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Cisco as Microsoft
C-K News of the Week
by Al Levit (alanl@ix.netcom.com)

Glendale, CA (Nov. 9, 1998) -- The Cash-King portfolio did well last week, picking up an even 5%. We ended the week ahead 16.75% for the year, and over 3 full percentage points above the S&P 500 and over 5 percentage points above the Nasdaq. It may seem like just a distant memory, but it was just a month ago that we were losing money for the year, and that the C-K portfolio was only slightly better than the S&P.

On a stock-by-stock basis, this is how the portfolio performed last week:

 Cash-King   Last     This     Change 
 Gap Inc.    $60.13   $67.13  + 11.6% 
 AmEx        $88.09   $97.31  + 10.5% 
 Coca-Cola   $67.63   $72.63   + 7.4% 
 Cisco       $63.00   $67.44   + 7.0% 
 Intel       $89.19   $95.44   + 7.0% 
 S Plough   $102.88  $107.25   + 4.2% 
 Microsoft  $105.88  $109.31   + 3.2% 
 Pfizer     $107.31  $109.31   + 1.9% 
 T. Rowe     $35.56   $35.75   + 0.5% 
 Fool Four   Last     This     Change 
 GM          $63.06   $67.06   + 6.3% 
 Exxon       $71.63   $73.50   + 2.6% 
 Chevron     $81.50   $83.31   + 2.2% 
 Kodak       $77.50   $78.00   + 0.6% 
 S&P 500       1099     1141   + 3.8% 
 Total C-K  $24,295  $25.519   + 5.0% 

Now let's take a look at what happened with the companies. I will go with my usual format and examine the companies by industry groups. I'll start with the technology group of Microsoft (Nasdaq: MSFT), Intel (Nasdaq: INTC), and Cisco (Nasdaq: CSCO). The big news out of this group last week came from Cisco, which released earnings after the market closed on Wednesday.

Cisco beat consensus estimates -- no surprise there. Earnings for the first quarter of 1999 were $0.34 a share vs. $0.26 a share for the first quarter of 1998. The First Call consensus estimate was for $0.33. More importantly, the company also performed well on a few of the "secondary" items that analysts were looking for beyond the earnings, namely:

  • Its book-to-bill ratio exceeded 1.0, indicating that orders exceeded booked sales.
  • It made nice gains in networking switches. Analysts have been worried about this area ever since rival Ascend (Nasdaq: ASND) reported a dip in sales in the previous quarter.
  • Days sales outstanding was cut to 47 days from 50.

The balance sheet was also very tidy, with a flowie of 1.13, Phil's new pure flowie of 1.17, and debt equal to that magical number: $0. This earnings release is another example of how, in my opinion, Cisco is becoming the Microsoft of networking. The Fools who know me know that I don't toss around compliments like that without meaning them.

As far as Microsoft itself is concerned, there was news last week, but nothing earth shattering. I will refrain from reporting on it because I will be devoting Thursday's column to Microsoft. Rumor has it that Oak will have a column on Friday about Mr. Softy as well (the slant may be a little different than mine). That's definitely enough Microsoft for one week.

Intel had a busy week. On Wednesday, it teamed up with FORE Systems (Nasdaq: FORE) and announced that they will be working together to enhance the videoconferencing solutions that they first announced last May. On the same day, Intel was demonstrating its "PC of the future" to reporters. The PC is a small eight-pound, pyramid-shaped design, with external ports that enable users to add on devices such as printers, storage devices, and DVD and CD players. Finally, on Thursday, Intel and IBM teamed up to promote an industry-wide, standard framework upon which to build Internet security software.

Intel is now up at $96. We're still waiting on Merrill Lynch analyst Tom Kurlak to either restate his short-term target price of $60 or to back off of it.

In the drug group, we saw several announcements from Pfizer (NYSE: PFE):

  • Singapore has been added to the list of countries that has approved Viagra for sale.
  • The FDA is checking into the 69 deaths that could be linked to Viagra, but reiterates that the drug is safe.
  • Four new cancer fighting drugs are in early development, and eight others are farther along in the pipeline and could be launched in the next three years.
  • Earnings for 1998 are now projected to be $1.95 to $2.00 per share, a 22% increase from 1997.

Things look very good for Pfizer, indeed. There was no news of note last week for Schering-Plough (NYSE: SGP). But... have you taken a look at its last earnings report? Holy cow.

In the financial group, there wasn't any news about American Express (NYSE: AXP), but the positive investment performance of the market as a whole has helped out both AmEx and T. Rowe Price Associates (Nasdaq: TROW). Investors had been leaving stock mutual funds in August, but they came back into international funds in September and to domestic funds in October. The Cash-King portfolio reaped some benefits from this, but we'd gladly give those benefits back if these people would just get out of funds altogether and invest for themselves! Of course, to the extent that people HAVE to invest in funds, and most 401(k) plans force you to go that way, there is no reason why we small investors shouldn't be able to profit from the funds' management fees!

