<THE RULE BREAKER PORTFOLIO>
AOL's Earnings and My NYSE Meeting
Sisylana pays a visit
By David Gardner (MotleyFool)
ALEXANDRIA, VA (April 27, 1999) -- The Rule Breaker portfolio lost 1.35% in value today, which compares quite unfavorably with the S&P 500 (up 0.20%), though favorably with the NASDAQ, which lost 1.88% in value.
After market close, America Online (NYSE: AOL) announced its third-quarter earnings, reporting profits of 11 cents per share -- two cents ahead of analysts' mean estimates. The company's quarterly revenue came in at $1.3 billion, about $300 million of which were Netscape's. Other AOL revenues, including advertising and e-commerce, were $275 million.
Of this report, Donald Selkin, chief market strategist at Joseph Gunnar & Company, had this to say: "Well, the whisper number was around $0.11 a share. I think the stock will be all right, because it sold off today. So this number won't take the stock to a new high, but it should make back some of the losses today. The stock could probably get back into the $160's tomorrow."
Y'know, I hadn't realized that the job of the analyst today was to help us daytrade the market. Is this what "analysis" is all about these days -- speculating about so-called whisper numbers and then speculating further about how the stock will be affected 24 hours later? If that's analysis, give me sisylana.
You've heard of sisylana, right? It's the very opposite of analysis, the analysts' antipodes! It involves some distance, some perspective, a deep breath or two, a continual view of the big picture. Sisylana is a beautiful sight. She guides investors to make good decisions, and to stay focused on the long-term growth, rather than the short-term focus on whether something shouted down the whispers or not.
Now, I understand that investors tightly focus their lenses on quarterly earnings reports. And I hope I don't sound too harsh when I point out the inherently, incorrigibly, incredibly short-term viewpoint that most analysts maintain. Some of my best friends are analysts. In fact, I should probably be seeing one right now. Heck, even our public companies themselves seem to be playing the analysts' game. If you read America Online's press release over Business Wire, you'll see that in the second paragraph the company actually points out that it beat the First Call consensus estimate of nine cents per share. I'm not sure what Sisylana would think of that.
When you look back at our initial purchase report for America Online, penned in August 1994, you'll see that America Online's trailing twelve-month revenues were, at that point, just $104 million. Sisylana sees the growth from a perspective many analysts probably do not -- but then again, many analysts weren't even thinking of this stock in 1994.
AOL now has 19 million paying customers around the world. Subscription revenue was $869 million, a 50% gain over the comparable quarter last year. Those are regular recurring monthly payments, almost pure cash flow, a lot of money increasing at an impressive growth rate. Those revenues do not include advertising or commerce. So yep, we are going to continue to hold these shares. In fact, to go back again to that 1994 report:
"...we see at least a decent chance that AOL could dominate cyberspace in the coming decade, as Microsoft has come to dominate software."
"BUY AND HOLD, HOLD, HOLD. Because of its high Fool Ratio, America Online could get clipped in the near-term, making it a risky play. If the Market remains weak and hostile to technology, AOL shareholders might feel some pain. But we are buying, and we are holding. And holding. And holding. Because when we come to like a company and its situation this much, we're very unlikely to let go, inside of a decade."
It hasn't been five years, yet. AOL was down $5 today.
Another loser was 3Dfx (Nasdaq: TDFX), which -- since bypassing the $20 level -- has come screeching back to the mid-teens. Earnings are due out on the company in two weeks. It will be very interesting to see how 3Dfx is faring, having shifted its business model.
Starbucks was today's biggest winner, up 13% to close at $39. Once down more than 50% for this portfolio, our SBUX investment has now gained 40% overall -- a nifty 10-month return that is handily beating the market. Why the big move? Well, the market may be getting more excited about the company's mysterious entrance into Internet businessdom, as announced just a few days ago. Before the end of the quarter, CEO Schultz informs us, we'll know what this non-coffee, multi-billion-dollar business that leverages Starbucks's existing network of cafes will be.
The NYSE Individual Investor Advisory Meeting
Changing gears, I have been wanting for the past couple weeks to let you know how my meeting at the New York Stock Exchange went. Regular readers will know that I was invited to be on the Individual Investor Advisory Committee of the New York Stock Exchange (NYSE), essentially invited as your advocate.
In my Rule Breaker recap of April 7th, I had invited your suggestions for topics I could bring up before the committee. You were very helpful in this regard; I have many to thank for the ideas and concerns put forth.
I attended the meeting with a list of three top items. In no particular order, they were:
- No selective disclosure by NYSE companies.
- Open hours of trading for all.
- Decimals, not fractions!
(I put an exclamation point on that last one to reveal my own feelings.)
First off, I was a newcomer to the committee, so much of my time was spent getting up-to-speed with the role of the committee, how the NYSE worked, etc. The meeting was, in fact, primarily handled by Dick Grasso, the dynamic and entertaining chairman of the exchange. Mr. Grasso gave a thoroughgoing recitation of the state of the Exchange today, where I learned that the NYSE is more focused on globalization and international expansion than I had previously realized. While the NYSE has a market capitalization well in excess of the Nasdaq, the world equities markets are capitalized at many times the NYSE's total cap, so the exchange is very focused on welcoming foreign companies to trade in New York.
Decimals are presently expected to be implemented by next spring, which represents a delay of about a year from initial expectations. Still, this will be a welcome and permanent change when it comes. No more trying to figure out what 37/64ths are when you're doing your own accounting.
