Rule Breaker Portfolio

<THE RULE BREAKER PORTFOLIO>

No Time for Humdrum!
Earnings keep things rolling

by Jeff Fischer (TMFJeff@aol.com)

Paris, France (Jan. 25, 1999) -- A humdrum day ended, surprisingly, with raised glasses and celebrations nearly all the way around. The stock market closed considerably higher after listing like an overloaded ship all morning. Too bad. It'd be nice to have more "humdrum" in our stock market from time to time. Traditionally, the stock market is a rather humdrum establishment on a daily basis: up a fraction here, down a fraction there. It's difficult to remember when, however -- during the last few months -- stocks actually treated us to a calm.

Have they?

Or is over-active Internet trading, which reportedly accounts for 15% of Nasdaq's daily dollar volume, roiling the market's seas to a constant froth? Perhaps. However, most active traders eventually lose money -- all studies have shown -- so logically the whipped-up frenzy will subside in time.

Or maybe not. So best to keep your Foolish head about you.

Today. A 9% decline in the portfolio's largest position put us down for the day against the S&P and the Nasdaq. The indices gained 0.7% and 1.3% respectively, while the Rule Breaker Portfolio declined 1.2% despite advances in America Online, @Home, AT&T, and a 12% jump in our teeny-tiny holding, 3Dfx.

AT&T (NYSE: T) reported a 45% increase in earnings per share for the fourth quarter thanks largely to continued cost-cutting from CEO Armstrong and a strong wireless business. However, the company's long-distance biz continued to lose ground to lower-priced competitors. The more exciting news surrounds Internet services, including the fact that AT&T is teaming with @Home (Nasdaq: ATHM) to deploy an Internet backbone for 5 million broadband users. This service should be in place by mid-1999 (and it should cut @Home's carrying costs in half -- lovely!). AT&T might also sell its Internet Service Provider business, WorldNet, with 1 million users, to @Home for about $1 billion (valuing each sub at $1,000).

Or so the rumor goes.

Without Excite (Nasdaq: XCIT) or the possibility of WorldNet, @Home is expected to achieve $155 million in revenue this year -- about triple '98 results -- and $380 million in the year 2000. An expected loss of $0.09 per share this year could be followed by a profit of $0.32 per share, it is estimated, in 2000. The company is expected to be cash flow positive this year. Currently, @Home is valued at about $13 billion.

America Online (NYSE: AOL) is valued at over $70 billion. The company will announce earnings on Wednesday and $0.14 per share is expected. For fiscal 1999 (ended September), AOL is expected to earn $0.56 per share on revenue of about $4 billion, followed by $0.89 per share next year on revenue of nearly $6 billion. This is, of course, revenue before the Netscape (Nasdaq: NSCP) acquisition or others (we don't want to count our chickens too soon).

Rev up your Web browsers!

To listen to AOL's live second quarter '99 conference call on Wednesday, visit www.broadcast.com at 5 p.m. ET. The replay will be available at that same address for 30 days. If you'd rather, the phone number for the call's replay is 888-433-2208. It can be accessed beginning at 8 p.m. ET on Wednesday for two days. We'll discuss AOL's earnings here on Wednesday, too, although we feel about as much urgency about them as we do about planting maize every spring. (We'll leave that to Harry Jones.) Regardless of the results, AOL is a "long-term core holding" by now. Period. Didn't your full-service broker tell you that yet? 82% of the company is now owned by institutions, many of them buying in the last 12 to 24 months.

Better late than never. (Correct, Barron's?)

3Dfx (Nasdaq: TDFX) will announce its fourth quarter earnings tomorrow and $0.05 per share is the anticipated result. That would be 67% lower than last year due to a multitude of factors, none of which I pretend to readily accept. Management had to have mis-stepped to deflate the company's earnings power so greatly while selling into record demand for its product. 3Dfx is hoped to earn $0.66 per share in fiscal 1999, down from $0.88 last year. We'll see. The estimates were wrong twice last year. First they were much too low, than they were too high. We were best off doing what we did: ignoring them.

Today 3Dfx rose 12% to $15 in anticipation of tomorrow's release. To hear the company's conference call replay on Tuesday, dial 800-633-8284 (access #11550030). The replay is available at 4 p.m. PT tomorrow for 48 hours. We'll take a gander at the results here, too. 3Dfx is valued at $232 million, with a book value of nearly $8 per share, or $120 million. The stock is at 22 times the guess for 1999's earnings per share.

