concerns with industry leader Einstein/Noah Bagels, the momentum of bagel stocks has also stalled. Therefore, the Hedgehog does not recommend buying AAFG.

E*Trade (EGRP) - 10/16/97 - A reader asked about online broker, EGRP. While I don't own any stocks in this company, I wish to note that it is the broker I use for my trades. For the year ending 9/97, EGRP trades at a PE of 92, projected PE based on current prices for 9/98 is 57. PS is 10.8 and projected long term growth is 55%. EGRP is therefore trading at about 100% of growth based on the '98 PE.

EGRP is quite a bit off its high because of the increasing flux of big name competition getting into internet trading, Fidelity is one of the latest. EGRP also seems to be getting a lot of flack about the quality of its service (the Hedgehog's never had any huge problems but customer service is slow). The newsgroups seem to be filled with criticism of EGRP. If you go to the links page, near the bottom of the page you'll find a link to a site that provides an extensive evaluation of the cost and quality of service of a whole bunch of the discount brokers including EGRP. EGRP is also being challenged hard by Datek, a broker that offers free real time quotes and quick trades.

Normally, I would say that EGRP is too pricey, but it is an internet stock that's actually making money in one of the most promising areas of Internet commerce. I also think EGRP has shown itself to be a quality company that will be able to keep up with the competition and continue to upgrade its service. EGRP could be on the defensive near term, particularly if the market as a whole slides. So while not a compelling buy at these prices, the long term investor shouldn't panic if they own shares in this company. In the long term EGRP should do quite well.

Rambus (RMBS) - 10/15/97 - A reader asked about RMBS; I don't know whether they were wanting to buy or short. If you've read The Hedgehog's commentary on shorting, you know that we shorted RMBS, but currently we have no stake in the company. RMBS owns technology that is used to dramatically improve the speed of a computer's memory interface. They don't actually make anything; rather, they license their technology. Their technology has been deemed very promising and Intel is planning to incorporate it in future components. Yesterday evening they announced earnings of $0.04 a quarter versus an expected $0.02. This still gives them a whopping PE of 611 and PS of about 60. For '98 the projected PE is still 275 against an estimated long term growth rate of 100%. Today the price is up about $4.00 to around $56.00, still off its $86.00 high. While we think the company has good long term prospects, it is still too expensive. If you want to buy, wait, there will probably be better prices. If you want to short, I'd also wait until the near term excitement over the earnings surprise plays out. If the stock shoots back into the $70s, definitely consider shorting it.Harken Energy (HEC) - 10/14/97 - A reader noticed that HEC was moving substantially higher and wondered if HEC was a good buy. HEC drills for oil and gas in the US and abroad. They develop fields to find new sources of oil and gas. The Hedgehog suspects that HEC is benefiting from the same momentum that is driving up the price of all the drilling services companies. This has suddenly become a hot sector with positive mentions in Barrons, on CNBC, and online at Briefing.com. This sector probably is a timely choice as demand for drilling services is skyrocketing, but HEC strikes the Hedgehog as being ahead of itself. The projected PE for the year ending 12/98 is nearly a 100; PS is almost 40. That's practically an internet stock. While HEC should have good growth and its price may continue to rise on momentum, the Hedgehog feels there are better long term opportunities in this sector. The Hedgehog will be issuing a special report on the drilling services sector within a few days, check it out for more

Service Merchandise (SME) - 10/14/97 - A reader noticed that SME was well off its all time high and wondered if there might be an opportunity here. SME is the nation's largest catalog showroom dealer, selling jewelry, electronics, and fitness equipment. By coincidence, SME announced quarterly earnings today, a loss of $0.25 a share caused by a drop in same store sales plus costs from restructuring. SME trades at a projected PE of 9 based on next years earnings, but long term growth is only estimated to be 6%. PS is a very low 0.11 and PB (price to book) is also a low 1.1. Return on equity is 12%, about half what Wal-Mart is achieving. While the low PB might be tempting, the growth potential here seems extremely limited and management appears to have a long way to go for a turnaround. This company also has strong competition on all sides of its market, from Wal-Mart to Sears to Best Buy. In my own town, the local SME is in a mediocre location and a somewhat rundown appearance. Retail should be strong next quarter, but there are better opportunities than SME. Check our review of Stein Mart for an example.

Thermolase (TLZ) - 10/11/97 - A reader asked us to look at TLZ. TLZ is the only company to have an approved laser system for hair removal. Through a subsidiary, they also sell skin care and other personal care products. For the year ended 9/97, they lost $0.19 a share. Estimates for the year ended 9/98 are for positive earnings of $0.30 a share which would give them a PE of 58. Current PS is 17.5 and estimated long term growth in earnings is 30%.

The Hedgehog has some concerns with this company based on a cursory review. A look at their most recent financial statement shows that revenues had doubled but that cost of revenues had risen even faster, while selling and administrative costs had tripled. They are also rather richly priced based on the projected PE versus long term growth and the fact that the company is currently losing money.

Before investing, I would also want to know more about how good their hair removal system really is. The company's filings imply that it is not permanent. The market for the product is big, and the potential for the product is also large, but at this point the uncertainties make this company too big a gamble for The Hedgehog to recommend.

Say Yes Foods - 10/10/97 - This small cap company has a line of fat free dairy products and trades over the counter under the symbol MILK. A reader interested in this company searched Yahoo for that symbol and came back with a news release stating that Broughton Foods, a dairy company, was issuing an IPO in part to fund a new acquisition. The reader wanted to know whether Just Say Foods might be a takeover target for Broughton.

A look at Broughton's IPO filing reveals that Broughton needs the money for their planned acquisition of Southern Belle, another dairy company. Broughton stated that they had initiated no actions toward making any other acquisitions. The reason for the confusion by the news services (Quote.com did the same thing) is because as part of the IPO, Broughton wants to be listed as MILK on the NASDAQ.

Now for the second part of the reader's question; is Say Yes Foods a good purchase? I don't have enough information to answer that, but I have some concerns. Say Yes Foods is listed on the internetstockmarket. Their most recent financial statement is for the year ended 12/96. They lost $1,500,000 against cash assets of $500,000. They can't keep that up for long. You need more recent financial info. I suggest calling Charles Thomas at 1-800-818-MILK. He's the president, considering the size of the company, you just might be able to talk with him. While you're at it, tell him Broughton is about to take his symbol.

I'd also try some of these fat free products. They'll need to taste great with all the brand name competition out there.