DRIP PORTFOLIO
Pathfinder Portfolio's Picks

After a year of writing about what he calls “Pathfinder” companies, George Runkle decides on the first three Drips that he will invest in to start his Pathfinder portfolio. The companies are Nortel Networks, Enron, and Scientific-Atlanta. These companies are “opening up” the Internet and have the potential for significant growth. George explains how he will invest in them.

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By George Runkle (TMF Runkle)
September 7, 2000

More than 200 posts have been made related to the Drip Port's new search for a 25% grower. Jeff Fischer (TMF Jeff) is compiling your company suggestions into one column and will share that here, with details, next Tuesday. Today, I share my three new Drip investment decisions with you, all of them are what I call Pathfinder companies.

Pathfinders Explained
Over the past year, I've been looking at Pathfinder companies. My first column on this subject ran on September 13, 1999. The Pathfinder idea came to me one day when I was stuck in traffic here in Atlanta. I found it rather interesting that when I got home I logged on to the Fool and went to work. Around that time, I made my first online purchases -- some HO train stuff for my son.

It occurred to me that the Internet was becoming the additional interstate highway that we just don't have the room or money to build in the physical world. Certain companies were opening up the Internet for the rest of us, much like the early "Pathfinders" out West. As opposed to the "Explorers," Pathfinders went to areas already explored, and charted the way for the rest of the country to follow. The Internet we already have, but it is up to a number of companies to develop the paths on the Internet for us to follow.

When I first started this series, I promised to set up a portfolio with my own money, but I really didn't expect to be spending as much time as I have researching the different companies. The telecommunications companies, in particular, have required a lot of research work. Now it's time to make a move and actually put some of my money down.

The First Three Stocks
After seriously considering which companies to invest in, I came up with three finalists that I'll set up Drips in: Nortel Networks (NYSE: NT), Enron (NYSE: ENE), and Scientific-Atlanta (NYSE: SFA). In one of my earlier columns of this long series, my list was much different. It was Intel (Nasdaq: INTC), Lucent Technologies (NYSE: LU), and Hewlett-Packard (NYSE: HWP). After receiving an unbelievable amount of feedback from all of you out there, and then writing about it here in the past and acting on it, the list came out quite different.

Originally, I proposed a mechanical set of criteria to score the different companies. This way you could simply make up a spreadsheet with certain criteria and filter out a list of companies. The problem is that these businesses are too new, and the market is changing too rapidly. Look at what has happened to Lucent -- it made a few missteps, and it looks like Nortel is gaining a meaningful advantage.

Additionally, most of these industries didn't exist just a few years ago, like bandwidth trading. And, wireless is changing rapidly as each generation gets introduced. This makes these industries too young and volatile for a mechanical model to mean much.

The Pathfinder Criteria
So, I came up with qualitative criteria to encapsulate this approach. A Pathfinder company must meet these criteria:

1. Leading innovator in an area that is creating and allowing for more traffic on the Internet.
2. Leading share of the market in its core competencies.
3. Sales growth greater than 25% over the past.
4. Dynamic management team that possesses a strong understanding of the business as measured by leadership, background, etc.
5. Must have a Drip.

I'd rather not put a "point value" on any of these factors; I think we're better off leaving them subjective. I thought about including non-Drip companies, since you can now invest in them through BuyandHold, Sharebuilder, etc. However, the idea of the Drip Portfolio is low-cost investing and, as excellent as these services are, I'm going to stay with companies that have Drip plans, since the fees are much lower this way. We'll continue to look at companies like Cisco Systems (Nasdaq: CSCO) and others -- any that are competitors to our Pathfinders -- and we may wish to invest in them outside of the Drip area. For example, I have shares in Cisco in my IRA.

How George Is Investing
I'm going to start with the easiest plan to enroll in first -- Enron. You can check the plan details on Netstock Direct. This week I'll enroll in the plan through Netstock Direct for a $25 per month purchase -- that means I'll be paying about 5% in fees in this Drip. I know how many of you feel about fees. In fact, Jeff Fischer doesn't agree with me on this decision initially, arguing that you invest for returns and a 5% cut off the top is too high. (The Fool suggests spending no more than 2.5% on fees per purchase.)

However, I want to invest this small amount in Enron so that I can have funds left for the other two companies. Nortel and Scientific-Atlanta will be set up through the Temper Enrollment Service, at www.moneypaper.com. I'll be tracking this portfolio vs. the S&P 500 with the Fool's portfolios online, the same ones you can use. I'll make changes to it as time goes on. I may need to increase the amount invested in Enron to lower my fee percentage, for example. We'll see!

Do you have suggestions for my new Pathfinder company portfolio? Post your thoughts on the Drip Companies board.

Drip Portfolio

9/7/2000 as of ~5:30:00 PM EDT
Ticker Company Day Chg % Chg Price
CPBCAMPBELL SOUP1/41.01%$25.13
INTCINTEL CORP3/42.66%$67.44
JNJJOHNSON & JOHNSON3/160.20%$93.44
MELMELLON FINANCIAL CORP-1/16-0.14%$44.81
PEPPEPSICO INC1/42.98%$43.19

  Day Week Month Year
To Date
Since
7/28/1997
Annualized
Drip 1.38% -3.75% -4.81% 33.77% 73.79% 19.41%
S&P 500 .69% -1.20% -1.00% 2.26% 60.05% 16.29%
S&P 500(DA) .69% -1.20% -1.00% 2.26% 62.67% 16.90%
S&P 500(DCA) n/a n/a n/a n/a 28.88% 8.49%
NASDAQ 2.12% -3.21% -2.57% .71% 161.11% 36.08%

Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
9/8/199745.9818INTC22.835$67.44195.32%
11/5/199835.1201MEL34.095$44.8131.43%
11/14/199715.019JNJ78.956$93.4418.34%
7/28/20005PEP48.000$43.19-10.03%
4/13/19988.403CPB53.977$25.13-53.45%

Trade Date # Shares Ticker Cost Value LT $ Val Ch
9/8/199745.9818INTC$1,050.02$3,100.90$2,050.88
11/5/199835.1201MEL$1,197.44$1,573.82$376.38
11/14/199715.019JNJ$1,185.84$1,403.34$217.50
7/28/20005PEP$240.00$215.94($24.06)
4/13/19988.403CPB$453.57$211.13($242.45)
  Cash: $60.08  
  Total: $6,565.19  


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.