Rule Breaker Portfolio

Rule Breaker Portfolio
The Rule Breaker Radar

By Paul Larson (TMF Parlay)

CHICAGO, IL (Sept. 17, 1999) -- As regular readers know, last week the Rule Breaker portfolio covered its lone short position, Trump (NYSE: DJT). By buying back the shares that were borrowed then sold in 1997, we simultaneously reduced the cash balance in the portfolio and created available funds that are not "at work" in the market. The nearly $12,000 in cash that was here before the latest Trump trade was being used as a reserve against the short position. With Da door on Da Donald saga closed, there is nearly $6,000 ($5,954.23, to be exact) that the Rule Breaker managers are left to deploy somewhere.

Even though this sum only amounts to roughly 1% of the portfolio's total value, one of the stated goals of the Rule Breaker is to stay fully invested in the market. In the past, we've parked extra cash in the S&P 500-mimicking Spiders (AMEX: SPY) when no other suitable companies could be identified for investment. This may very well be the temporary fate of the current cash balance, but we won't throw the money into the Spiders before looking for new Rule Breakers first.

Enter the Rule Breaker Radar. (Otherwise known as the "RBR," trademark pending.) In order for a company to appear on the RBR it must meet most, preferably all, of the following criteria. For those that are new here or may have forgotten what the criteria are for Rule Breaking companies, here's a rundown of what we look for:

1) The top dog and first-mover in an important, emerging industry.

2) A sustainable advantage gained through business momentum, patents, visionary leadership, and/or inept competition.

3) Excellent past share appreciation measured by a relative strength of 90 or higher.

4) Good management and smart backing.

5) The greater the consumer brand, the better.

6) A significant constituent of the financial media is recently on record for calling it overvalued.

In doing the research for some of the other columns I scribe, I have come across several companies that are bleeping loudly on the RBR. I think it's safe to call all of the following companies potential Rule Breakers, but nothing more. We have high standards, and the candidates below may not be sufficiently appealing to add to this portfolio. Nevertheless, when trying to screen for companies, it's good to start with a wide selection. Without further delay, here are four companies I think possess some Rule Breaking qualities:

Biogen (Nasdaq: BGEN)

I originally came across this biotech bad boy when writing a Daily Double back in March. With biotechnology being one of our favorite important, emerging industries, and Biogen looking like it could be Rule Breaker Amgen's (Nasdaq: AMGN) long-lost twin, I thought the company warranted further research. I even wrote an entire column about why I thought Biogen looked like a Rule Breaker. Unfortunately, no action was taken back then, and the company has since risen nearly 50% over the past six months.

I think Biogen possesses what it takes to warrant further consideration for purchase by this portfolio. Allow me to reference some other articles that tell the Biogen story well:

- Fool On The Hill: Biotech Big Boy Biogen (6/18/99)
- News: Biogen Riding High in the Biotech Saddle (9/16/99)


Priceline (Nasdaq: PCLN)

Few companies better exemplify the new ways in which e-commerce is spurring economic activity by matching buyers and sellers. In exchange for some flexibility in scheduling, consumers get to "name their price" for a variety of items. Priceline started by peddling empty airline seats, but the firm has expanded into numerous other areas, including hotel rooms, rental cars, home loans, and even new cars. What's most exciting about Priceline's patented "reverse auction" system is that it can theoretically be applied to almost any product category.

Priceline fits five of the Rule Breaker criteria. The relative strength isn't the greatest at the moment, since the stock is in the neighborhood of its annual low, but it is still trading at more than triple its initial public offering (IPO) price of six months ago.

To decide whether Priceline is attractive, one must first decide whether the "name your price" thing is just a fad or if it is here to stay. More importantly, one must decide if Priceline's patent will hold up to further scrutiny. Priceline's questionable patent is the only thing holding a flood of competitors at bay, and some e-commerce heavies like Microsoft (Nasdaq: MSFT) are starting to trickle in. I'm confident that reverse auctions are here to stay, but I'm less confident that Priceline's patents will hold up in court. As always, time will give us 20/20 vision.

Here are some recent Foolish articles about Priceline:

- Daily Trouble: Priceline (8/10/99)
- Dueling Fools: Priceline (7/21/99)


Cytyc (Nasdaq: CYTC)

A doctor friend of mine alerted me early last year to this company that is drastically changing the way women are getting screened for cervical cancer. Cytyc has developed a much more sensitive test than traditional Pap smears, and the medical community is slowly but surely embracing the new technology. Years of losses due to research and development spending are now turning into significant profits and cash flow.

Cytyc is the top dog and first mover in its market and also has an impressive portfolio of patents, but it's unclear at the moment, at least to me, whether the competition poses a viable threat. Another biotechnology company, AutoCyte (Nasdaq: ACYT), has a similar testing system that some say is better than Cytyc's. The two firms just this week engaged in nasty legal battle over patents. There's also competition in the form of virus testing systems, such as those being developed by Digene (Nasdaq: DIGE). Some studies have shown that testing for the virus that causes cervical cancer may be a better way of identifying which women are at risk.

