Rule Breaker Portfolio

<THE RULE BREAKER PORTFOLIO>

Amazon Swings for the Roof

by Paul Larson (TMFParlay@aol.com)

Chicago, IL (Feb. 1, 1999) -- The Rule Breaker Portfolio had another dreary winter day today by dropping 1.67% versus a mere 0.52% drop for the S&P 500. The Nasdaq, which has been an absolutely scolding hot index of late, bucked the rest of the market and managed to eke out a modest 0.17% gain.

Can you believe that the Nasdaq Composite Index has bounced up nearly 85% since the lows reached back in October? It's looking like the Nasdaq and not the S&P is the filly to beat in 1999. The Rule Breaker is comfortably ahead of the S&P's 3.88% gain thus far in 1999 yet trailing by over 4% the Nasdaq's 14.48% upward move. Nevertheless, the race is far from over with 10 months and 27 days before we close the books on the year.

Proving that its growth in the fourth quarter was not just due to the holidays, Amazon.com (Nasdaq: AMZN) said at a conference with the Wise today that they expect modest sequential sales growth in the first quarter -- jolly good news. On the other hand, the company also said to expect net margins to be slightly lower in the coming quarters due to aggressive investment in the company's infrastructure. Short-term, that means to be more patient in expecting profits. In the long-term, it could mean profits will be that much higher when (and, of course, if) they come down the road.

Looking for a reason that Amazon is issuing more debt securities? In true Rule Breaker bravado, Amazon's CFO Joy Covey said at the same conference, "We've been thinking too small here... It's time to build a foundation here for a multi-billion-dollar company." In other words, Amazon is not only swinging for the fences, but they are also hoping to hit the ball completely out of the ballpark and onto the roof across the street.

Additionally, S&P rated Amazon's $1.25 billion convertible subordinated debt offering (say that ten times fast) today with a grade of "CCC+". While this puts the company's credit rating far in the "junk" territory, it's worth noting that the company's bonds have always been considered high risk. Back in May when Amazon last hit up the bond market for some cash, its debt was rated "Caa2" by Moody's, again solidly in the high-risk, high-yield arena. The relatively poor debt rating caused many to question Amazon's business model back then, but one look at what the stock has done since May shows what those with a more conservative bent missed.

Of course, Amazon is not the type of stock for those who can't afford to take on risk since their aggressive plans carry the potential of falling flat. We expect the company to do well and reap the rewards of online commerce in the future, but the consequences are quite steep if we are wrong in our assessment. Like most Rule Breakers and homerun sluggers, Amazon is either going to hit that roof or strike out trying. Don't be mistaken, investing in the Rule Breaking style is not for everyone. Remember this portfolio's first principle, which states:

"We consciously take on lots of risk, believing that for experienced and Foolish investors, high risk will lead to high reward."

Catching up on more news released last week, Starbucks (Nasdaq: SBUX) announced that for the first four weeks of January same-store sales (SSS) at its existing stores were up 6% compared to last year. Entire sales for the same period were up 25%, reflecting the continued expansion of the company's franchise. What's encouraging is that the SSS are up even though Starbucks continues to build more and more locations. If the company's SSS started to drop we might be worried about Starbucks reaching "saturation" or (even worse) the concept being a "fad." Yet with the sales at existing stores holding up and even growing, those fears should be minimized. We'll be sure to continue to keep tabs on the SSS figures going forward.

Starbucks remains modestly below where this portfolio bought the stock back in the balmy days of July, yet we're patient. The timing of the purchase certainly wasn't the best, but we're not market timers. In fact, quite the opposite. The long run should make any timing issues irrelevant if the company can continue to profitably execute its plan.

On the earnings front, Amgen (Nasdaq: AMGN) reported on Thursday healthy earnings per share growth of 34% versus 1997's fourth quarter. Reflecting the best of both worlds, the company's yearly profits grew to $863 million from $644 million while the number of shares outstanding also decreased. The company's cash horde continues to grow (now at nearly $1.3 billion), debt remains negligible and dollars spent on research is being further extended. In short, it looks like everything is on track at Amgen, and we're rather excited to have one of the leading biotech firms in this portfolio. Biotech is, by little surprise, one of our favorite "important and emerging" industries.

Make sure to click back here tomorrow when Yi-Hsin Chang will run down the earnings results for all the Rule Breaking companies that have reported thus far. For those who enjoy getting a ton of information in a little space, it will be sure to please.

See you on the boards!

-- Paul Larson

02/01/99 Close
Stock  Change    Bid 
 ---------------- 
AMZN  -1      115.88
AMGN  -2 5/8  125.13
AOL   -4 5/8  170.63
T     +2 13/16 93.56
ATHM  -4 3/8  120.00
DJT   +  1/8    4.44
DD    -  5/16  50.94
XON   -  13/16 69.63
IP    +  7/16  40.00
IOM   +  1/8    7.25
LU    -2 1/16 110.50
SBUX  -  3/4   51.25
TDFX  -  11/16 11.94

 
                   Day   Month    Year  History  Annualized 
      R-BREAKER  -1.67%  -1.67%  10.30%  1007.04%   70.77%
        S&P:     -0.52%  -0.52%   3.88%  191.27%   26.86%
        NASDAQ:  +0.17%   0.17%  14.48%  248.54%   32.04%
 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    170.63    9286.86%
   9/9/97  1320 Amazon.com     6.58    115.88    1661.22%
  5/17/95  1960 Iomega Cor     1.28      7.25     466.23%
  10/1/96    84 LucentTech    23.81    110.50     364.13%
  8/12/96   130 AT&T          39.58     93.56     136.40%
  12/4/98   450 @Home Corp    56.08    120.00     113.98%
  4/30/97 -1170*Trump*         8.47      4.44      47.60%
 12/16/98   290 Amgen         85.75    125.13      45.92%
  2/20/98   200 Exxon         64.09     69.63       8.64%
   7/2/98   235 Starbucks     55.91     51.25      -8.33%
  2/20/98   215 DuPont        59.83     50.94     -14.87%
  2/20/98   270 Int'l Pape    47.69     40.00     -16.13%
   1/8/98   425 3Dfx          25.67     11.94     -53.49%

    Rec'd    #  Security     In At     Value      Change
   8/5/94  1100 AmOnline    1999.47 187687.50  $185688.03
   9/9/97  1320 Amazon.com  8684.60 152955.00  $144270.40
  12/4/98   450 @Home Corp 25236.13  54000.00   $28763.87
 12/16/98   290 Amgen      24867.50  36286.25   $11418.75
  5/17/95  1960 Iomega Cor  2509.60  14210.00   $11700.40
  2/20/98   200 Exxon      12818.00  13925.00    $1107.00
  8/12/96   130 AT&T        5145.11  12163.13    $7018.02
   7/2/98   235 Starbucks  13138.63  12043.75   -$1094.88
  2/20/98   215 DuPont     12864.25  10951.56   -$1912.69
  2/20/98   270 Int'l Pape 12876.75  10800.00   -$2076.75
  10/1/96    84 LucentTech  1999.88   9282.00    $7282.12
   1/8/98   425 3Dfx       10908.63   5073.44   -$5835.19
  4/30/97 -1170*Trump*     -9908.50  -5191.88    $4716.63

                              CASH  $39332.55
                             TOTAL $553518.30

</THE RULE BREAKER PORTFOLIO>

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