<THE RULE MAKER PORTFOLIO>
The Oncoming King
By Tom Gardner ([email protected])
ALEXANDRIA, VA (Feb. 23, 1999) -- Yahoo! finished strong again today, up $7 to $152. That means that in less than a week, we've made 21% -- or more than $430 on our investment. But so what?
As you can imagine, I consider the relationship between the stock's run-up and our recent purchase to be nothing more than a wonderful coincidence, a stroke of pure luck. Some may say that -- by reading charts, studying trading-volume patterns, and following the alignment of the planets -- they knew, with near certainty, that the stock was prepped for a 21% rebound in the days that followed our purchase.
I can't make those claims, though.
Hey, maybe there are traders that can call short-term prices with accuracy. And maybe, after adjusting for all trading costs and capital gains taxes, these traders can still beat the market. And maybe, by trading stocks each hour and each week, by paying down the commissions, paying the accountant to untangle their statements, paying Uncle Sam the short-term capital gains taxes, and paying the time out of their life toward this endeavor, these traders actually will beat the market and enjoy the adventure of it.
I'm just not one of them.
To my eye, it must be easier and more enjoyable to attempt to predict, with exactness, the direction of a butterfly in a stiff breeze than the daily path of stock prices in an open market. Even if I could achieve it, I'd have all those costs to assume -- costs which, in one clear case, the financial industry wants to have me carry (namely, trading commissions -- their source of profit). Because of that, I'm never surprised to hear the leaders on The Street suggesting that we trade, willy nilly, to preserve and extend wealth.
The question is -- whose wealth?
In our quest to preserve and extend our own wealth, your Rule Maker managers believe they should spend their time assessing the prospects for business growth in industries with fat margins and tens of millions of regular customers, and largely ignore short-term price. This means that since we believe in Yahoo!'s long-term prospects, we could easily have purchased our Yahoo! shares five weeks ago at $175 rather than last week at the discounted price of $125 per stub.
Now, I know how callous that sounds. Here I've suggested that we would have invested our latest $2,000 into Yahoo!, without batting an eye at the 40% swing in the value of the company. That's a few-week difference in the company's capitalization of $9.8 billion. That's either starting where we did, or starting 40% in the hole -- and, yes, we are willing to assume that pricing risk to invest in what we consider to be the best companies in important and expanding markets.
I understand that this degree of price insensitivity appears to be highly irresponsible. And given that, I'd like to do my level best to explain, in this specific situation, why the near-term valuation of Yahoo!'s stock meant relatively little to us.
First of all, you should know that, when buying, we did and do take into account the value of a business relative to others in its market. We like to get that broad context. And, on February 17th, when we bought our Yahoo! shares, here are the relative values we saw in the converging sector of media and technology:
Tech/Media Values, 2/17/99 Time Warner $76.6 billion AOL $74.7 billion Disney $72.5 billion CBS $26.1 billion Yahoo! $24.8 billion Gannett $18.4 billion
At the time of our purchase, Yahoo! was valued at $6 billion more than the parent of the USA Today newspaper (Gannett) and around $50 billion less than Disney, America Online, and Time Warner. Upon first glance, that seems way out of whack. The investing community seems to have been unable to distinguish diamonds from marbles in a dish on the floor. America Online? Yahoo!? What!?
How, for instance, can a recent upstart like America Online (NYSE: AOL) be priced more dearly than Walt Disney (NYSE: DIS)? Disney has been in business for more than seventy years, has more than 115,000 employees, and is home to brands like ESPN, ABC Television, Miramax Films, Mickey Mouse, the Disney Channel, Disney World, Disneyland, Hyperion Publishing, Infoseek, and go.com. How can America Online, a company that "wasn't making any money" three years ago, be valued more richly than Disney?
Taking it one step further, how can Yahoo! be priced in the same range as CBS Television? CBS has the rights to AFC Football games; it's got Ted Danson as Becker; it is home to The David Letterman Show; it owns stakes in CBS Sportsline and CBS Marketwatch; it owns fourteen television stations; it owns two cable networks; it owns most of Infinity Broadcasting -- with its more than 160 leading radio stations. How can Yahoo!, with just 700 employees and less than three years as a public company, be worth as much as CBS?
My answer is that the Internet is taking over as the medium to absorb all mediums. The public markets are recognizing this. And, as investors are inclined to do, they are rewarding financial location and forward direction far more than a company's historical standing, its traditional brands, and its assets under management today.