Regardless, Cytyc has some of the qualities of a Rule Breaker and deserves further consideration.

- Daily Double: Cytyc (9/13/99)


VISX (Nasdaq: VISX)

Last weekend, I was listening to the Fool Radio Show (which you can listen to online by clicking here) and a Dueling Fools segment concerning VISX. After the traditional "Springer" segment (my favorite), Tom Gardner went ahead and called VISX "the classic Rule Breaker." The RBR started going "blip... blip... blip...."

VISX is the market leader in corrective laser eye surgery, making glasses and contracts history for most that undergo the company's procedure. Like Cytyc, VISX has patent protection, is the leader in an important and emerging industry, and has had excellent share appreciation. VISX also lacks some of the same qualities that Cytyc does, namely, it doesn't exactly have a consumer brand and there are upstart competitors to consider.

The Dueling Fools on the radio preceded the online Duel, and clicking into the Duel is as good a place as any to see both sides of the VISX story.

- Dueling Fools: VISX (9/15/99)


To end...

I have at least a dozen more Rule Breaker candidates, yet time and space limitations mean the radar will have to be turned off for the moment. But fret not, we have plenty of time and future columns with which to turn the radar back on and scan the investment landscape for companies that are breaking the rules.

If you, dear Fool, know of companies that you think fit the Rule Breaker mold, don't be shy to post your thoughts on the Rule Breaker Companies message board. (We're also open to suggestions for a new short, too.)

For thoughts on today's eBay (Nasdaq: EBAY) move, see Jeff Fischer's post on the Rule Breaker Companies message board, and see the Fool News article on the news by TMF Braden.

Have a Foolish weekend!






Rule Breaker Portfolio

9/17/99 Closing Numbers
Ticker Company Dly Pr Chg Price
AMGNAMGEN INC1$83.13
AMZNAMAZON.COM-1 7/16$63.81
AOLAMERICA ONLINE-1 9/16$86.00
ATHMAT HOME CORP CL A1/16$38.44
CATCATERPILLAR INC3/4$58.31
CHVCHEVRON CORP7/8$93.00
DDDU PONT (EI) DE NEMOURS5/8$62.06
EBAYEBAY INC-10 3/4$141.00
GTGOODYEAR TIRE & RUBBER CO-1/16$51.94
IOMIOMEGA CORP1/16$3.31
SBUXSTARBUCKS CORP5/8$22.00
TDFX3DFX INTERACTIVE-7/32$8.97

  Day Week Month Year
To Date
Since
8/5/94
Annualized
Rule Breaker -1.33% -6.62% -1.14% 14.36% 1,050.01% 61.13%
S&P 500 1.28% -1.20% 1.14% 8.64% 191.32% 23.23%
S&P 500(DA) 1.28% -1.20% 1.14% 9.22% 205.58% 24.38%
NASDAQ 2.24% -.60% 4.76% 30.87% 298.46% 31.00%

Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
8/5/942200AOL0.917$86.009,277.38%
9/9/972640AMZN3.188$63.811,901.95%
5/17/951960IOM1.280$3.31158.70%
12/16/98580AMGN42.889$83.1393.82%
2/26/99300EBAY100.527$141.0040.26%
12/4/98900ATHM28.040$38.4437.08%
2/23/99300CAT46.964$58.3124.16%
2/23/99180CHV79.169$93.0017.47%
2/23/99290GT48.715$51.946.61%
2/20/98260DD58.844$62.065.47%
7/2/98470SBUX27.955$22.00-21.30%
1/8/98425TDFX25.667$8.97-65.06%

Trade Date # Shares Ticker Cost Value LT $ Val Ch
8/5/942200AOL$2,017.62$189,200.00$187,182.40
9/9/972640AMZN$8,415.03$168,465.00$160,050.00
12/16/98580AMGN$24,875.50$48,212.50$23,337.00
2/26/99300EBAY$30,158.00$42,300.00$12,142.00
12/4/98900ATHM$25,236.13$34,593.75$9,357.63
5/17/951960IOM$2,509.63$6,492.50$3,982.87
2/23/99300CAT$14,089.25$17,493.75$3,404.50
2/23/99180CHV$14,250.50$16,740.00$2,489.50
2/23/99290GT$14,127.38$15,061.88$934.50
2/20/98260DD$15,299.44$16,136.25$836.81
7/2/98470SBUX$13,138.63$10,340.00($2,798.63)
1/8/98425TDFX$10,908.63$3,811.72($7,096.91)
  Cash: $5,954.23  
  Total: $574,801.60  



Note
The Fool Portfolio was launched on August 5, 1994, with $50,000. It was renamed the Rule Breaker Portfolio in October 1998. The investing strategy began with the first investments of the Fool Port and has evolved with time and experience. In July 2001, the portfolio began adding $12,500 each quarter (We missed Jan. 2002, so we added $25,000 in April 2002). We skip a quarter if we have enough uninvested cash or cash available in stocks we would prefer to sell to make new investments. All transactions are shared and explained publicly before being made, and returns are compared in each week's column to the S&P 500 (including dividends where noted) and the Nasdaq composite. For a history of all transactions, please click here.