Much discussion occurred on the subject of trading hours, mainly on the likelihood of expanded hours being a long-term trend as the global markets unite. I think this is fine -- though as a Fool, I don't particularly care. In only the rarest of cases do I make even 10 trades a year -- and during those trading moments, I generally don't care whether it's 10:00 a.m. or 10:00 p.m.
Many of you wrote with the hope (and perhaps expectation) that if and when after-hours trading is opened to all individuals, we'll never miss an uptick or downtick on any of our stocks again. So that if our company announces bad earnings, we'll be able to get out right then (say, at night), rather than the next morning at $7 per share less. What's being missed here is that the $7 drop you see is something suffered by everyone -- it's a "spot auction" in the morning where the market maker matches all his buy and sell orders on the spot at a new price that everyone gets. There is no opportunity to get out $1/8 below the day's previous close. The after-hours trading you see done later at night on low volume suffers the same volatility, and as it's not floor-of-the-exchange trading with floor-of-the-exchange liquidity, the prices are notoriously unreliable (as anyone who follows after-hours quotes knows).
The meeting ran very long, without much opportunity for questions or discussion. I'm going to make sure there's more time for that next time, and in fact the administrators on the committee made it clear that committee members could raise key issues ahead of time, next time, to get them on the agenda. But I did get to ask my question about selective disclosure.
I said that it's not a matter of hoping that the SEC will do something about this (the SEC has been notoriously slow on this issue -- an issue that has been championed by The Motley Fool and discussed prominently at fool.com for years now). Eventually, it probably will. SEC regulators constantly mention that they're looking into regulating Internet activities (brokers, discussion, etc.), but I wish they were less interested in increased regulation and more interested in enforcing the laws that were set up with the commission in 1934.
Anyway, I asked the NYSE to make a strong statement asking its member companies to open up conference calls and any other behind-closed-door information sessions with analysts. To many in the room, I believe this idea was quite shocking, but it was enough in my first meeting to make the statement and get the committee focused on this inequity in our equity markets.
So decimals are coming, more after-hours trading is coming, and selective disclosure is melting. These trends all benefit you and me, and we will watch them closely in the future. I will raise these issues again at our next meeting, to study the progress. Meantime, if any of you is interested in learning more about the NYSE, the website (improving) is www.nyse.com -- there is a lot of educational info up there. Also, now that I have an "in," consider it YOUR "in." If you have a particular topic or question you'd like me to raise (even in advance of the meeting, as I can make phone calls for us), please drop a note to our Rule Breaker Portfolio message board.
Final line (long report -- phew!): A nice review of our book, Rule Breakers, Rule Makers, appears in today's Wall Street Journal on the front page of section C. While it's probably too much to expect that the author would mention this portfolio's 1692% historic gain (versus 211% for the S&P 500 -- which beats 92% of all mutual funds), I ain't gettin' greedy. Seriously, though, I'd like to thank Mr. Clements for actually taking the time to read and think about our book. Having now been an author of four books, I can tell you that it's not every reviewer who actually reads them!
David Gardner, April 27, 1999
Day Month Year History Annualized R-BREAKER -1.35% 12.32% 78.52% 1691.77% 84.17% S&P: +0.20% 5.94% 11.18% 210.85% 27.13% NASDAQ: -1.88% 5.71% 18.68% 261.33% 31.24% Rec'd # Security In At Now Change 8/5/94 2200 AmOnline 0.91 155.00 16954.52% 9/9/97 1320 Amazon.com 6.58 205.88 3029.16% 5/17/95 1960 Iomega Cor 1.28 5.03 292.94% 12/4/98 450 @Home Corp 56.08 154.25 175.05% 2/26/99 300 eBay 100.53 209.25 108.15% 12/16/98 580 Amgen 42.88 69.75 62.68% 4/30/97 -1170*Trump* 8.47 4.38 48.34% 7/2/98 470 Starbucks 27.95 39.00 39.51% 2/23/99 300 Caterpilla 46.96 63.56 35.34% 2/23/99 180 Chevron 79.17 98.94 24.97% 2/20/98 260 DuPont 58.84 69.13 17.47% 2/23/99 290 Goodyear T 48.72 54.25 11.36% 1/8/98 425 3Dfx 25.67 16.25 -36.69% Rec'd # Security In At Value Change 8/5/94 2200 AmOnline 1999.47 341000.00 $339000.53 9/9/97 1320 Amazon.com 8684.60 271755.00 $263070.40 12/4/98 450 @Home Corp 25236.13 69412.50 $44176.37 2/26/99 300 eBay 30158.00 62775.00 $32617.00 12/16/98 580 Amgen 24867.50 40455.00 $15587.50 5/17/95 1960 Iomega Cor 2509.60 9861.25 $7351.65 7/2/98 470 Starbucks 13138.63 18330.00 $5191.38 2/23/99 300 Caterpilla 14089.25 19068.75 $4979.50 4/30/97 -1170*Trump* -9908.50 -5118.75 $4789.75 2/23/99 180 Chevron 14250.50 17808.75 $3558.25 2/20/98 260 DuPont 15299.43 17972.50 $2673.07 2/23/99 290 Goodyear T 14127.38 15732.50 $1605.13 1/8/98 425 3Dfx 10908.63 6906.25 -$4002.38 CASH $9924.87 TOTAL $895883.62Note: 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>