Rule Breaker Portfolio

<THE RULE BREAKER PORTFOLIO>

eBay Buy Report
Starting March in the Green
Plus, a forward earnings snapshot

By Paul Larson (TMFParlay@aol.com)

CHICAGO, IL (March 1, 1999) -- The Rule Breaker portfolio started the month of March with an Irish flair -- in the green. The portfolio sported a 1.83% gain versus an anemic 0.31% gain on the Nasdaq and a slight 0.18% loss in the S&P. Let's hope that the good performance carries through the rest of the month so that we have plenty to celebrate about on "our" holiday -- April Fool's.

Today we saw one of the Rule Breaker stocks do the splits when Amgen (Nasdaq: AMGN) started trading this morning at roughly half the price at which it ended Friday. Do we place any significance to these splits? Not really. I always say that having your stock split is like getting two $10 bills for a $20 bill. You may have twice as much paper, but it isn't worth any more than before. Last week David said buying a stock before a split is like eating a pizza before it's been sliced. Make sure to check the archives for this interesting column on the subject.

Amgen is not the only stock doing the splits this week. After the close today eBay (Nasdaq: EBAY) will split its shares 3-for-1. That means tomorrow morning the price of the stock will be roughly a third of what it ended trading at today, but the value of the company will ultimately be the same.

eBay started the morning on a weak note as news of further federal investigations into illegal transactions at the site surfaced, knocking the stock as low as $306 1/4 on the news. Make sure to check out this morning's Breakfast with the Fool for more information on the situation. The market seemed to shrug the news off by the afternoon as the stock was bid up to $354 1/4. However, eBay took a nosedive in the last hour of trading and ended at $323, down $11 on the day. eBay is the name, volatility is the game.

Some may be wondering how the portfolio was fortunate enough to buy eBay near its daily low on Friday. After seeing a similarly fortunate trade in Yahoo! (Nasdaq: YHOO) over in the Rule Maker portfolio, some may think that we have a bright future as day traders and market timers. Nevertheless, let me assure you that the timing of the eBay and Yahoo! purchases was nothing more than simple luck. If one doesn't believe in our inept timing skills, just look as far as where we purchased Starbucks (Nasdaq: SBUX) or 3Dfx (Nasdaq: TDFX). Both companies were bought at darn close to their daily and weekly (as well as yearly) highs.

On this comparatively quiet Monday I thought it would be of interest to take inventory of where the Rule Breaker stocks are trading relative to their forward earnings estimates. Like a picture, a table is worth a thousand words:


            Fwd EPS Estimate    Fwd P/E
Trump       ($1.85)                  NA
Amazon      ($0.92)                  NA
@Home       ($0.09)                  NA
eBay         $0.24              1,345.8 
AOL          $0.65                137.3
Starbucks    $1.21                 44.5
Chevron      $3.15                 24.1
Iomega       $0.30                 20.4
DuPont       $2.78                 18.9
Amgen        $1.86                 35.4
3Dfx         $0.68                 16.6
Caterpillar  $3.64                 13.5
Goodyear     $4.39                 11.0

All of the earnings estimates here are for fiscal years ended in December of 1999. The two exceptions are AOL and Starbucks. The AOL estimate is for the fiscal year ended in June of 1999, while Starbucks has a fiscal year that ends in September. All of the estimates are available for free here at Fool.com through the revamped portfolios feature. Just click the "estimates" link for the latest earnings information from I/B/E/S. When the Fool was first started back in 1994 this information was difficult and quite expensive to come by. Nowadays, the data is at the "right" price.

In any case, the above table is sorted from the most expensive to the cheapest stock in terms of forward earnings estimates. It should come as little surprise that those at the top of the list tend to have the brightest prospects going forward while those at the bottom tend to either have slower growth or some distinct uncertainties going forward. The obvious exception to this trend is Trump (NYSE: DJT) since the company has meager growth prospects and is expected to show losses for the foreseeable future. Such is the nature of analyzing P/E ratios for companies with no "E" to look at.

