Rule Breaker Portfolio

<THE RULE BREAKER PORTFOLIO>

$5,000 Homeruns
Plus, a Magic Fool Tour

by Jeff Fischer (TMFJeff@aol.com)

ALEXANDRIA, VA (Feb. 18, 1999) -- The stock market strikes a brick wall every day at 4:00 p.m. (Eastern) when trading halts; for us, however, it seemed to hit a brick wall this morning. It was a humdrum day for many of our stocks; for others, it was a "let's fall down" day.

Amazon
(Nasdaq: AMZN) lead the rainy parade as it continued its recent stumble. It's intuitive to watch the stock fall several days straight and think "what a sorry sight," but one year ago Amazon traded at only $10, and as recently as November 13, it was only $37. In that light, today's $89 price still represents a tremendous return -- even over the meaningless short term.

The company is now valued at about $17 billion, down from its high valuation of over $36 billion reached five weeks ago, on January 8. Since Amazon should achieve sales of over $1 billion this year, the stock is at 17 times its revenue run-rate (the past quarter's revenue multiplied by four). What does that mean? Not much in the immediate, but this valuation looks much more "reasonable" than it did in January.

For comparison only, America Online (NYSE: AOL) is valued at over $74 billion and trades at 25 times trailing 12-month sales and 18.5 times its revenue run rate. AOL is profitable, of course, and it easily deserves a higher multiple to sales than Amazon.

As for valuation, however: both of these companies continue to be Rule Breakers, so under Rule Breaker protocol, we aren't very concerned about valuation. These companies represent open situations, which makes it difficult to value them in the near term. The possibilities available to both companies are limited only by management's ability to capture (as opposed to missing) the opportunities as presented.

Imagine the Internet as a young North America. The entire landscape (a mere few years ago) was free of formal business and commerce. It was (and still is) an oil well waiting to be hit, especially as more and more people migrate online. Amazon and AOL have already struck several gushing wells of success. Now, using the equity created from early victories, both companies can increase their stature and reach much more easily than newcomers or lesser competitors. The same is true of Amgen (Nasdaq: AMGN), except Amgen is mining the biotech landscape, not Internet Country.

What's New with Rule Breaker Port?

We still believe in all of our holdings, otherwise we'd dump 'em after finding someplace better to invest the cash. Speaking of cash, we're working on a new buy report in which to deploy our remaining cash on hand. We were actually prepared to buy biotech Agouron Pharmaceuticals (Nasdaq: AGPH), but somebody beat us to it. That somebody was Warner-Lambert (NYSE: WLA), which announced that it's paying $2.1 billion for all of Agouron. We were simply going to buy $25,000 worth of the company.

So, now we're working on a new buy that will slurp up much of our cash. Some of our money will also be used when we make our Foolish Four switch next week, and the remainder is what we'll need to cover our Trump Hotels (NYSE: DJT) short, unless Trump goes to zero.

For newer readers who want to learn more about the Rule Breaker -- how we search for Rule Breaking stocks, and the guidelines under which the portfolio invests -- please see our five principles (listed in the top right of this page) beginning with Principle One. After you've read those, visit the Rule Breaker message board (join the community!) and see the FAQ page there. That answers other common questions related to this portfolio.

Regarding the Rule Breaker message board: it frequently discusses potential Rule Breakers. For example, is DoubleClick (Nasdaq: DCLK) a Rule Breaker? The Fool just interviewed its co-founder and CEO. Give the interview a gander.

News of the Day

Hey, batter batter! Hey, batter! Swing!

What was Mark McGwire's homerun secret last year? Apparently it was Starbucks (Nasdaq: SBUX) coffee.

Next year, Starbucks will donate $5,000 for every homerun that McGwire slugs over the wall. Starbucks will donate the money to a children's charity in the host city where the ball game is played. The company guarantees that donations will total at least $250,000 for the season. (You know what that means? It means Starbucks is admitting that McGwire could hit fewer than 50 homeruns this season! Man! After hitting 70 last year.) An amusing incident brought this arrangement to being, as explained in the Starbucks press release.

