Rule Breaker Portfolio

<THE RULE BREAKER PORTFOLIO>
What Happened to Fool Port?

Growing @Home
...it's not just for Martha Stewart anymore

by Jeff Fischer (TMFJeff@aol.com)

Paris, France (Jan. 20, 1999) -- The Rule Breaker Portfolio was broken today, declining over 7% to land splat on the ground far behind the Nasdaq for the year, and only slightly above the S&P 500 (in comparison to where we stood one day ago). Such is the way with volatility: one minute you're the star of the show, the next minute you're... hey, you're still the star of the show.

If anything, this portfolio has shown over the past four-and-a-half years that volatility is not a risk: it's either present or it isn't, but it doesn't make or break you (unless you use so much margin that you're demolished when one of your holdings swoons). The Rule Breaker is up 948% in less than five years compared to 186% for the S&P 500 with dividends reinvested. Yup, here we are preaching long-term investing on another losing day, while on a good day we'd celebrate the day AND preach long-term investing.

Hey, can you blame us? We're Fools. We enjoy ourselves whatever any one particular day throws at us. I actually enjoy seeing the portfolio rise and fall large numbers: it spices up the day. Though, I usually don't check the numbers until the end of the day anyway, on the premise that one day will never make or break any Foolish investor: day by day, it just doesn't matter. The battle, if there was one, would be one of length. Fools don't battle, though: they invest.

(Before breaking into something Zen, let's move forward.)

Amazon.com (Nasdaq: AMZN) surrendered $27 without reason; perhaps because it had gained $120, at one point, since December. Sitting at $113 now, it's hard for us to complain when the stock was $9 one year ago today, and $60 six weeks ago.

Amazon will report earnings (meaning losses) next week. We'll be concentrating on the growth of its registered customer base and, to a lesser extent, its expenses. Expenses are expected to be high as the company ramps new business lines. That will probably remain true for several years, to varying degrees. Also, rumors are circling that Amazon might be in the market to buy something like a Lycos (Nasdaq: LCOS). We wouldn't guess either way, other than to know that Amazon will make other acquisitions over the years, certainly. We look forward to those.

@Home (Nasdaq: ATHM) stuck its strategic flag in the sand yesterday, announcing an intent to acquire Excite (Nasdaq: XCIT) in a stock-for-stock deal valued at nearly $7 billion. (To read David's column about the news, simply scroll down and click the archived column.) Today, @Home stood behind the bar and mixed a fine martini: quarterly results.

The company's subscriber base grew to 331,000, a whole 21,000 above common estimates, while revenue skyrocketed 546% for the year. @Home's subscriber base is still paltry compared to online leader America Online (NYSE: AOL), at 15 million. But that's good. We like that. @Home has mountains of growth remaining in front of it, and in the next three years it's expected that we'll see a very rapid ramp in cable Internet subscribers as:

  1. The numbers of homes reached by cable technology doubles and doubles again,

  2. the demand for the technology soars as the Internet becomes an increasingly important part of our lives,

  3. dissatisfaction with phone-connected services increases due to proliferating traffic resulting in slower access and more busy signals (BEEP BEEP BEEP), and

  4. broadband access is the next step: continuous high-speed Internet access at a flat monthly fee (no need to dial each time you want to check something online) which will eventually merge with television, telephone, and videophone. (You want to rent a movie? Click on the Internet. Want to call your friend? Click here. Want to order pizza: click!)

@Home reported fourth quarter revenue of $19.2 million and a net loss (before special charges) of $7.6 million, or $0.06 per share, in line with estimates (as if it mattered long term). This loss is much smaller than the losses posted in the past six quarters, when deficits were $11 million to $13 million per quarter.

For the year, revenue increased seven-fold (cha-ching) to $48 million, up from $7.4 million in 1997. For the year, the company lost $40 million, or $0.35 per share (again before charges) compared to a $46.5 million loss, $0.45 per share, last year. Declining losses posted in the midst of a very rapidly growing business: that's a good sign. The company's subscriber base also grew nearly seven-fold to 331,000, as we shared. But this is just the start.

In this month alone, @Home has announced deals with AT&T (NYSE: T) and Excite, both of which promise to bring @Home to a new frontier in the market of broadband Internet access. @Home has cable agreements that will allow its services to reach 60 million homes, handily crushing the reach of any competitor. This year and next, as I hypothesized earlier this month, we might see @Home "come of age." It has 13 million homes ready for its service right now. That reach should be more than 20 million this year.

By the end of 1999, subscribers are estimated to grow three-fold, to 1 million, and by 2001 many estimates call for 5 million subscribers. That's super-fast growth. Can it really happen? A leap from 1 million to 5 million in two years? You tell us. We don't know. We invest while thinking positively about strong companies, but we also invest thinking five years from now. If @Home reaches 5 million in 2003 instead of 2001, OK. Fine. If it does it in 2001, great. Whatever happens, it'll be great to watch and we'll be here each step of the way.