In fact, the declining value of non-cash assets has always been a part of our public-market system, becoming most evident back in 1986 with Microsoft (Nasdaq: MSFT). The markets are beginning to recognize that heavy assets are a disadvantage to a business, not an advantage. They slow down the runner. They weigh down the growth. They impede a fast transition. Today, 88% of Microsoft's $21 billion in current assets are cash. And the software giant has cash equivalent to 13 times more the value of its property and equipment.
A light business. A heavy load of cash. A rapidly expanding base of tens of millions of weekly customers, with worldwide potential. In the convergence of technology and media, I think you want to bet on the technology leaders that are tasting interactivity, not the media companies that have to shed their heavy assets.
To close tonight, minimize your emotional reaction (if you had one) to seeing AOL valued more dearly than Disney, and glance at our six companies above, ranked according to profitability, cash, and long-term debt. I've listed them according to my sense of ascending values. What order do you place them in?
Net Margin Cash Debt Yahoo! 30% $0.5 bil. $0 AOL 13% $1.5 bil. $0.4 bil. Disney 8% $1.2 bil. $11.0 bil. T.Warner 2% $0.4 bil. $9.0 bil. Gannett 14% $0.1 bil. $1.3 bil. CBS 0% $0.1 bil. $4.8 bil.
Take a close look at those numbers.
To my thinking, Yahoo! is the oncoming king. America Online is being crowned. Yahoo! has profoundly more momentum and considerably better financials than the larger media companies on this list. And I believe the public markets will continue to reward that financial location and forward direction more dearly than historical standing, traditional brands, and present assets under management.
Tom Gardner, Fool
P.S. A correction to last night's column. The post I intended to link to, depicting Schering-Plough's company value extending from $27 million in 1952 to $81 billion today, can be found by clicking this link
Stock Change Bid AXP +3 1/8 111.63 CHV + 13/16 78.75 CSCO + 7/8 102.94 KO -1 7/8 62.56 GPS - 5/8 65.25 EK +1 69.44 XON - 7/16 67.75 GM -1 15/16 85.56 INTC +1 7/16 134.25 MSFT +6 7/16 155.44 PFE + 7/8 133.88 SGP +2 1/4 55.31 TROW + 19/32 32.34 YHOO +7 7/8 152.88
Day Month Year History R-MAKER +1.41% -1.02% 7.32% 35.79% S&P: -0.08% -0.66% 3.73% 28.37% NASDAQ: +1.47% -5.17% 8.38% 43.77% Rule Maker Stocks Rec'd # Security In At Now Change 2/3/98 24 Microsoft 78.27 155.44 98.59% 5/1/98 55 Gap Inc. 34.37 65.25 89.85% 6/23/98 34 Cisco Syst 58.41 102.94 76.23% 2/3/98 22 Pfizer 82.30 133.88 62.67% 2/13/98 22 Intel 84.67 134.25 58.55% 2/17/99 16 Yahoo Inc. 125.81 152.88 21.51% 8/21/98 44 Schering-P 47.99 55.31 15.25% 5/26/98 18 AmExpress 104.07 111.63 7.26% 2/6/98 56 T. Rowe Pr 33.67 32.34 -3.95% 2/27/98 27 Coca-Cola 69.11 62.56 -9.47% Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 17 General Mo 72.41 85.56 18.17% 3/12/98 20 Eastman Ko 63.15 69.44 9.96% 3/12/98 20 Exxon 64.34 67.75 5.31% 3/12/98 15 Chevron 83.34 78.75 -5.51% Rule Maker Stocks Rec'd # Security In At Value Change 2/3/98 24 Microsoft 1878.45 3730.50 $1852.05 5/1/98 55 Gap Inc. 1890.33 3588.75 $1698.42 6/23/98 34 Cisco Syst 1985.95 3499.88 $1513.93 2/3/98 22 Pfizer 1810.58 2945.25 $1134.67 2/13/98 22 Intel 1862.83 2953.50 $1090.67 2/17/99 16 Yahoo Inc. 2013.00 2446.00 $433.00 8/21/98 44 Schering-P 2111.7 2433.75 $322.05 5/26/98 18 AmExpress 1873.20 2009.25 $136.05 2/6/98 56 T. Rowe Pr 1885.70 1811.25 -$74.45 2/27/98 27 Coca-Cola 1865.89 1689.19 -$176.70 Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 17 General Mo 1230.89 1454.56 $223.67 3/12/98 20 Eastman Ko 1262.95 1388.75 $125.80 3/12/98 20 Exxon 1286.70 1355.00 $68.30 3/12/98 15 Chevron 1250.14 1181.25 -$68.89 CASH $185.03 TOTAL $32671.91
Note: The Rule Maker Portfolio began with $20,000 on February 2, 1998, and
it adds $2,000 in cash (which is soon invested in stocks) every six months.