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DRIP PORTFOLIO
Easing Into Pepsi

The Drip Port will begin to buy its additional shares of PepsiCo slowly and cautiously. This is partly due to lessons learned from Campbell Soup. With Campbell, the Drip Port rushed to buy shares at the start in order to balance the new position (based on dollars invested) with the port's older, much larger positions. Balancing of this nature may do more harm than good, however, as it did with Campbell Soup, because the "balancing" helped lead to purchases at high prices around a 40 P/E. Drip Port won't try to "balance" PepsiCo into the portfolio, but will buy more based only on the stock's merits at the time.

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By Jeff Fischer (TMF Jeff)
August 10, 2000

The Drip Port purchased its first five shares of PepsiCo (NYSE: PEP) on July 28 at $45 per share plus $15 in commissions. At the same time, we e-mailed the Bank of New York for PepsiCo Drip enrollment forms, which we soon received. Now we're waiting for our PepsiCo stock certificate, and then we'll enroll in the company's free dividend reinvestment plan.

That will take several weeks, but even after we are enrolled in the plan, we are going to invest more money in PepsiCo only very slowly. The stock of the snack food giant has risen 25% this year and, at $44 per share, it trades at 30.7 times year 2000 earnings per share estimates of $1.43. It trades at 27 times year 2001 estimates of $1.61.

PepsiCo's stock has risen as news spread and proof unfurled (via quarterly reports) of the company's stronger, more-focused, and higher-return business. With Frito-Lay cracking the whip, PepsiCo is set to achieve more than 15% earnings per share growth this year, and perhaps next year, too. The company is increasing its operating performance nearly across the board. Plus, following a handful of lackluster years, many people believe that the carbonated beverage industry will finally spout better annual results soon.

We're going to invest in our new holding more slowly than usual, however, due to the stock's valuation and due in part to lessons we learned from Campbell Soup (NYSE: CPB). Although these are two different companies with two separate stories, some similarities do exist.

At the time of both our first Campbell and Pepsi purchases, each company had recently reconfigured its business to increase growth. In the process, Campbell Soup anticipated and promised much more than it actually delivered. We were buying the stock on the way up as nearly everyone's hopes for Campbell rose. But, after disappointing investors, the stock turned around and punched us in the stomach.

"Balancing acts" may unbalance you!
We don't want to chase PepsiCo in the same way that we chased the soup guy. We slugged money into Campbell Soup quickly in 1998, in large part to get the new holding up to speed, size-wise, to our first two holdings -- Intel (Nasdaq: INTC) and Johnson & Johnson (NYSE: JNJ). In retrospect, this was a mistake.

There's no legitimate reason to feel that you must have the same amount of dollars invested in all of your holdings all of the time, or even some of the time. This isn't feasible for most investors, nor is it relevant! We would have done much better only investing an amount based on Campbell Soup's merits at a given valuation, rather than based on the size of our other, older investments. Had we done this, we may have hesitated to buy as much Campbell stock as we did at a 40 price-to-earnings multiple.

With PepsiCo, we will only buy more stock based on its merits, and we will not concern ourselves with "balancing" our portfolio's holdings based on the dollar amount invested in each position. I believe this approach makes sense with all our investments: Put money into each holding based only on its merits and our projections for it, not based on how much money we have in our other holdings.

Drip investors especially seem to try to stay "balanced." Rethink this strategy and you may find that you'd rather invest more money in your best ideas!

What we'll do with Campbell Soup -- Your Turn!
Now that we have a new (and we believe better) investment in the food and beverage industry, we need to decide what to do with Campbell Soup. We will tackle this topic head-on next week. If you have thoughts to share on the subject now, please post them on the Drip Companies discussion board! Our next Drip Port column doesn't run until Tuesday, so we're now more available to discuss issues like these with you.

Fool on!

Drip Portfolio

8/10/2000 Closing Numbers
Ticker Company Day Chg % Chg Price
CPBCAMPBELL SOUP5/161.22%$26.00
INTCINTEL CORP-1 9/16-2.46%$62.00
JNJJOHNSON & JOHNSON19/322.74%$97.41
MELMELLON FINANCIAL CORP-13/16-1.91%$41.75
PEPPEPSICO INC1/162.41%$45.06

  Day Week Month Year
To Date
Since
7/28/1997
Annualized
Drip -.85% -.89% -.56% 27.89% 66.15% 18.18%
S&P 500 -.86% -.18% 2.06% -.61% 55.55% 15.65%
S&P 500(DA) -.86% -.18% 2.06% -.61% 58.17% 16.28%
S&P 500(DCA) n/a n/a n/a n/a 25.31% 7.71%
NASDAQ -2.43% -.72% -.19% -7.60% 139.55% 33.30%

Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
9/8/199745.9818INTC22.835$62.00171.51%
11/14/199715.019JNJ78.956$97.4123.37%
11/5/199834.9399MEL34.051$41.7522.61%
7/28/20005PEP48.000$45.06-6.12%
4/13/19988.403CPB53.977$26.00-51.83%

Trade Date # Shares Ticker Cost Value LT $ Val Ch
9/8/199745.9818INTC$1,050.02$2,850.87$1,800.86
11/14/199715.019JNJ$1,185.84$1,462.95$277.11
11/5/199834.9399MEL$1,189.74$1,458.74$269.00
7/28/20005PEP$240.00$225.31($14.69)
4/13/19988.403CPB$453.57$218.48($235.09)
  Cash: $60.08  
  Total: $6,276.43  


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.





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