Rule Breaker Portfolio

<THE RULE BREAKER PORTFOLIO>

Blodget Heads Back Up the Amazon

By Louis Corrigan (TMFSeymor@aol.com)

ATLANTA, GA (Feb. 19, 1999) -- The mighty Rule Breaker today snapped its market-lagging ways of late, snagging a 4.9% gain thanks to a bounce in its portfolio of Internet-related issues. Amazon (Nasdaq: AMZN) flowed 13.8% higher to $101 7/8. @Home (Nasdaq: ATHM) cabled together a 3.8% increase to $100 3/4. America Online (NYSE: AOL) expanded nearly 3.0% to $160 3/8. Lucent (NYSE: LU) lighted up for a 2.0% gain to $103. And Starbucks (Nasdaq: SBUX), the official coffee of Internet junkies, jolted ahead 3.1% to $48 3/8. Among the day's clunkers was the portfolio's sole short-sale, Da Donald, eh, Trump (NYSE: DJT), which ended up fractionally after flirting with an Internet-sized gain.

Was there any real news on the horizon? Not much that I can see. Iomega's (NYSE: IOM) little 2% bounce to $6 1/2 might owe something to the fact that the partnership announced Wednesday evening between computer disk drive maker Western Digital (NYSE: WDC) and thin film media supplier Komag (NYSE: KMAG) might give Iomega a little more power over HMT Technology (Nasdaq: HMTT), one of its major suppliers. Then again, Iomega has been sliding, and maybe today was just its day to climb up those playground stairs again.

A change of heart by the now famous Henry Blodget, CIBC Oppenheimer's Internet analyst, seemed to be the trigger for today's Internet rally. On December 16, Blodget made a name for himself when he issued a 12-month price target on Amazon of $133.3 ($400 prior to the 3-for-1 stock split). That call was based on some optimistic though not wholly ridiculous growth projections. Prior to that, Amazon was trading at a lowly $80, an all-but-ignored stock (okay, not really). Less than a month later, Amazon shares blew by Blodget's target on the way to a January 8 intraday high near $200.

Having made his clients a ton of money in less than a month, Blodget bought his own Caribbean island and spent a week celebrating with a free-flowing rum punch and a cast of supermodels fresh from Sports Illustrated's annual swimsuit shoot. When he finally returned to reality, that is, New York, Blodget looked out on what he had wrought, and unlike God on the seventh day, declared, "Yikes." (Poetic license applied for.)

Actually, he considered the sequential dip in gross margins revealed in Amazon's preliminary fourth quarter sales report. Then he checked out the new atCost site launched January 19 by online auctioneer Onsale (Nasdaq: ONSL). He saw the ingredients for an e-commerce price war, which he thought could really "let the wind out of the sails of Amazon for a while," according to The Wall Street Journal. His note of caution contributed to Amazon's recent sell-off.

Today, Blodget changed his tune again, making me wonder if he plans to do this monthly. In a research note to institutional clients, he said the recent pullback in leading Net names like Amazon and Yahoo! (Nasdaq: YHOO) makes this "a good opportunity for long-term investors to begin accumulating the stocks (accumulate -- not 'bet the farm;' the stocks could easily pull back further)."

Valuing dynamic, high-growth businesses can be a high-volatility sport. Blodget's words were a tonic, perhaps even a gin and tonic, for Internet investors who had watched some of the big names give back their recent gains after the board at Lycos (Nasdaq: LCOS) decided that company wasn't really worth what investors had thought. While Blodget's words may sound like the crassly opportunistic call of a fair-haired chameleon, they're actually pretty logical. With Amazon at $89 1/2 yesterday -- about 55% off its high, 49% below his 1999 price target, and just 12% above its price when he made his original call in December -- the risk-reward looked a lot more attractive today than it did just a month ago.

Since Blodget's views appear to be having a disproportionate affect on the Internet issues, it's worth learning a little more about his overall perspective. In his research note today, he suggests that long-term Internet investment dollars should be mostly in Amazon, Yahoo!, AOL, and Microsoft (Nasdaq: MSFT), with @Home, eBay (Nasdaq: EBAY) and DoubleClick (Nasdaq: DCLK) among other "names that we like." He recommends that investors "buy a basket" of the leading Internet contenders "rather than one or two" on the theory that one or more should attain a "multi-hundred billion dollar" market cap down the road. He just doesn't know which one. Together, the Rule Breaker and Rule Maker ports now own five of his seven top names.