Last but not least, we examine the retail group. There was quite a bit of activity in Coca-Cola (NYSE: KO) on Tuesday, as it was widely reported that Coke would start competing with PepsiCo (NYSE: PEP) by selling bottled water in gas stations. There was only one problem. The reports were wrong, and Coke issued a denial, of sorts, on Tuesday evening. It seems that the margins in bottled water simply aren't what they are in Coca-Cola, so bottled water doesn't fit into Coke's (or the Cash-King, for that matter) business model. On Tuesday, Coke went up when the market was flat. On Wednesday, after the correction, Coke came back while the market went up. So it goes over the short term -- this way and that, forward and back, blah and blah. Over the long term, I believe that Coke's decision only to enter those businesses that match its long-term business targets (high gross and net margins among them) is the way to go.

Finally, Gap (NYSE: GPS) reported that same-store sales increased 18% in October 1998 compared to the comparable period in 1997. Analysts had been predicting a much smaller increase. Total sales were up 40% from the prior year. Christmas came a little early for Gap this year, and it just might stick around until the end of the year! Our Gap shares are on a serious rebound from the low-$40s not long ago.

That's it for today. Tomorrow, I'll be sharing with you how my family dealt with the market turmoil last month. We handled it a little differently than Phil's family did, although I think that both of our approaches were pretty Foolish. Until then,

Fool on,

Al (CashKingAl)

Order your copy of Rule Breakers, Rule Makers in advance.
The book doesn't come out until January, but you can reserve your copy today!

11/09/98 Close
Stock  Change    Bid 
 AXP   -2 5/16  95.00 
 CHV   -  7/8   82.44 
 CSCO  -  7/16  67.00 
 KO    -1 1/16  71.56 
 GPS   +1 1/8   68.25 
 EK    +1 3/16  79.19 
 XON   -1 1/2   72.00 
 GM    -1 1/16  66.00 
 INTC  +  9/16  96.00 
 MSFT  +1 3/8   110.69 
 PFE   -1 1/16  108.25 
 SGP   -  5/16  106.94 
 TROW  -1 1/16  34.69 

                  Day     Month   Year    History 
         C-K      -0.49%   4.52%  16.18%  16.18% 
         S&P:     -0.95%   2.87%  12.35%  12.35% 
         NASDAQ:  +0.24%   5.06%  11.68%  11.68% 
 Cash-King Stocks 
     Rec'd    #  Security     In At       Now    Change 
     2/3/98   24 Microsoft     78.27    110.69    41.42% 
     5/1/98   37 Gap Inc.      51.09     68.25    33.59% 
     2/3/98   22 Pfizer        82.30    108.25    31.53% 
    6/23/98   34 Cisco Syst    58.41     67.00    14.71% 
    2/13/98   22 Intel         84.67     96.00    13.38% 
    8/21/98   22 Schering-P    95.99    106.94    11.41% 
    2/27/98   27 Coca-Cola     69.11     71.56     3.55% 
     2/6/98   56 T. Rowe Pr    33.67     34.69     3.01% 
    5/26/98   18 AmExpress    104.07     95.00    -8.71% 
 Foolish Four Stocks 
     Rec'd    #  Security     In At     Value    Change 
    3/12/98   20 Eastman Ko    63.15     79.19    25.40% 
    3/12/98   20 Exxon         64.34     72.00    11.91% 
    3/12/98   15 Chevron       83.34     82.44    -1.09% 
    3/12/98   17 General Mo    72.41     66.00    -8.85% 
 Cash-King Stocks 
     Rec'd    #  Security     In At     Value    Change 
     2/3/98   24 Microsoft   1878.45   2656.50   $778.05 
     5/1/98   37 Gap Inc.    1890.33   2525.25   $634.92 
     2/3/98   22 Pfizer      1810.58   2381.50   $570.92 
    6/23/98   34 Cisco Syst  1985.95   2278.00   $292.05 
    2/13/98   22 Intel       1862.83   2112.00   $249.17 
    8/21/98   22 Schering-P   2111.7   2352.63   $240.93 
    2/27/98   27 Coca-Cola   1865.89   1932.19    $66.30 
     2/6/98   56 T. Rowe Pr  1885.70   1942.50    $56.80 
    5/26/98   18 AmExpress   1873.20   1710.00  -$163.20 
 Foolish Four Stocks 
     Rec'd    #  Security     In At     Value    Change 
    3/12/98   20 Eastman Ko  1262.95   1583.75   $320.80 
    3/12/98   20 Exxon       1286.70   1440.00   $153.30 
    3/12/98   15 Chevron     1250.14   1236.56   -$13.58 
    3/12/98   17 General Mo  1230.89   1122.00  -$108.89 
                               CASH    $120.62 
                              TOTAL  $25393.50 
 *Please note: On 8/4/98 $2,000 cash was added to the
portfolio. $2,000 will be added every six months.

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


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