It's estimated that @Home's revenue will climb to $93 million this year and that its loss will drop to only $0.09 per share (meaning that it will be profitable to end the year), and then 2000 should be an entirely profitable year. These estimates don't leave much room for high-margin advertising and commerce partnerships, and they don't take into account the potential Excite merger. We'll have much more on that as we work through the news, numbers, and ramifications.

I can't give much more information on @Home tonight. I'm writing a Dueling Fools on the company this week -- representing the bull argument -- and I don't want to give my bearish opponent an advantage by showing my argument. Or so the joke goes! The Dueling Fools will run next week.

Next up: We should see earnings reports from Starbucks (Nasdaq: SBUX) very soon (tomorrow, coffee people?), and from Iomega (NYSE: IOM) tomorrow, for certain. Iomega is expected to post its first profit (of five cents per share) in nearly one year.

The luxury of being a Fool, though, means: these pennies by the quarter don't matter much. In sum, they do, over the years, sure; in sum, everything a company accomplishes matters. But in the same breath, all companies have bum periods during their corporate lives (AOL comes to mind), and we work to look beyond the dark tunnels to see what a company's potential truly is, when the sun is shining, over the long term (AOL comes to mind again. And perhaps Amazon should come to mind, too, it having fallen 19% today -- though that's no big deal, actually, considering its precipitous rise.)

To read @Home's fourth quarter report, click here. To discuss the long-term company (which is much more interesting and useful) visit the @Home message board by clicking here. Meanwhile, to speak with us about this portfolio, head to the Rule Breaker Board: click here.

For more Foolishness tonight, be sure to visit Harry Jones. Last night he talked about investing for yield, and today Harry is discussing word of mouth endorsements. By the time this year is out, I hope to meet Harry Jones. Finally, in Drip Port we take a close look at Mellon, our latest investment.

For now, Fool on!

01/20/99 Close
Stock  Change    Bid 
 ---------------- 
AMZN -26 13/16  113.00
AMGN  +2 1/2  113.75
AOL   -1 7/16 148.50
T     +  3/8   91.75
ATHM  -5 5/8  109.75
DJT   +  7/16   4.88
DD    -1 7/16  54.50
XON   -  1/16  71.00
IP    -2 3/8   41.00
IOM   +  1/16   9.63
LU    +1      115.06
SBUX  +  1/16  54.06
TDFX  +  5/8   13.63

 
                   Day   Month    Year  History  Annualized 
      R-BREAKER  -7.04%   4.50%   4.50%  948.91%   69.38%
        S&P:     +0.36%   2.22%   2.22%  186.82%   26.65%
        NASDAQ:  +0.30%  10.16%  10.16%  235.40%   31.17%
 Note:  Yearly, historical and annualized returns for the 
S&P include dividends

    Rec'd    #  Security     In At       Now      Change
   8/5/94  1100 AmOnline       1.82    148.50    8069.66%
   9/9/97  1320 Amazon.com     6.58    113.00    1617.52%
  5/17/95  1960 Iomega Cor     1.28      9.63     651.71%
  10/1/96    84 LucentTech    23.81    115.06     383.29%
  8/12/96   130 AT&T          39.58     91.75     131.82%
  12/4/98   450 @Home Corp    56.08    109.75      95.70%
  4/30/97 -1170*Trump*         8.47      4.88      42.44%
 12/16/98   290 Amgen         85.75    113.75      32.65%
  2/20/98   200 Exxon         64.09     71.00      10.78%
   7/2/98   235 Starbucks     55.91     54.06      -3.30%
  2/20/98   215 DuPont        59.83     54.50      -8.91%
  2/20/98   270 Int'l Pape    47.69     41.00     -14.03%
   1/8/98   425 3Dfx          25.67     13.63     -46.92%

    Rec'd    #  Security     In At     Value      Change
   9/9/97  1320 Amazon.com  8684.60 149160.00  $140475.40
   8/5/94  1100 AmOnline    1999.47 163350.00  $161350.53
  12/4/98   450 @Home Corp 25236.13  49387.50   $24151.37
  5/17/95  1960 Iomega Cor  2509.60  18865.00   $16355.40
 12/16/98   290 Amgen      24867.50  32987.50    $8120.00
  10/1/96    84 LucentTech  1999.88   9665.25    $7665.37
  8/12/96   130 AT&T        5145.11  11927.50    $6782.39
  4/30/97 -1170*Trump*     -9908.50  -5703.75    $4204.75
  2/20/98   200 Exxon      12818.00  14200.00    $1382.00
   7/2/98   235 Starbucks  13138.63  12704.69    -$433.94
  2/20/98   215 DuPont     12864.25  11717.50   -$1146.75
  2/20/98   270 Int'l Pape 12876.75  11070.00   -$1806.75
   1/8/98   425 3Dfx       10908.63   5790.63   -$5118.00

                              CASH  $39332.55
                             TOTAL $524454.36 

</THE RULE BREAKER PORTFOLIO>

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