DRIP PORTFOLIO

The Drip Portfolio
This Is Not Your Father's IBM

By George Runkle (TMF Runkle)

ATLANTA, GA (Oct. 4, 1999) -- In my last column, I narrowed down the list of Pathfinder companies to the following: Intel (Nasdaq: INTC), Compaq (NYSE: CPQ), Hewlett-Packard (NYSE: HWP), Nortel (NYSE: NT), Motorola (NYSE: MOT), Lucent Technologies (NYSE: LU), Scientific-Atlanta (NYSE: SFA), and IBM (NYSE: IBM).

For Drips, you are in for a long time, so when I backtested to see what financial measure could be used to screen the stocks, I used a five-year period. Unfortunately, NOTHING in the data I culled from Value Line correlated significantly with future stock price returns. It becomes necessary, in my opinion, to screen companies based on what we know of them. In last week's column, I eliminated a few of these in the first round. Scientific-Atlanta and Nortel were knocked off because I don't know enough about them. Compaq was eliminated since I have had bad experiences with them. Motorola was scratched because of its missteps in the cell phone market. Finally, I said I didn't like IBM -- I felt it was a company past its prime.

The e-mail I received encouraged me to look into Scientific-Atlanta and Nortel. I will do that, and since Scientific-Atlanta is literally down the street from me, I'm going to try to finagle a visit. Also, there was an overwhelming response to my negative thoughts on IBM. Most (4:1) disagreed with me. Let me quote a few of the e-mails I got:

Richard Hewitt gave this link to ZDNet. Then he said:

"This article discusses how IBM comes up with many more patents than any other company and how it has just recently become extremely good at turning its technological advantage over every other company in the world into billions and billions in cash."

Kevin Virobik has an opposing view:
"I hate Lou Gerstner. I am a loyal user of IBM's OS/2 Warp operating system -- an OS that beats Windows in every way, shape, or form EXCEPT in marketing prowess. Gerstner is killing OS/2 for the SOHO which makes absolutely no business sense considering the DOJ trial against MS and the Linux inroads in the extremely profitable server market.

"Even more disturbing is Gerstner's leveraging IBM's R&D and his transfer of profitable patents to potential competitors. I guess my point is that Gerstner has been focused on short-term gain to please the Market while foregoing long-term funding and planning of tomorrow's technologies."

Finally, let me quote Michael Surel:
"I would like to point out that IBM has made it possible to use copper instead of aluminum on a silicon wafer. This page provides IBM's brief overview of why this is important. In a nutshell, copper will allow chips to run faster and at a cooler temperature since it is a much better conductor of electricity than aluminum. Faster processors equal more powerful computers, plain and simple. Next, I would like to point out some information I gleaned by doing a search for "IBM." IBM is going to offer Linux on ThinkPad laptops. They have announced plans for development (I'm not a big fan of vaporware and its ilk, but these guys aren't Microsoft) of network chips and related products. Imagine how fast these need to be to make real-time streaming of voice and video a reality for the average application. Sounds like a good application of a chip with copper circuits, eh?"

I spent some time on IBM's website, and I was impressed with its Small Business Center. They provide a lot of services for businesses that want to get on the Web, from a simple website with e-mail to handling orders for merchandise. Also, they sell all of the computer hardware and software you need for a business, from a one-person shop to a large business. While there are other places you can get this, they provide the complete package in one place, and allow you to move up as your business increases. Most important, you can get the service and products from one place, saving valuable time.

In past years, IBM developed problems much in parallel with the ones the U.S. automakers encountered. They were living by an old paradigm where they had little competition, and they determined what products their customers could get, not responding to what their customers wanted. IBM blew its lead in the PC market and went through some very difficult times as "Rule Breakers" appeared to compete with it. Looking at operations the past few years, it appears that the company has reinvented itself and is feeding the demands of the market.

Like Kevin Virobik, I'm very skeptical about licensing technology to other companies. Also, just because a company has an innovative laboratory doesn't mean it will translate its developments into success. Do you know who developed the mouse and Graphical User Interface (GUI)? No, not Apple Computers (Nasdaq: AAPL). It was Xerox (NYSE: XRX) at its Palo Alto Research Center (PARC). Steve Jobs got the idea for the Mac on a tour there. Xerox never brought its mouse or GUI, which they called Smalltalk, to market.

However, the IBM Business Center caught my eye. I can think of so many uses for their services that it really impresses upon me that this company is not the one I used to know. Duly chastened, I'll take IBM off my "eliminated" list. In upcoming weeks we'll see how much success I have with Scientific-Atlanta, we'll look at Nortel, and I want to revisit Motorola. To discuss these companies and the column, please visit the Drip Companies message board.

Drip Portfolio

10/4/99 Closing Numbers
Ticker Company Dly Pr Chg Price
CPBCAMPBELL SOUP-1/8$38.75
INTCINTEL CORP1/16$77.00
JNJJOHNSON & JOHNSON1/2$94.50
MELMELLON BANK CORP5/8$34.56

  Day Week Month Year
To Date
Since
7/28/97
Annualized
Drip 2.39% 2.39% 2.81% 11.47% 26.77% 11.45%
S&P 500 1.70% 1.70% 1.71% 6.13% 38.97% 16.23%
S&P 500(DA) 1.70% 1.70% 1.71% 6.71% 41.59% 17.23%
S&P 500(DCA) n/a n/a n/a n/a 19.10% 8.32%
NASDAQ 2.16% 2.16% 1.81% 27.51% 78.13% 30.20%

Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
9/8/9721.0839INTC42.592$77.0080.78%
11/14/9710.215JNJ78.341$94.5020.63%
11/5/9825.5267MEL34.137$34.561.25%
4/13/988.174CPB54.586$38.75-29.01%

Trade Date # Shares Ticker Cost Value LT $ Val Ch
9/8/9721.0839INTC$898.01$1,623.46$725.45
11/14/9710.215JNJ$800.25$965.32$165.06
11/5/9825.5267MEL$871.40$882.27$10.86
4/13/988.174CPB$446.18$316.74($129.44)
  Cash: $24.37  
  Total: $3,812.15  


Key
• S&P 500 (DA) = dividend adjusted. Dividends have been added to the total return of the index.

Note
Drip Port launched with $500 on July 28, 1997, adds $100 to invest every month, and the goal is to own $150,000 in stock by August of the year 2017. Due to the slow nature of dollar-cost-averaging and our relatively significant starting costs, we do not expect to seriously challenge the S&P 500 for the first three to five years as we build an investment base. The long-term advantages of dollar-cost-averaging still overcome the short-term disadvantages, however. Final note: our investment in Campbell Soup is frozen due to fees instituted in its investment plan. Click here for a history of all Drip Port transactions.