Rule Breaker Portfolio

Fool Portfolio Report
Wednesday, December 17, 1997
by David Gardner (DavidG@fool.com)


ALEXANDRIA, VA (Dec. 17, 1997) -- Yuck.

I know, I know, I'm supposed to be enjoying December -- and I suppose I am when you get right down to it, take it all in all -- but I haven't enjoyed watching the Fool Portfolio very much. Largely due to a rare Foolish Four butchering (3M down $9 today, almost 10%), the Motley Fool Portfolio underperformed the market again Wednesday, tossing up a major-league surrender flag of 1.70% versus minor-league white hankies of 0.26% and 0.36% for the S&P 500 and Nasdaq, respectively.

For the month, we're now off 1.5%, behind the S&P's gain of 1.1%, though still ahead of the Nasdaq's rude treatment (it's down 3.3%).

Minnesota Mining & Manufacturing (NYSE: MMM) got walloped today following its announcement that its fourth-quarter earnings would come in flat, versus a year ago. For the fourth quarter of 1996, MMM reported earnings per share of $0.90; the company had been expected to post a dollar per share for this fourth quarter.

To blame? First off, currency exchange rates. As 3M does 53% of its business internationally, its sandpaper, Scotch tape, fluorochemicals, dental products, and Post-it Notes are paid for in lots of different foreign denominations. Converting that money back into U.S. dollars is an everyday reality for MMM, and this quarter's strong dollar means that it gets fewer greenbacks for its rupees. Fool News takes the example of Japan and puts it this way: "Japanese revenues from adhesive tape (sold in yen) translated into fewer dollars as the yen fell about 10% against the dollar during the course of the year." That's blame #1.

Continuing our Fool News item, you reach blame #2: "Overall demand in Japan was lower than expected (unit volume is expected to be up less than 5%)." It wasn't only the Far East, though, as Brazil also got its share of blame -- growth in unit volume there was nil. (Flat "unit volume" means just that the sheer numbers of products sold remained the same).

Finally, blame #3 is that in the third quarter, sales growth rose 9% in the U.S. -- it was a record-breaking blowout quarter. This quarter, 3M is currently projecting slower growth of 5%-7% domestically. Put all those together and you have a stock that disappointed the market today. And disappointed Foolish Four fans everywhere.

Now, nine bucks may sound like a lot, but high stock prices naturally carry larger-sounding moves, of course. Consider that this move is the equivalent of Iomega losing $2 1/2, or The Donald losing $5/8. That's not to say it's trivial -- not at all, this is a Foolish Four behemoth that just got spayed. (Foolish Public Service Announcement: Spay those parakeets, ladies and gentlemen.)

We own the stock through our mechanical investment approach that tosses us into higher-yielding Dow stocks. We will continue to hold, come Hades or high water, until our switch date in February. The thing's still up 29% for us, though it's now down to the market over the period we've owned it. (Sigh.) But it ain't February yet.

For more on 3M, do take a gander at one of Fooldom's best draws, tonight's daily Dow report, from the able pen of our own Robert Sheard.

What else? Well, America Online (NYSE:AOL) announced a $40 million deal with Barnes & Noble after market close yesterday. AOL will get paid $40 million over the next four years to serve up B&N as the exclusive online bookseller over its AOL service, an extension and expansion of an existing deal.

AOL was down $3/8 today. Barnes & Noble rose $3/4.

While AOL is a key FoolPort holding, the deal was viewed as more significant to another key FoolPort holding, Amazon.com (Nasdaq:AMZN). The Dow Jones news report I read made a specific point of saying that B&N would "be the exclusive seller of books on the nation's largest online service, shutting out Amazon.com Inc. and other major online booksellers."

As if there are other major online booksellers? (Rimshot.)

One poster named "Shrtsale" on our Web message boards wrote (add your own sics), "Barne's and Noble sign agreement with AOL. All Amagone.com had left was their name and now it is gone. Next will be agreements with Yahoo and other search engines. Amazon does not have deep pockets as others. Get Short and Get Ready." I think more light is shed on this situation by our own TMF Nico, who posted a good explanation in our Web Amazon folder, a portion of which I excerpt here:

"In January 1997, Barnes & Noble and America Online announced a partnership in which B&N would be the exclusive bookseller in AOL's Marketplace. The site went live in mid-March. The terms of the partnership were not disclosed at the time. The $40 million, four-year deal the Journal wrote about today will apparently expand (or possibly extend -- there is a typo in the text) that original deal....

"Last July, Amazon.com and America Online announced what was called a "comprehensive promotional agreement" under which Amazon would be the exclusive bookseller on AOL.com and AOL's NetFind search service. The three-year deal gave Amazon two things: A permanent button at the top of the AOL.com home page which links users directly to the Amazon site; and context-sensitive links keyed from search results at AOL NetFind. For this, AOL received $19 million over three years, with additional dollars to be triggered by Amazon revenue thresholds.

