Rule Breaker Portfolio

<THE RULE BREAKER PORTFOLIO>

Starbucks, Come on Down!
Er... wait. Go back up! Plus, RB's performance.

By Jeff Fischer (TMF Jeff)

Alexandria, VA (August 10, 1999) -- Fear reigns that the Fed will raise interest rates both on August 24 and again in October. This fear has subjected stocks to a continued tailspin. Eventually the ground will loom large from the cockpit, and we'll either hit it hard (a bottom!) or we'll pull up and level off. Following today's failed take-off, the Nasdaq is 13.3% below its high and the S&P 500 is 9.7% from its peak.

As Louis explained yesterday, rising interest rates serve to devalue stocks because the higher that interest rates levitate, the lower the value of future earnings from a company. That relationship granted, investors are probably overreacting. Interest rates might increase a few more times in the near term, but they will still be low. Critics wail that rates are near a two-year apex, but this new high is being measured against the mild backdrop of the past many years.

The market is confused and uncertain, however, so it descends. America Online (NYSE: AOL) and Excite@Home (Nasdaq: ATHM) are another indication of this general uncertainty. One stock rose (AOL) and the other fell following AT&T (NYSE: T) related rumors that you've read. After the rumor was all but discredited, both stocks fell. Fact is, @Home has exclusive rights to AT&T's cable until 2002, and in some regions even longer than that, but the stock fell anyway. Investors don't seem to know what to think about broadband. We believe that both companies will lead.

Our Performance

We invest in companies that we believe will pulverize the S&P 500. Therefore, we don't particularly care about the entire stock market's movement. The direction of the stock market shouldn't be taken into account when investing Foolishly, because it cannot be predicted or controlled. So, we don't invest in the "stock market" as a whole. We look for companies that should top the S&P 500.

Soon to scroll before your eyes is a list of our holdings and how each has performed against the S&P 500 since each was purchased, measured as of yesterday's close. A few points: one, we have earned almost 50% on our Trump Hotels (NYSE: DJT) short position, and over the same period the S&P 500 has gained 62%. This investment has still been an efficient use of capital, however, because it actually didn't involve any of our capital. We borrowed shares and we sold them. Therefore, we didn't have money sitting in Trump that could have been invested in the S&P 500 anyway. A return on a short is gravy.

Second, you should Foolishly note that three of our companies beating the S&P 500 by the widest margin since inception are not young, new companies. In fact, these companies have nothing to do with hyper-growth industries. Two of our best performers when measured against the S&P are none other than (drumroll, please!)... Caterpillar (NYSE: CAT) and Chevron (NYSE: CHV). Another strong market crusher has been Goodyear (NYSE: GT). Each of these have beaten the S&P 500 by a wider margin than Iomega (NYSE: IOM), Amgen (NYSE: AMGN), and Excite@Home (NYSE: ATHM).

This fact should answer one ongoing query: No, Fools, we're not going to stop using the Foolish Four approach in the Rule Breaker. The Foolish Four is again crushing the S&P this year, up over 20%.

Here is the fancy, complete list.

Date     Company Cost  Our Return  S&P 500*
08/05/94  AOL    0.91   9307.49%   197.37%
09/09/97  AMZN   6.58   1199.54%    37.73%
05/17/95  IOM    1.28    197.76%   146.16%
12/16/98  AMGN  42.88     79.15%    11.53%
04/30/97  *DJT*  8.47     49.82%    62.25%     
12/04/98  ATHM  28.04     35.52%     9.70%
02/23/99  CAT   46.96     22.97%     1.96%   
02/23/99  CHV   79.17     22.05%     1.96%
02/20/98  DD    58.84     20.76%    25.34%
02/23/99  GT    48.72     14.57%     1.96%
02/26/99  EBAY  100.53   -20.79%     5.21%
07/02/98  SBUX  27.95    -25.55%    13.28%
01/08/98  TDFX  25.67    -45.70%    36.30%

Note: DJT is a short position. *The S&P 500 is measured from each individual stocks' date of purchase, and includes reinvested dividends.

Aside from DuPont (NYSE: DD) and our three losers, our investments are topping the S&P 500. Just a few weeks ago, eBay (Nasdaq: EBAY) and Starbucks (Nasdaq: SBUX) were winning as well. Iomega is the true sore thumb, however. It had a considerably greater advantage on the S&P in months and years past. Yes, we make mistakes aplenty.

Overall, as of yesterday, Ye Olde Rule Breaker Portfolio had returned 902% compared to the S&P 500's return of 197%.