Amazon.com (Nasdaq: AMZN) is valued at around $18 billion. The most-often discussed Internet company of the past year should announce its results this week, too. Crack Fool sleuth TMF Movie hasn't been able to procure an exact date from the company yet, although she provides all of the other conference call and earnings information on the Fool. (Thanks Movie!) She also continues to strike a blockade at Amazon regarding conference call access. When it comes to its conference call, Amazon is more secretive than an 11-year-old boy experiencing his first crush (a crush that usually involves his teacher or a racing bike -- or both).

Amazon achieved sales of about $570 million this year, topping most estimates by at least $100 million. If Amazon grows sales this year at the same rate that was previously expected (60%), it could accomplish revenue of over $900 million in 1999. Some analysts recently called for profits in the year 2000, but nobody is very capable of putting forth hard numbers yet. The company is changing too quickly, adding too many new categories (breaking too many rules). We like that. Amazon is expected to report a loss of about $0.54 per share in 1998, and a loss of $0.57 next year.

Finally, Starbucks (Nasdaq: SBUX) announced estimate-matching earnings of $0.29 per share last week. The company is expected to earn $1.21 per share this year and $1.58 in fiscal 2000, putting the $50 stock at 31 times year 2000 estimates while Starbucks is growing earnings 34% annually. Valued at $4.4 billion, Starbucks had recent annual sales of over $1.3 billion, which doesn't include the partnership revenue it earns from bottled Frappuccino or ice cream.

To continue your reading pleasure, please either 1) Hit refresh on this page continually for the next 24 hours until a new column appears (we won't mind the impressions -- click the ad banner up there, too!), or 2) click right now to the best interview in cyberspace: Last weekend Tom and David Gardner spoke with Amazon CEO Jeff Bezos on The Motley Fool Radio Show. You can read the Amazon interview now...

And Fool on!

01/25/99 Close
Stock  Change    Bid 
 ---------------- 
AMZN  -10 5/8 112.38
AMGN  -  7/16 114.19
AOL   +4 3/4  145.25
T     +1 5/16  89.63
ATHM  +4 1/16 105.06
DJT   -  3/16   4.56
DD    +  7/16  54.75
XON   +  5/8   72.00
IP    +1 1/16  42.06
IOM   -  5/16   7.75
LU    -1 5/8  101.88
SBUX    ---    50.06
TDFX  +1 19/32 14.94

 
                   Day   Month    Year  History  Annualized 
      R-BREAKER  -1.21%   2.33%   2.33%  927.07%   68.32%
        S&P:     +0.68%   0.38%   0.38%  181.89%   26.07%
        NASDAQ:  +1.30%   8.05%   8.05%  228.99%   30.50%
 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    145.25    7890.87%
   9/9/97  1320 Amazon.com     6.58    112.38    1608.02%
  5/17/95  1960 Iomega Cor     1.28      7.75     505.28%
  10/1/96    84 LucentTech    23.81    101.88     327.90%
  8/12/96   130 AT&T          39.58     89.63     126.45%
  12/4/98   450 @Home Corp    56.08    105.06      87.34%
  4/30/97 -1170*Trump*         8.47      4.56      46.13%
 12/16/98   290 Amgen         85.75    114.19      33.16%
  2/20/98   200 Exxon         64.09     72.00      12.34%
  2/20/98   215 DuPont        59.83     54.75      -8.50%
   7/2/98   235 Starbucks     55.91     50.06     -10.46%
  2/20/98   270 Int'l Pape    47.69     42.06     -11.80%
   1/8/98   425 3Dfx          25.67     14.94     -41.80%

    Rec'd    #  Security     In At     Value      Change
   9/9/97  1320 Amazon.com  8684.60 148335.00  $139650.40
   8/5/94  1100 AmOnline    1999.47 159775.00  $157775.53
  12/4/98   450 @Home Corp 25236.13  47278.13   $22042.00
  5/17/95  1960 Iomega Cor  2509.60  15190.00   $12680.40
 12/16/98   290 Amgen      24867.50  33114.38    $8246.88
  10/1/96    84 LucentTech  1999.88   8557.50    $6557.62
  8/12/96   130 AT&T        5145.11  11651.25    $6506.14
  4/30/97 -1170*Trump*     -9908.50  -5338.13    $4570.38
  2/20/98   200 Exxon      12818.00  14400.00    $1582.00
  2/20/98   215 DuPont     12864.25  11771.25   -$1093.00
   7/2/98   235 Starbucks  13138.63  11764.69   -$1373.94
  2/20/98   270 Int'l Pape 12876.75  11356.88   -$1519.88
   1/8/98   425 3Dfx       10908.63   6348.44   -$4560.19

                              CASH  $39332.55
                             TOTAL $513536.93

</THE RULE BREAKER PORTFOLIO>

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