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Cash-King Port

The Cash King Portfolio has been renamed the Rule Maker Portfolio.

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Raised to Really Strong Buy

by Tom Gardner
(TomG@fool.com)

Alexandria, VA (Sept. 1, 1998) -- Today, I'm formally upgrading the Cash-King Portfolio from a Strong Buy rating to a Really Strong Buy status -- a ranking that's appropriate only for long-term investors... those with time horizons in excess of five years. Citing cash-flow strength across our businesses, in anticipation of the continued democratization of the planet over the next twenty years (with a few hiccups), and owing to the 20% pricing discount offered by Wall Street, I'm raising Cash-King to that Really Strong Buy ranking, effective today.

On with today's report...

Holy cow. As I write this column, in the dark of the night on Monday, I'm smiling at the harsh decline of the past six weeks. Contrary, and somewhat inappropriate perhaps, but yes, I'm smiling. Since July 17th, the Dow is off 19%, the S&P 500 is down 19%, and the Nasdaq Composite has fallen 25%. Russia is in political disarray; Asia is stuck in an agonizing recession; and every news organization in America has a lead story, "Crisis on Wall Street!" Close your eyes and picture the headlines on newsstands over the next few weeks.

Now open your eyes again.

Today's report is a letter to Cash-King investors of all ages, income levels, of all walks of life. I'm writing to tell you that the U.S. stock market isn't going to disappear and that the holdings in this portfolio are far more likely to double in size over the next five years than they are to be cut in half. Contrary to this point, you can expect a lot of hand-wringing angst emanating from Wall Street these days. After all, an increase in trading volatility plays into their profit center. But if you called yourself a long-term investor in early July, are there any fundamental reasons to change that perspective now?

I would suggest to you that there aren't. In fact, I believe the only new strategy you should be taking today is to more rigorously sort through your change cups, your savings accounts, and your yard-sale profits for long-term savings to invest in superior businesses at bargain prices. Why? One reason is that today there is 25% more cash stored in money-market funds than there was last year at this time. And the market has now been flat over that twelve-month period. More cash to invest, same price of businesses today. While that's no guarantee that we'll snap back cleanly from this decline, it does mean that there's an awful lot of capital to support a return from these dark hours.

But what companies might one invest in?

Today, the Cash-King Portfolio holds businesses showing strong sales growth, marking healthy demand. Pfizer, Cisco, Microsoft, Gap, and Schering-Plough have all posted in excess of 15% sales growth over the past year. Each of these businesses also has healthy and rising profit margins. And each of them has cash reserves substantial enough to weather a market downturn. They don't use the public markets as a financing vehicle. The market could shut down for ten years, and likely they'd keep on cooking.

Yes, all five of the companies I mentioned have very sturdy operational models, an exploding flow of cash, product lines in demand -- in many ways, an embarrassment of riches.

Now match these two together: 1) You have 25% more cash in money market funds and 2) there are a collection of businesses that, though they're stronger this year than last, are priced as they were. Mrs. Market doesn't often bend down on a knee to give a ten-fingered boost to long-term investors. These past few weeks, she's done just that. Schering-Plough is 18% off its highs. Microsoft is 19% off its highs. Cisco is 22% off its highs. Pfizer is 24% off its highs. Gap is 25% off its highs. The stock market has hung red pennants from a string, tied balloons to the post, tacked placards to the wall, and announced a deep-discount sale for those who would own businesses, not raffle tickets.

**** 20% Off! ****

But, let me be clear about the other end of the spectrum -- where the short-term trader resides. This announcement of a sale is the sort that could seriously harm those who look to stocks impatiently, because Mrs. Market may offer an even better deal in a month, or three. And by doing so, she may destroy the savings accounts of those who treat the product of equities as short-term currency -- buying stock on margin or trading with money they'll need in the next year or two.

Danger, Will Robinson.

In the Cash-King portfolio, we approach the public markets differently. A slip of stock is not the raffle ticket of a short-term trader, but is more like the deed to a house that we plan to live in for many years. Those who treat stock like a scratch-off ticket must assume the same sort of high risk (and I think absurd non-opportunity) that the Powerball offers. Conversely, those who treat stock like a house should relish this latest discount, moving patiently to add another round of investments in times like these.

After all, if you plan to own positions for ten years -- and if you're following this portfolio, we encourage you to think this way -- well, the likelihood that the prices of these businesses will be lower in 10 years verges on nil. Empty set. In that environment with a long-term mentality, who cares exactly when and where the market will hit its lowest low? Let the big boys try to call it perfectly. A 20% discount is inspiration enough.

To restate, I don't believe this sort of bargain opportunity on companies like Microsoft, Cisco, Schering-Plough, Pfizer, and Gap is going to present itself very often. I've sorted through the financial statements of these five companies, looking for blemishes on their chin, scanning their defenses for a hole, studying their gait for a hitch, poking their ribs for a weakness, and all I see are outfits that are stronger today than they were last year -- in fact, stronger today than at any point in their corporate history.

