Rule Breaker Portfolio

Fool Portfolio Report
Tuesday, December 16, 1997
by Jeff Fischer (TMFJeff@aol.com)


ALEXANDRIA, VA (Dec. 16, 1997) -- The Fool's long-term goal is to double the return of the S&P 500, and to date it is doing so: up 231% against the S&P's 111% gain since August 4, 1994. But today the S&P dunked us, turning our own goal against us by doubling our return. The portfolio gained 0.24% as the S&P climbed 0.48%, while the Nasdaq crunched us both, rebounding 1.07%.

Before we delve into today's report, if you're reading this in time, don't miss Tom Gardner in tonight's chat with the Investor's Business Daily founder, Bill O'Neil. Tom and Mr. O'Neil will discuss the market, finding stocks, and the investment approaches prescribed by the fastest-growing newspaper in the country. This evening's event begins at 10 p.m. EST, so those of you on the West Coast have no excuse for missing it, except -- unfortunately for Web readers -- the event is only on America Online.

I'll help AOL users attend the event by keeping this recap brief. Today's column is titled "Amazon disappoints Bears, and Trump disappoints Gabelli." Gabelli is a vocal bull on Trump stock who has apparently shied away from his stance without a word. First, though...

America Online (NYSE: AOL) announced that it surpassed the one million member mark in international markets. AOL offers its service in the United Kingdom (visit the Fool U.K.), Germany, France, Canada, and Japan, while members in Austria, Switzerland and Sweden are able to access AOL as well. Next year the company plans to launch a service down under, in Australia. The stock trades at 94 times the fiscal '98 earnings estimate of $0.90 per share, while a subscriber-based valuation puts the stock's fair value -- for now -- at $87 1/2.

You would think that after years of seeing AOL bears emerge whenever an AOL insider sold stock, bears of Amazon.com (Nasdaq: AMZN) would learn not to value a business or take an investment position based on a single event alone. But literally for months, Amazon bears were counting on the November stock lock-up termination to bring Amazon shares toppling, and many people even shorted the stock based on this event alone. The fateful day came and went during the third week of November, and Amazon's stock -- well, the stock rose.

When a company goes public there is a lock-up period, usually six months long, that keeps insiders and executives from selling their stock positions in the company over that time. In Amazon's case, at the end of six months 18 million shares were released from the lock-up. Bears on the Amazon message board and in the investing community were expecting these "new" shares to flood the market and, of course, some of the shares were sold, but not enough to cause more than a short-term blip. The lock-up story reinforces that a single event is never reason enough to invest long or short in any company. Fools value the business when considering an investment, not external factors (especially very short-term factors). Several Amazon shorts waited with great anticipation for the stock to fall on the day that the lock-up period terminated, and when it didn't, they began to cover their positions and instead the stock actually rose.

Amazon will announce fourth quarter results around January 20. A loss of $0.44 per share is expected.

Following a rash of downgrades and earnings revisions, 3Com (Nasdaq: COMS) is set to report its most dismal quarter in years on Thursday, the 18th. The company is now expected to make four cents per share in the quarter and $1.08 per share for fiscal '98 ended in May. In fiscal '99 the company is expected to earn $2.01 per share, though that's a random guess from analysts. For now, it's best to value 3Com on a price-to-sales basis (or, even better, on an enterprise value-to-sales basis). With a market cap of $12 billion the stock trades at under two times sales, which should provide some comfort to 3Com shareholders.

After the company announced that it would miss the current quarter and, therefore, estimates for the year, the stock fell to $31 but rebounded to $34 before the end of that fateful day. This may be one of those "the bad news is already out" stories. Meanwhile, the relatively low valuation relative to sales should help sustain the stock price, at least theoretically. We'll have coverage of 3Com's earnings on Thursday.

Finally, Trump Hotels (NYSE: DJT) made another new low for the Fool Port today, touching $6 1/4 before closing at $6 7/16 on heavy volume (five times the average) of 1.2 million shares. The stock may now be facing tax-loss, end-of-the-year selling, as well as the fact that -- Tom reminded today in conversation -- once a stock falls to $5 it is no longer marginable, so investors may be selling to pre-empt a margin call. Without net earnings, Trump is best valued on an EBITDA basis (earnings before interest, taxes, depreciation and amortization; or, as we call it, "blah blah blah").