"As much as the word 'exclusive' is used, [these deals] contain nothing that prevents either Amazon or B&N from making deals with other online services. Amazon has a partnership with Yahoo (announced last July, within 24 hours of its deal with AOL.). Excite's WebCrawler features Barnes & Noble, while the main service at Excite.com has a deal with Amazon.... Excite thus parallels AOL's parallelism."

"Deals like these have been flying with increased frequency all year. I suppose today's AOL-Barnes & Noble announcement could be seen as a competitive poke at Amazon. But when these deals are looked at in their mutual context — which can be a useful thing to do — what we see is a growing confidence that electronic commerce is happening, right now, and confirmation of magnet online sites such as Yahoo, AOL, and Amazon (as different as these are) as business concepts."

Bravo, and quite true. Amazon.com dropped less than a point today (down $13/16) -- could it be that the entire stock market is reading TMF Nico's posts on our Web boards?!?

Anyway, as you well can see, little was up today. Iomega down, and GM down, KLA-Tencor off another couple of bucks (that stock's starting to look tasty at 14 times 6/98 earnings). And our short of Trump bounced back $5/16, up to $6 3/4 today.

It was one of those days.

You think we had it bad? How about the souls of those who work at the law firm of Barrack, Rodos & Bacine? The Philadelphia firm put out this press release (Web) today, summarizing its group of class-action suits (including 3Com), encouraging us all to join.

"Have you or a loved one recently lost money in the stock market? Are you looking for a respectable firm to represent your interest? At [you fill in the blank], we obtain for you what you rightfully deserve, everything you're entitled to under the law."

Blah blah blah. What a debilitating career.

Too drab a note to end on. So I tell you this: our Fool Charity Fund has already raised nearly $100,000 in just the few weeks since we've been taking donations. Fundraising ends this December 31st. Please look into it, as I'd like to raise double that! Have you given?

Finally, I want to draw your attention to a week in June in which Tom and I and a bunch of Fools are going on a Caribbean cruise to get sunburned, sip lemonade, and talk stocks. It's the first-ever Fool Cruise! Bring the spouse, bring the great aunt, bring the spayed parakeet and let's do an investment seminar. The prices are for a full week, and include airfare, port tax, and double-accomodation. And you get us! (OK, subtract some value, there.) Fool Cruise -- you GOTTA be there.

To close, here's to a better tomorrow. Down 1.70% today, that's odds-on.

-- David Gardner, December 17, 1997


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.

Today's FoolWatch: all the latest in Fooldom.

Have You Given? The Fool Charity Fund


TODAY'S NUMBERS
Stock Change Bid ---------------- AMZN - 13/16 52.69 AOL - 3/8 83.94 T +1 57.88 CHV - 7/8 74.88 DJT + 5/16 6.75 GM - 1/2 64.19 INVX - 1/4 21.63 IOM - 7/16 26.50 KLAC -2 1/4 34.75 LU + 1/2 76.00 MMM -9 84.88 COMS - 3/4 34.44

Day Month Year History FOOL -1.70% -1.48% 22.25% 226.25% S&P: -0.26% 1.06% 30.35% 110.63% NASDAQ: -0.36% -3.32% 19.86% 114.86% Rec'd # Security In At Now Change 8/5/94 355 AmOnline 7.27 83.94 1054.12% 5/17/95 980 Iomega Cor 2.52 26.50 951.59% 10/1/96 42 LucentTech 47.62 76.00 59.61% 8/11/95 125 Chevron 50.28 74.88 48.90% 8/12/96 130 AT&T 39.58 57.88 46.23% 9/9/97 290 Amazon.com 38.22 52.69 37.85% 8/12/96 110 Minn M&M 65.68 84.88 29.23% 8/12/96 280 Gen'l Moto 51.97 64.19 23.50% 4/30/97 -1170 *Trump* 8.47 6.75 20.30% 6/26/97 325 Innovex 27.71 21.63 -21.96% 8/24/95 130 KLA-Tencor 44.71 34.75 -22.28% 8/13/96 250 3Com Corp. 46.86 34.44 -26.51% Rec'd # Security In At Value Change 8/5/94 355 AmOnline 2581.87 29797.81 $27215.94 5/17/95 980 Iomega Cor 2509.60 25970.00 $23460.40 9/9/97 290 Amazon.com 11084.24 15279.38 $4195.14 8/12/96 280 Gen'l Moto 14552.49 17972.50 $3420.01 8/11/95 125 Chevron 6285.61 9359.38 $3073.77 8/12/96 130 AT&T 5145.11 7523.75 $2378.64 8/12/96 110 Minn M&M 7224.44 9336.25 $2111.81 4/30/97 -1170*Trump* -9908.50 -7897.50 $2011.00 10/1/96 42 LucentTech 1999.88 3192.00 $1192.12 8/24/95 130 KLA-Tencor 5812.49 4517.50 -$1294.99 6/26/97 325 Innovex 9005.62 7028.13 -$1977.50 8/13/96 250 3Com Corp. 11714.99 8609.38 -$3105.62 CASH $32438.81 TOTAL $163127.37








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.