DRIP PORTFOLIO
Selecting Enron

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By George L. Smyth
June 20, 2000

Last week I provided an example of how I went about defining a Drip investment strategy. This week, I will provide an example of the thinking I used to select one of my Drip investments, Enron (NYSE: ENE).

As stated last week, I did not want to choose a company in the energy sector that was akin to the stodgy old utility. I came to this conclusion very quickly after considering Baltimore Gas & Electric, my local utility. Looking over the company's annual report, I saw nothing special, and knowing that deregulation could be a serious future problem, I realized that this would be the case for most utilities.

I did not want to look too deeply at the oil companies, partially because I don't have confidence that there will be a healthy oil supply far in the future, and partially because oil is not environmentally friendly. Having worked in the computer department for an environmental organization for many years, this was an issue for me.

I began to look at large companies that dealt with natural gas, which is efficient and much cleaner than oil. Natural gas also appears to have a brighter future with greater growth potential. Enron, being the largest supplier of natural gas in North America, was toward the top of my list.

As I read about the company, I noted that Enron was into more than simply supplying natural gas. It was more of a complete energy solution, being involved in oil, wind power, solar energy, and the delivery of electricity.

Addressing the exploration issue, I was comforted by the knowledge that a company doesn't necessarily have to be incredibly successful with the exploration process as long as they know how to trade the product. When it came to natural gas, I found that Enron was running circles around everyone, as the company had revolutionized the industry in this aspect.

I looked at Enron's past performance and was impressed with how the share price had handily beaten the S&P 500 Index over the previous 100 months. Although that told me nothing about the future, it let me know that it had been successful over a long period of time. Every company will have its good and bad periods, but the long-term performance is what really matters. I wanted to see a good history at Enron.

Now that I had found a company that I liked, upon seeing that it offered a fee-free Drip I obtained a copy of the annual report. The financials looked good, with my only concern being the debt load. I concluded that this was the result of Enron's need to have first-mover status in numerous areas. As this debt is necessary for the well-being of the company, it is what I refer to as "good debt." Since Enron had used debt to its advantage in the past, I decided that this would not be a sticking point for me.

I then looked in magazines to see what others had to say about Enron, and found that InformationWeek Magazine had regarded it as the most innovative company in the United States for the past few years. (More recently, the April 17, 2000 issue of Fortune magazine noted that the company had received the highest award for innovation in their "Most Admired Companies in America" survey.)

From that point, every other company I examined was compared to Enron. I selected and discarded nearly a dozen companies through this comparison. Every other company either exhibited a fatal flaw or simply did not match Enron's standards.

That clinched it for me. I obtained a prospectus and started a Drip with the company. I was surprised that there had been no talk of this company on either of the Drip Investing boards and began mentioning it. This only goes to show that there are advantages to going in one's own direction -- you never know what you'll find.

So, that's an example of the road I took to select one of my six Drips. It took quite a bit of time, but resulted in the selection of a company with which I felt comfortable. The amount of time it took to make the decision was not an issue, as I was making a selection that would probably affect the ensuing two decades of my life, and whose consequences would shape the quality my retirement years. One doesn't want to rush into those decisions.

You can read the full Enron Drip research I put together by going to http://members.home.net/hmpi -- once there, select DRiP Investing.

Each company you select should be a gem. Drips are long-term propositions and must be treated accordingly. I believe that I found a real keeper because I answered the right questions first, and let the company find me.

How do you find your investments and what are your favorites? Visit us on the Drip Companies discussion board and share.

Related Links:

  • Drip Port's Investment Criteria
  • Rule Maker's 11 Steps to Investing
  • Rule Breaker's Investment Criteria and Principles
  • Drip Portfolio

    6/20/2000 Closing Numbers
    Ticker Company Day Chg % Chg Price
    CPBCAMPBELL SOUP1/21.67%$30.38
    INTCINTEL CORP13/161.33%$138.31
    JNJJOHNSON & JOHNSON-1 5/8-1.80%$88.56
    MELMELLON FINANCIAL CORP9/161.60%$35.81

      Day Week Month Year
    To Date
    Since
    7/28/1997
    Annualized
    Drip .69% 6.04% 3.42% 28.68% 67.17% 19.39%
    S&P 500 -.68% .78% 3.90% .46% 57.22% 16.89%
    S&P 500(DA) -.68% .78% 3.90% .46% 59.84% 17.56%
    S&P 500(DCA) n/a n/a n/a n/a 28.24% 8.96%
    NASDAQ .59% 3.96% 18.01% -1.37% 155.70% 38.24%

    Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
    9/8/199722.9909INTC45.671$138.31202.85%
    11/14/199714.965JNJ78.923$88.5612.21%
    11/5/199834.9399MEL34.051$35.815.17%
    4/13/19988.337CPB54.179$30.38-43.94%

    Trade Date # Shares Ticker Cost Value LT $ Val Ch
    9/8/199722.9909INTC$1,050.02$3,179.93$2,129.91
    11/14/199714.965JNJ$1,181.08$1,325.34$144.26
    11/5/199834.9399MEL$1,189.74$1,251.29$61.54
    4/13/19988.337CPB$451.69$253.24($198.45)
      Cash: $0.05  
      Total: $6,009.84  


    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.