<THE RULE MAKER PORTFOLIO>

Some Answers for Tom
And a Question for Dale

By Al Levit

Glendale, CA (March 12, 1999) --

"[Dell's] Rule Maker Score: 36 points."

"Unfortunately for Dell, this does mark a decline from its third quarter numbers, at which point its total score was 40 points. Interestingly, the decline is entirely linked to comparisons between Dell and its lead competitor, Compaq�

Through perseverance, Compaq has now leapt to the lead in gross margins, nibbled down Dell's lead in net margins, and narrowed the gap on the flow ratio.
-- Tom Gardner (Rule Maker Report -- 2/24/99)

For the last four days, I've been looking at Dell Computer Corp. (Nasdaq: DELL) in light of its less-than-perfect results during the 4th quarter of fiscal 1999. As I mentioned earlier, it wasn't just the Wise who pounced on Dell. Co-founding Fool and Chief of the Rule Makers Tom Gardner got his licks in as well. I'll finish up this week by answering some of Tom's questions about Dell, but then I also want to pose a question for the Fool's own PC company expert, Dale Wettlaufer.

First, some thoughts for Tom:

  • I think you need to be careful about measuring Dell, a Merchant King, on traditional Rule Maker criteria. Keep in mind that American Express (NYSE: AXP) is an example of a company in the portfolio that we didn't measure in the same way as the other companies in our portfolio. As for Dell, the company generates outstanding returns based on its low margin, high asset-turnover business model. Admittedly, the Merchant King business model may be riskier than that of a Rule Maker, but that hasn't stopped Dell from being the best-performing stock of the decade. Evaluating Dell as a Rule Maker tells us, "No, this company is not a Rule Maker." But, it does not tell us that the company won't continue to excel as a Merchant King.

  • Compaq Computer (NYSE: CPQ) may be gaining a little on Dell in the Rule Making area, but as noted Wednesday, Compaq is losing big time where it really counts. This is in the Merchant King area where Compaq's existing relationships keep it from going completely to the direct-marketing method that Dell pioneered and everyone else is trying to imitate.

  • Dell's Rule Maker score would be significantly higher if we gave it "an automatic top score" for sales growth as I suggested on Tuesday.

  • Tom, you stated that Dell doesn't having any pricing power over its customers because the cost of computers is relatively high. But, this problem is more acute for the PC companies that sell to individuals rather than to businesses and governments. Fortunately for Dell, large institutions made up more than 85% of systems sold by the company in 1998. In addition, there is much more brand loyalty when a company standardizes on one supplier, such as Ford (NYSE: F) has just done with Dell. Dell is actively pursuing other Top 50 companies to standardize on their computers as well.

For Dale, my question is about Gateway 2000 (NYSE: GTW). I understand that it is a fine company, as you wrote a few months ago:

"The better product mix is one of the most attractive features of Gateway and harkens back to the days of Dell richening its product mix and thus growing profits and cash flow much faster than the rest of the industry."

As a matter of fact, it seems that almost every time you write something good about Gateway, you can't help but mention Dell, and often Dell seems to get more attention than Gateway! So I wonder, what was it -- other than price -- that made you choose Gateway over Dell?

I'd really like to know, since my portfolio is overweighted with Dell. But I don't want to make a change based strictly on valuation because one of the many things I've learned here in the Rule Maker portfolio is that the quality of the business is much more important than valuation (a principle we call "QuaVa"). I believe that's one lesson that does carry over to Merchant Kings. For example, I keep reading that the thought of Dell stepping on Gateway's turf makes Gateway shareholders nervous. Interestingly enough, the thought of Gateway moving in on Dell's turf doesn't seem to worry us Dell shareholders. Of course, Dell could continue to do great, and Gateway, growing from a smaller base, could do even better (but probably with more risk attached). I guess that's what makes a market. At any rate, that certainly makes a week. I'll be back in three.

As a reminder, this weekend is your last chance to offer your opinion on our Question of the Week -- is antitrust scrutiny at all reflective of a Rule Maker's monopoly status? Voice your thoughts on the Strategy board. We'll be giving a groovy Fool ballcap to the person who posts the most insightful response.

Finally, if you're new to the Rule Maker or investing in general, join us on our new Rule Maker Beginners message board.

Have a great weekend!

Al

03/12/99 Close

Stock  Change    Bid
AXP   +2 3/4   126.25
CHV   -  3/8   84.69
CSCO  -2 1/4   103.25
KO    +2 15/16 69.25
GPS   -2 1/4   66.50
EK      ---    66.63
XON   -  11/16 74.00
GM    -  11/16 89.00
INTC  +  1/8   118.25
MSFT  -1 1/4   160.19
PFE   -  3/8   140.25
SGP   +  13/16 58.00
TROW  -  1/2   35.63
YHOO  -3       176.00

                   Day   Month    Year  History
        R-MAKER  -0.52%   7.09%  11.63%  41.25%
        S&P:     -0.24%   4.54%   5.64%  30.71%
        NASDAQ:  -1.27%   4.09%   8.61%  44.08%

Rule Maker Stocks

    Rec'd    #  Security     In At       Now    Change
    2/3/98   24 Microsoft     78.27    160.19   104.66%
    5/1/98   55 Gap Inc.      34.37     66.50    93.48%
   6/23/98   34 Cisco Syst    58.41    103.25    76.77%
    2/3/98   22 Pfizer        82.30    140.25    70.42%
   2/17/99   16 Yahoo Inc.   125.81    176.00    39.89%
   2/13/98   22 Intel         84.67    118.25    39.65%
   5/26/98   18 AmExpress    104.07    126.25    21.32%
   8/21/98   44 Schering-P    47.99     58.00    20.85%
    2/6/98   56 T. Rowe Pr    33.67     35.63     5.80%
   2/27/98   27 Coca-Cola     69.11     69.25     0.21%

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   17 General Mo    72.41     89.00    22.92%
   3/12/98   20 Exxon         64.34     74.00    15.02%
   3/12/98   20 Eastman Ko    63.15     66.63     5.51%
   3/12/98   15 Chevron       83.34     84.69     1.61%

Rule Maker Stocks

    Rec'd    #  Security     In At     Value    Change
    2/3/98   24 Microsoft   1878.45   3844.50  $1966.05
    5/1/98   55 Gap Inc.    1890.33   3657.50  $1767.17
   6/23/98   34 Cisco Syst  1985.95   3510.50  $1524.55
    2/3/98   22 Pfizer      1810.58   3085.50  $1274.92
   2/17/99   16 Yahoo Inc.  2013.00   2816.00   $803.00
   2/13/98   22 Intel       1862.83   2601.50   $738.67
   8/21/98   44 Schering-P   2111.7   2552.00   $440.30
   5/26/98   18 AmExpress   1873.20   2272.50   $399.30
    2/6/98   56 T. Rowe Pr  1885.70   1995.00   $109.30
   2/27/98   27 Coca-Cola   1865.89   1869.75     $3.86

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   17 General Mo  1230.89   1513.00   $282.11
   3/12/98   20 Exxon       1286.70   1480.00   $193.30
   3/12/98   20 Eastman Ko  1262.95   1332.50    $69.55
   3/12/98   15 Chevron     1250.14   1270.31    $20.17

                              CASH    $185.03
                             TOTAL  $33985.59

Note: The Rule Maker Portfolio began with $20,000 on February 2, 1998, and it adds $2,000 in cash (which is soon invested in stocks) every six months.

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