All of this, of course, is just interesting chitchat that doesn't tell us anything new about these businesses or their business models. For some wild-eyed speculation about Amazon's future business model, you might check out Thursday's Fool on the Hill column, where I ponder the possibility of an Amazon operating with zero gross profit margins. (Send flames to the Fool on the Hill message board.)

Still, it's worth noting that the Rule Breaker portfolio might become even more volatile than usual over the next few months. As Blodget mentions in today's research report, some 30 plus pure-play Internet ventures hope to go public in the next six months. Some believe the number will be more like 60, assuming a receptive market. That could add $50 billion or more (maybe much more) in market cap to the Internet sector. Assuming a fixed demand for Internet issues -- which may be a faulty assumption -- such an increased supply alone could put some pressure on stocks throughout the sector.

Yet, investors looking to diversify into a group of leading names in this growing area of the economy should be less concerned about timing their purchases and more concerned about selecting the companies and thinking about where this medium is moving. Along those lines, be sure to check out the Rule Maker's buy report on Yahoo!, Nico's feature this week on the promise of the Internet, and Yi-Hsin's StockTalk interview with DoubleClick's CEO Kevin O'Connor. And have a splendid weekend.

Today, Harry Jones on spinach.

02/19/99 Close
Stock  Change    Bid 
 ---------------- 
AMZN  +12 3/8 101.88
AMGN  +  5/8  124.13
AOL   +4 1/2  160.38
T     -  3/16  85.69
ATHM  +3 11/16 100.75
DJT   +  1/16   4.38
DD    +  7/8   52.56
XON   -  3/8   68.50
IP    +  3/8   42.06
IOM   +  1/8    6.50
LU    +2      103.00
SBUX  +1 7/16  48.38
TDFX  +  1/16  11.13

 
                   Day   Month    Year  History  Annualized 
      R-BREAKER  +4.93%  -9.15%   1.91%  922.84%   66.85%
        S&P:     +0.15%  -3.16%   1.13%  183.89%   25.82%
        NASDAQ:  +1.01%  -8.88%   4.14%  217.07%   28.92%
 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    160.38    8722.96%
   9/9/97  1320 Amazon.com     6.58    101.88    1448.43%
  5/17/95  1960 Iomega Cor     1.28      6.50     407.65%
  10/1/96    84 LucentTech    23.81    103.00     332.63%
  8/12/96   130 AT&T          39.58     85.69     116.50%
  12/4/98   450 @Home Corp    56.08    100.75      79.65%
  4/30/97 -1170*Trump*         8.47      4.38      48.34%
 12/16/98   290 Amgen         85.75    124.13      44.75%
  2/20/98   200 Exxon         64.09     68.50       6.88%
  2/20/98   270 Int'l Pape    47.69     42.06     -11.80%
  2/20/98   215 DuPont        59.83     52.56     -12.15%
   7/2/98   235 Starbucks     55.91     48.38     -13.48%
   1/8/98   425 3Dfx          25.67     11.13     -56.66%

    Rec'd    #  Security     In At     Value      Change
   8/5/94  1100 AmOnline    1999.47 176412.50  $174413.03
   9/9/97  1320 Amazon.com  8684.60 134475.00  $125790.40
  12/4/98   450 @Home Corp 25236.13  45337.50   $20101.37
 12/16/98   290 Amgen      24867.50  35996.25   $11128.75
  5/17/95  1960 Iomega Cor  2509.60  12740.00   $10230.40
  10/1/96    84 LucentTech  1999.88   8652.00    $6652.12
  8/12/96   130 AT&T        5145.11  11139.38    $5994.27
  4/30/97 -1170*Trump*     -9908.50  -5118.75    $4789.75
  2/20/98   200 Exxon      12818.00  13700.00     $882.00
  2/20/98   270 Int'l Pape 12876.75  11356.88   -$1519.88
  2/20/98   215 DuPont     12864.25  11300.94   -$1563.31
   7/2/98   235 Starbucks  13138.63  11368.13   -$1770.50
   1/8/98   425 3Dfx       10908.63   4728.13   -$6180.50

                              CASH  $39332.55
                             TOTAL $511420.49

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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