Unlike some of the other portfolios in Folly, the Rule Breaker method does not worry much about current valuation. For those who love finding the disparities between current price and intrinsic value, let me suggest the Boring portfolio. Here in the Rule Breaker portfolio we look at valuation with some sort of vague interest, but it is the quality of the company and the ability to make a profit in the future that concerns us most. From looking at numbers alone, especially P/E ratios, it's almost impossible to tell what industries are important and emerging and what companies have sustainable advantages in those industries. A completely different kind of homework is needed to get that kind of information.

And if you don't like doing homework at all, you've got company. Harry is our resident expert at portfolio management sans number crunching or getting to know companies.

Hope to see you on the Rule Breaker message board!

Be Foolish!

-- Paul Larson

Will Harry Jones surprise us with a buy report today? Doubtful.

03/02/99 Close
Stock  Change    Bid 
 ---------------- 
AMZN  -11 11/16  121.31
AMGN  -  1/4   64.00
AOL   -2 3/4   86.63
ATHM  +8 7/16 115.56
DJT     ---     4.25
CHV   -  3/8   75.69
CAT   -1 3/4   47.44
DD    -1 1/8   51.31
GT    -  1/4   48.00
IOM   -  1/16   6.06
SBUX  +  7/8   54.75
TDFX  +  9/16   11.88
EBAY  +9  7/16   117.06

 
                   Day   Month    Year  History  Annualized 
      R-BREAKER  -2.69%  -0.91%  12.55% 1029.63%   69.94%
        S&P:     -0.86%  -1.04%   0.02%  180.90%   25.34%
        NASDAQ:  -1.58%  -1.27%   3.03%  213.68%   28.41%


    Rec'd    #  Security     In At       Now      Change
   8/5/94  2200 AmOnline       0.91     86.63    9431.28%
   9/9/97  1320 Amazon.com     6.58    121.31    1743.87%
  5/17/95  1960 Iomega Cor     1.28      6.06     373.48%
  12/4/98   450 @Home Corp    56.08    115.56     106.07%
  4/30/97 -1170*Trump*         8.47      4.25      49.82%
 12/16/98   580 Amgen         42.88     64.00      49.27%
  2/26/99   300  eBay        100.53    117.06      16.45%
  2/23/99   300 Caterpilla    46.96     47.44       1.01%
  2/23/99   290 Goodyear T    48.72     48.00      -1.47%
   7/2/98   235 Starbucks     55.91     54.75      -2.07%
  2/23/99   180 Chevron       79.17     75.69      -4.40%
  2/20/98   260 DuPont        58.84     51.31     -12.80%
   1/8/98   425 3Dfx          25.67     11.88     -53.74%

    Rec'd    #  Security     In At     Value      Change
   8/5/94  2200 AmOnline    1999.47 190575.00  $188575.53
   9/9/97  1320 Amazon.com  8684.60 160132.50  $151447.90
  12/4/98   450 @Home Corp 25236.13  52003.13   $26767.00
 12/16/98   580 Amgen      24867.50  37120.00   $12252.50
  5/17/95  1960 Iomega Cor  2509.60  11882.50    $9372.90
  2/26/99   300  eBay         30158  35118.75    $4960.75
  4/30/97 -1170*Trump*     -9908.50  -4972.50    $4936.00
  2/23/99   300 Caterpilla 14089.25  14231.25     $142.00
  2/23/99   290 Goodyear T 14127.38  13920.00    -$207.38
   7/2/98   235 Starbucks  13138.63  12866.25    -$272.38
  2/23/99   180 Chevron    14250.50  13623.75    -$626.75
  2/20/98   260 DuPont     15299.43  13341.25   -$1958.18
   1/8/98   425 3Dfx       10908.63   5046.88   -$5861.75

                              CASH   $9924.87
                             TOTAL $564813.62

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 in the yearly, historic and annualized returns). For a history of all transactions, please click here.

</THE RULE BREAKER PORTFOLIO>

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