I also believe that even with Russia going through some restructuring, even with Asia battling banking corruption, even with the over-generalized law of diminishing returns, these enormous and highly profitable businesses have greater opportunities ahead of them than at any time in their operational history. I match that up with the 25% of additional cash in money market funds, sitting outside of the best-regulated and freest markets in the world, and yep, name me more bullish for the long haul than I was back on February 3rd, the day this portfolio started.

Mrs. Market has just done our species a huge favor. Long-term owners of Cash-King companies are today a few percentage points ahead of the S&P 500. But I believe the best is yet to come. It's just too bad we don't have any new money to add to these investments until early February. Do you?

For the remaining three days of this week, barring some truly catastrophic event, I'll be writing about Microsoft: why I think it's the strongest business in America today, perhaps the strongest public business this century, and how we might rank the strength of its position in financial terms. Oh, and, Microsoft versus T-bills over the next five years -- I'll take Microsoft. Any takers?

Fool on, Fools.

Tom Gardner

Cash-King Strategy Folder
Cash-King Companies Folder


09/01/98 Close
Stock  Change    Bid 
 AXP   +4       82.00 
 CHV   +1 9/16  75.63 
 CSCO  +8 1/8   90.00 
 KO    +3       68.13 
 GPS   -1 9/16  49.50 
 EK    +1 13/16 79.94 
 XON   +  15/16 66.38 
 GM    +1       59.00 
 INTC  +4 13/16 76.00 
 MSFT  +5 5/16  101.25 
 PFE   +3       96.50 
 SGP   +5 5/8   91.63 
 TROW  -  7/16  30.00 
 

 
              Day      Month       Year       History 
 C-K          3.61%     3.61%      2.11%       2.11%  
 S&P 500      3.83%     3.83%     (1.17%)     (1.17%) 
 Nasdaq       5.06%     5.06%     (5.48%)     (5.48%) 
  
 Cash-King Stocks 
  
     Rec'd    #  Security     In At       Now    Change 
     2/3/98   24 Microsoft     78.27    101.25    29.36% 
     2/3/98   22 Pfizer        82.30     96.50    17.26% 
    6/23/98   23 Cisco Syst    86.35     90.00     4.23% 
    2/27/98   27 Coca-Cola     69.11     68.13    -1.42% 
     5/1/98   37 Gap Inc.      51.09     49.50    -3.11% 
    8/21/98   22 Schering P    95.99     91.63    -4.54% 
    2/13/98   22 Intel         84.67     76.00   -10.24% 
     2/6/98   56 T. Rowe Pr    33.67     30.00   -10.91% 
    5/26/98   18 AmExpress    104.07     82.00   -21.20% 
  
 Foolish Four Stocks 
  
     Rec'd    #  Security     In At     Value    Change 
    3/12/98   20 Eastman Ko    63.15     79.94    26.59% 
    3/12/98   20 Exxon         64.34     66.38     3.17% 
    3/12/98   15 Chevron       83.34     75.63    -9.26% 
    3/12/98   17 General Mo    72.41     59.00   -18.51% 
  
 Cash-King Stocks 
  
     Rec'd    #  Security     In At     Value    Change 
     2/3/98   24 Microsoft   1878.45   2430.00   $551.55 
     2/3/98   22 Pfizer      1810.58   2123.00   $312.42 
    6/23/98   23 Cisco Syst  1985.95   2070.00    $84.05 
    2/27/98   27 Coca-Cola   1865.89   1839.38   -$26.52 
     5/1/98   37 Gap Inc.    1890.33   1831.50   -$58.83 
    8/21/98   22 Schering P   2111.7   2015.75   -$95.95 
    2/13/98   22 Intel       1862.83   1672.00  -$190.83 
     2/6/98   56 T. Rowe Pr  1885.70   1680.00  -$205.70 
    5/26/98   18 AmExpress   1873.20   1476.00  -$397.20 
  
 Foolish Four Stocks 
  
     Rec'd    #  Security     In At     Value    Change 
    3/12/98   20 Eastman Ko  1262.95   1598.75   $335.80 
    3/12/98   20 Exxon       1286.70   1327.50    $40.80 
    3/12/98   15 Chevron     1250.14   1134.38  -$115.77 
    3/12/98   17 General Mo  1230.89   1003.00  -$227.89 
  
                               CASH     $48.07 
                              TOTAL  $22249.32 
   
 *Please note: On 8/4/98 $2,000 cash was added to the
portfolio for future investment. This will be reflected
in the numbers as soon as possible.

*The year for the S&P and Nasdaq will be as of 02/03/98

</THE CASH-KING PORTFOLIO>

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