Trump's blah, blah, blah has been below what was hoped for, and the company ponying up to the bar for another $100 million loan doesn't help. Mario Gabelli, a CNBC guest, was vocally bullish on Trump Hotels when the stock was above $10 per share this summer, causing DJT to rise sharply as he spoke over the airwaves. Mr. Gabelli was recently on CNBC and made no mention of Trump, though thanks to the Internet he's being held accountable on the Fool message boards and here as well.

When will Mr. Gabelli mention Trump again, either admitting a mistake or stating that he's holding on and still believes in the business? Foolishness is about accountability. Without it, what a person states holds little merit. Show us your cards, Mario! There's no holding out. The world is an open pipeline of information now -- now that everyone has a voice and a collective memory, together.

Fool on...

--Jeff Fischer


Do your Foolish gift shopping now, in time for the Holidays. And consider the Fool's Industry Focus '98 book -- to learn not only about industry-leading stocks, but about the industries in which they operate. Learn which 20 companies in 20 industries our news and analysis team favor most, as they pinpoint what they feel is the best investment in each industry.

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TODAY'S NUMBERS
Stock Change Bid ---------------- AMZN -1 3/8 53.50 AOL - 11/16 84.31 T - 3/8 56.88 CHV - 7/16 75.75 DJT - 1/2 6.44 GM + 7/8 64.69 INVX + 7/16 21.88 IOM - 9/16 26.94 KLAC +2 1/2 37.00 LU +2 9/16 75.50 MMM +1 3/16 93.88 COMS + 5/8 35.19

Day Month Year History FOOL +0.24% 0.22% 24.35% 231.88% S&P: +0.48% 1.32% 30.69% 111.18% NASDAQ: +1.07% -2.97% 20.29% 115.64% Rec'd # Security In At Now Change 8/5/94 355 AmOnline 7.27 84.31 1059.27% 5/17/95 980 Iomega Cor 2.52 26.94 968.95% 10/1/96 42 LucentTech 47.62 75.50 58.56% 8/11/95 125 Chevron 50.28 75.75 50.64% 8/12/96 130 AT&T 39.58 56.88 43.70% 8/12/96 110 Minn M&M 65.68 93.88 42.93% 9/9/97 290 Amazon.com 38.22 53.50 39.97% 8/12/96 280 Gen'l Moto 51.97 64.69 24.46% 4/30/97 -1170 *Trump* 8.47 6.44 23.99% 8/24/95 130 KLA-Tencor 44.71 37.00 -17.25% 6/26/97 325 Innovex 27.71 21.88 -21.06% 8/13/96 250 3Com Corp. 46.86 35.19 -24.91% Rec'd # Security In At Value Change 8/5/94 355 AmOnline 2581.87 29930.94 $27349.07 5/17/95 980 Iomega Cor 2509.60 26398.75 $23889.15 9/9/97 290 Amazon.com 11084.24 15515.00 $4430.76 8/12/96 280 Gen'l Moto 14552.49 18112.50 $3560.01 8/11/95 125 Chevron 6285.61 9468.75 $3183.14 8/12/96 110 Minn M&M 7224.44 10326.25 $3101.81 4/30/97 -1170*Trump* -9908.50 -7531.88 $2376.63 8/12/96 130 AT&T 5145.11 7393.75 $2248.64 10/1/96 42 LucentTech 1999.88 3171.00 $1171.12 8/24/95 130 KLA-Tencor 5812.49 4810.00 -$1002.49 6/26/97 325 Innovex 9005.62 7109.38 -$1896.25 8/13/96 250 3Com Corp. 11714.99 8796.88 -$2918.12 CASH $32438.81 TOTAL $165940.12








Note
The Fool Portfolio was launched on August 5, 1994, with $50,000. It was renamed the Rule Breaker Portfolio in October 1998. The investing strategy began with the first investments of the Fool Port and has evolved with time and experience. In July 2001, the portfolio began adding $12,500 each quarter (We missed Jan. 2002, so we added $25,000 in April 2002). We skip a quarter if we have enough uninvested cash or cash available in stocks we would prefer to sell to make new investments. All transactions are shared and explained publicly before being made, and returns are compared in each week's column to the S&P 500 (including dividends where noted) and the Nasdaq composite. For a history of all transactions, please click here.