Getting Lost on the Fool?

Visit the Fool's site map. And if you're a new Fool (or even a very seasoned Fool), tonight embark upon a great, automatic and amusing tour of the Fool site. It's an excellent way to learn what the Fool offers on its varied website -- all of it free. (Except, of course, for FoolMart.)

Finally, why not check in with the Harry Jones portfolio before you logoff this evening; and Drip Port considers beaten-down Campbell Soup (NYSE: CPB).

Fool on!

Harry Jones missing?

02/18/99 Close
Stock  Change    Bid 
 ---------------- 
AMZN  -4       89.50
AMGN  +1      123.50
AOL   +3      155.88
T     +1 5/8   85.88
ATHM  -2 15/16 97.06
DJT   +  1/8    4.31
DD    -  13/16 51.69
XON   +  1/4   68.88
IP    +1 3/16  41.69
IOM   +  3/16   6.38
LU    +4 3/4  101.00
SBUX  +  3/8   46.94
TDFX  -  3/16  11.06

 
                   Day   Month    Year  History  Annualized 
      R-BREAKER  -0.40% -13.42%  -2.88%  874.80%   65.14%
        S&P:     +1.08%  -3.31%   0.97%  183.47%   25.80%
        NASDAQ:  +0.52%  -9.79%   3.09%  213.89%   28.66%
 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    155.88    8475.40%
   9/9/97  1320 Amazon.com     6.58     89.50    1260.34%
  5/17/95  1960 Iomega Cor     1.28      6.38     397.89%
  10/1/96    84 LucentTech    23.81    101.00     324.23%
  8/12/96   130 AT&T          39.58     85.88     116.98%
  12/4/98   450 @Home Corp    56.08     97.06      73.08%
  4/30/97 -1170*Trump*         8.47      4.31      49.08%
 12/16/98   290 Amgen         85.75    123.50      44.02%
  2/20/98   200 Exxon         64.09     68.88       7.47%
  2/20/98   270 Int'l Pape    47.69     41.69     -12.59%
  2/20/98   215 DuPont        59.83     51.69     -13.61%
   7/2/98   235 Starbucks     55.91     46.94     -16.05%
   1/8/98   425 3Dfx          25.67     11.06     -56.90%

    Rec'd    #  Security     In At     Value      Change
   8/5/94  1100 AmOnline    1999.47 171462.50  $169463.03
   9/9/97  1320 Amazon.com  8684.60 118140.00  $109455.40
  12/4/98   450 @Home Corp 25236.13  43678.13   $18442.00
 12/16/98   290 Amgen      24867.50  35815.00   $10947.50
  5/17/95  1960 Iomega Cor  2509.60  12495.00    $9985.40
  10/1/96    84 LucentTech  1999.88   8484.00    $6484.12
  8/12/96   130 AT&T        5145.11  11163.75    $6018.64
  4/30/97 -1170*Trump*     -9908.50  -5045.63    $4862.88
  2/20/98   200 Exxon      12818.00  13775.00     $957.00
  2/20/98   270 Int'l Pape 12876.75  11255.63   -$1621.13
  2/20/98   215 DuPont     12864.25  11112.81   -$1751.44
   7/2/98   235 Starbucks  13138.63  11030.31   -$2108.31
   1/8/98   425 3Dfx       10908.63   4701.56   -$6207.06

                              CASH  $39332.55
                             TOTAL $487400.61

Note: The Rule Breaker Portfolio was launched on August 5, 1994, with $50,000. Additional cash is never added, all transactions are shared and explained publicly before being made, and returns are compared daily to the S&P 500 (including dividends). For a history of all transactions, please click here.

</THE RULE BREAKER PORTFOLIO>

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