When this portfolio launched, one goal was to publicly take the S&P 500 and managed mutual funds to task. So far, mission accomplished. Over 80% of mutual funds have returned well below 197% the past five years, let alone 900%. And those folks invest for a living, Fools, and they tell you that you shouldn't invest your own money. "It's too difficult."

How difficult is it to find and understand -- and keep current with -- strong companies?

Keeping Current

eBay rebounded 12% on word that it will auction automobiles on its site. The company also plans a "Great Collections" service auctioning items priced between $250 and $10,000, and it will expand its regional auction service to 50 cities from just one today.

Across the pond, J. Sainsbury PLC, the United Kingdom's second-largest supermarket owner, announced that it will have Starbucks outlets in some stores. Starbucks dipped into the teens before closing at $20 1/16. The stock is at a price that Fool analyst Dale Wettlaufer said could be interesting. (Dale: "Sticking with my valuation of the company last year and assuming intrinsic value has grown about 25% year-over-year, I think the stock is very interesting again at $21 1/4.") Starbucks trades at 29.4 times the year 2000 consensus earnings estimate, and EPS is expected to grow 26%. The fear is that new Internet ventures will lower earnings. Starbucks says it is under control.

Finally, in what may be the most popular IPO since MP3.Com (Nasdaq: MPPP), potential Rule Breaker Red Hat, Inc., is poised to go public tomorrow under ticker symbol RHAT. Hopefully Red Hat's stock won't be white hot and soar quickly only to later fizzle as did MP3.com. For more on the operating system software company, see today's Fool news article on Red Hat. Tomorrow, we'll share thoughts on MP3.

Fool on!

08/10/99 Close
Stock  Change    Bid 
------------------ 
AMGN  -1 13/16   75.00
AMZN  +5 1/2     91.00
AOL   -1 1/4     84.25
ATHM  -3 3/8     34.63
CAT   +1 1/8     58.88
CHV   +  3/16    96.81
DD    -  3/4     70.31
DJT   -  1/16     4.19
EBAY  +9 5/8     89.25
GT    +1 1/16    56.88
IOM   -  1/16     3.75
SBUX  -  3/4     20.06
TDFX  -  1/16    13.88


                  Day     Month   Year   History   Annualized 
      R-BREAKER  +0.67%  -8.89%   0.52%  908.95%   58.58%
        S&P:     -1.26%  -3.56%   4.83%  193.80%   23.98%
        NASDAQ:  -1.15%  -5.62%  13.56%  245.76%   28.08%


    Rec'd    #  Security     In At       Now      Change
   8/5/94  2200 AmOnline       0.91     84.25    9169.96%
   9/9/97  1320 Amazon.com     6.58     91.00    1283.14%
  5/17/95  1960 Iomega Cor     1.28      3.75     192.88%
 12/16/98   580 Amgen         42.88     75.00      74.93%
  4/30/97 -1170*Trump*         8.47      4.19      50.55%
  2/23/99   300 Caterpilla    46.96     58.88      25.36%
  12/4/98   900 Excite@Hom    28.04     34.63      23.48%
  2/23/99   180 Chevron       79.17     96.81      22.29%
  2/20/98   260 DuPont        58.84     70.31      19.49%
  2/23/99   290 Goodyear T    48.72     56.88      16.75%
  2/26/99   300 eBay         100.53     89.25     -11.22%
   7/2/98   470 Starbucks     27.95     20.06     -28.23%
   1/8/98   425 3Dfx          25.67     13.88     -45.94%

    Rec'd    #  Security     In At     Value      Change
   8/5/94  2200 AmOnline    1999.47 185350.00  $183350.53
   9/9/97  1320 Amazon.com  8684.60 120120.00  $111435.40
 12/16/98   580 Amgen      24867.50  43500.00   $18632.50
  12/4/98   900 Excite@Hom 25236.13  31162.50    $5926.37
  4/30/97 -1170*Trump*     -9908.50  -4899.38    $5009.13
  5/17/95  1960 Iomega Cor  2509.60   7350.00    $4840.40
  2/23/99   300 Caterpilla 14089.25  17662.50    $3573.25
  2/23/99   180 Chevron    14250.50  17426.25    $3175.75
  2/20/98   260 DuPont     15299.43  18281.25    $2981.82
  2/23/99   290 Goodyear T 14127.38  16493.75    $2366.38
  2/26/99   300 eBay       30158.00  26775.00   -$3383.00
   7/2/98   470 Starbucks  13138.63   9429.38   -$3709.25
   1/8/98   425 3Dfx       10908.63   5896.88   -$5011.75

                              CASH   $9924.87
                             TOTAL $504473.00
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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