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Media Vision's Stock Plunge Shows Fate Of Highfliers Posting Distressing Data

By Warren Getler

03/28/1994 The Wall Street Journal PAGE C7

Call it the Humpty - Dumpty effect.

In today's choppy market, highflying issues that report disappointing earnings get chopped to pieces. And it may take a very long time for those beaten-down stocks to pull themselves together again.

Take Media Vision Technology Inc. It got clobbered Thursday, falling 49% to $11 a share in heavy Nasdaq trading. The Freemont, Calif., multimedia computer-accessory company said early in the day that it expects a first-quarter loss because of lower revenue caused by a product shipment delay and price cuts.

Faster than investors could holler "ouch," Lehman Brothers Inc., Cowen & Co. and Montgomery Securities all jumped in and downgraded the stock, adding power to the down draft pummeling the issue. On Friday, the stock drifted lower still, closing at $10.75. The stock, in fact, had slid 17% on Wednesday, prompting some analysts to believe word of the pending announcement had leaked.

"The stock was a disaster waiting to happen," says Mary Lisanti, senior smallstock portfolio manager at Bankers Trust Co. in New York.

Ms. Lisanti, who bought the stock at around $27 in mid-October and rode it higher to around $42 in early January, dumped it as soon as she heard from the company's distributors that there could be a red flag in the company's balance sheet: growing inventories, at a time when the company was coming off a very strong fourth quarter.

"We suspected there were going to be earnings problems. The growing inventories just didn't make sense, so we sold the stock over two months ago," she says.

These days, Ms. Lisanti emphasizes, she's extremely sensitive to signs of earnings trouble among high-profile, often-hyped companies in the volatile smallstock market.

"If small caps don't meet earnings expectations in this earnings-driven market, they get creamed," she adds.

"There's certainly more risk in this market. What's different between now and two years ago is that back then, a stock would get knocked down and then recover. People would forgive. Today, it's more like down and out for the count," she says.

So what can one do to detect and, more importantly, avoid disasters waiting to happen?

It isn't easy, especially when companies tell analysts that both fundamentals and financial health remain solid, as was the case with Media Vision until Thursday, market pros say. For a start, Ms. Lisanti recommends that investors do their homework and obtain the annual (10Ks) or, better, quarterly reports (10Qs) from companies to review balance sheets.

"Companies really can't play games with balance sheets, but they have some leeway in the profit and loss statement," she says. Look for anything that could put a drag on continuing earnings gains, such as big borrowings, or inventories or receivables growing faster than sales.

"You've got to know your companies, know your management, and, yes, know the nitty-gritty," she says.

David Klaskin, president of Oak Ridge Investments in Chicago, got burned on Media Vision, but he blames the company for not being "forthcoming about their financials, on a broad basis -- some of the problem was in inventories, some of it was in receivables."

Media Vision officials said they didn't deliberately hold back information but were themselves surprised at the sudden deterioration of the company's market position. The company makes products designed to enhance the sound capabilities of personal computers, and uses digital technology to integrate audio, text, graphics, animation and video.

"Competitive price pressures were slowly building up, and we did not anticipate that they would become so steep so quickly," said Paul Jain, Media Vision's chief executive officer. He added that the company "was severely restricted by what it can say because we are in the quiet period," before the announcement of quarterly earnings.

David Diamond, manager of Boston Co.'s small-stock fund, says his formula for avoiding earnings-shortfall disasters is simply to eschew stocks with high price-earnings ratios. "The higher the P/E, the higher the expectations in terms of earnings growth," he says. His fund of 150 small-cap issues is up 7.5% so far this year after a gain of 41.6% last year.

Noting that the average P/E for the broader market is around 19 or 20, Mr.Diamond notes: "To the extent you buy a 10 or 12 multiple stock, earnings expectations will be fairly low. So, if the company disappoints, people are not as concerned as they would be for a company with a P/E of 30 to 40."

For those companies in his portfolio he looks for several red flags. "In the balance sheet, I look for clues that would suggest a slowdown in business, such as a decrease in sales as a percentage of assets in the business," he says. In the profit and loss statement, he searches for any marked decline in pretax profit margins. And he keeps an eye on insider activity. "When I start to see a heavy selling pattern, it always makes me skeptical," he says.

For example, Mr. Diamond says he recently sold his position in RasterOps, a small technology company traded on Nasdaq, at a loss because heavy insider selling was taking place and the competition signaled that business was becoming more intense.

Friday Market Activity

Heavy selling at the close sent smallcap stock prices lower.

The Russell 2000 Index of small-capitalization stocks extended Thursday's slide of 3.13, or 1.16%, by falling 0.62, or 0.23%, to 266.45.

The Nasdaq Composite Index dropped 3.23, or 0.41%, to 783.45.

Advancing Nasdaq issues outpaced decliners, 1,610 to 1,458, on Nasdaq National Market volume of 241,817,000 shares and total volume of 281,286,000.

For the week, the Russell 2000 fell 4.63, or 1.70%, after setting records three days in the prior week, and the Nasdaq Composite dropped 20.48, or 2.55%, after climbing to two all-time highs in the prior week.

Computer networking stocks were weak. Proteon lost 1/2 to 6 1/2; Data General fell 3/8 to 7 3/8 on the Big Board, and CrossComm dropped 2 1/8 to 13 7/8.

Also in the technology sector, America Online's week-long surge came to a close, with its stock price down 6 7/8 to 84 5/8 after reaching an all-time high Thursday. The Wall Street Journal reported that the provider of online services said any takeover talk is misguided.

But Borland International gained 1 to 14 3/8. Speculation is growing that negotiations continue between the software concern and Novell about a merger. One former Borland employee said a Novell buyout of Borland is almost certain. Novell edged 1/8 lower to 19 1/4.

News that Paco Pharmaceutical Services sees fourth-quarter sales and fiscal 1994 earnings below analysts' estimates pulled its stock price down 1 1/4, to 7 3/4. The company said it sees sales for the quarter of $15 million to $16 million, below forecasts of $17 million. Paco expects year-end earnings to be below the 88 cents a share projected by analysts.

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Caitlin Mollison contributed to this article