Rule Breaker Portfolio

Rule Breaker Portfolio
Which are still Rule Breakers?
Is Amazon? AOL? Amgen? More...

By Jeff Fischer (TMF Jeff)

ALEXANDRIA, VA (Sept. 23, 1999) -- Stocks tumbled, but the action doesn't change the course of a long-term, Foolish investor. So, today we focus on our companies: which are still Rule Breakers and which are not?

When we bought Amazon (Nasdaq: AMZN) at a split-adjusted $3, we received more negative email and posts than with any other purchase. We were going to get burned, they said. Bad. As it turns out, early Amazon owners who were apparently playing with fire were the ones who didn't get burned. (Fire burns but can't burn itself.) Where is Amazon today? Amazon remains a Rule Breaker. How so? There isn't a viable alternative to Amazon yet, and Amazon is always one step ahead as it aims to keep its latest, exclusive offerings exactly that: exclusive.

For example, when you place something for auction on Amazon it can be linked to many of the retail products on Amazon's site, thereby targeting your item at parties that are likely to be interested in it. (Have a Jerry Garcia poster to auction? It could be linked to Grateful Dead CDs.) This will result in more compulsive bidding. Amazon also began to offer its own branded products last week -- a line of Amazon bags. Today, Amazon announced that it took a 20% stake in online gift registry, Della & James Inc.

The registry service will allow users to post wish lists online. For example, you can see what your sibling would like by visiting their online wish list. Products sold at Amazon can be bought from the wish list with a quick click. (By the way, check out the fine art that I bought for my brother on eBay. We had an intense family bidding war for it. When the auction closed, the college student selling the art was asked in email, "Tell me you did NOT get $32 for that thing!" Yeah, he did get $32. Thanks to eBay.)

Amazon is still a Rule Breaker. What about eBay?

Tuesday, David proposed that eBay (Nasdaq: EBAY) is a Tweener approaching Rule Maker status. Provided the numerous alternatives to eBay, I agree with David. eBay is Tweening even though there isn't a community nearly as strong, and even though most auction houses don't have services such as eBay's A-Go-Go paging. Like David, I believe that eBay will emerge as the industry's Rule Maker after it Tweens, standing far above the crowd. eBay has critical mass of both buyers and sellers and it has a monstrous branding and mind share lead. In a world driven by network effects (including word of mouth), those two assets are invaluable. So, Tween away, eBay!

(If you have no idea what I'm talking about when I say "Tween," please visit the Rule Breaker Principles linked on the right side of this page starting with #1. And don't feel dumb. David only recently created the word "Tweener." It isn't in Webster's yet.)

Next up: I believe that Excite@Home (Nasdaq: ATHM) is approaching Tweenerdom, too. My interpretation does rely on how one defines the company's business. If Excite@Home's business is high-speed cable Internet access, it stands alone with Road Runner as a Rule Breaker. If its business is high-speed Internet access period, however, digital subscriber line (DSL) access is becoming a widespread, viable alternative to Excite@Home's cable. In some areas, DSL is the only alternative.

Excite@Home couldn't possibly dominate the sprawling high-speed Internet access market, of course, but decisions made now could determine whether it Tweens like a fading skyrocket, or rises into Rule Maker heaven on its own merits. If Excite@Home could agree with AT&T (NYSE: T) and its 20 other cable partners to become a gateway to cable access to would-be competitors (meaning, sell cable access to other firms), the cable companies and Excite@Home could likely become Rule Makers in the industry.

With cable closed to competitors, however, Excite@Home is competing directly with all other forms of high-speed Internet access. Given this, I don't currently believe that it can become a Rule Maker. I now peg it as a Tweener. In fact, AOL may end up making many of the rules in high-speed Internet access instead, because it will drive a great deal of traffic to DSL.

America Online (NYSE: AOL) is both Making Rules and still Breaking Rules. For most worldwide customers, there are alternatives to AOL (today's merger serves for an example). The alternatives help make AOL a Tweener, one that I think leans far into Rule Maker territory. AOL continues to sign multimillion dollar contracts with content partners (DrKoop, eBay, etc.), thereby placing AOL firmly in the Rule Maker role. AOL is making the Rules regarding who pays who. AOL also commands some 65% of all Internet traffic. If AOL isn't a Rule Maker yet, it is perhaps the closest of the companies we hold -- even though it has more competition than Starbucks, and it faces more uncertainty, too.

The closest that Starbucks (Nasdaq: SBUX) faces to nationwide competition -- not to mention worldwide -- may be Dunkin Donuts or 7-Eleven. Ahem, Fools. These are not viable alternatives to Starbucks. Starbucks is still a bona fide Rule Breaker and it could exist as such for a long, long time. Building a global brand to compete with Starbucks could prove near impossible at this point. Starbucks has become a small but important part of life for millions. "Important" is the key word.

Now we leap to Amgen (Nasdaq: AMGN). Amgen is still a Rule Breaker. Viable alternatives, other than products that are actually licensed from Amgen, do not exist for Amgen's two big products, Epogen and Neupogen. Plus, Amgen's patents on these important drugs stand until 2004 and 2006, at which time they begin to expire. This week's Dueling Fools put Amgen under the microscope. My conclusion: still a Rule Breaker.

Next: Iomega (NYSE: IOM). Ooops. I'm selling my Zip Drive on eBay this week. Current bid: $66. We'll consider Iomega and 3dfx (Nasdaq: TDFX) tomorrow.

So, thus far, by my mind our positions rate as follows:

America Online: Tweening towards Rule Maker (there's no certainty, of course).
Amgen: Rule Breaker (patents remain for several years).
eBay: Tweening towards Rule Maker.
Excite@Home: Tweener (David may not agree).
Starbucks: Rule Breaker (no viable worldwide alternative).

So, which is better to be? Should we wish for our companies to remain as Rule Breakers or to become Rule Makers? We'll discuss that soon, too.

Tidbits to close

You've read the Rule Breaker. You've read the Rule Maker. Now, we're proud to introduce the Rule Shaker. This new real-money portfolio launched on the Fool UK site this month. Nothing has been purchased yet. Give the UK's Rule Shaker a look... As a Fool, I discussed broadband and e-commerce with Multex's "Analyst Corner" last week. For thoughts on those industries, give that a look, too... Finally, today we wish a fond farewell to Louis Corrigan (TMF Seymor) as he leaves for another adventure. We'll miss his words here and throughout Fooldom. Drop Louis a note if you've appreciated his work. And Fool on!

--Jeff Fischer, September 23, 1999






Rule Breaker Portfolio

9/23/99 Closing Numbers
Ticker Company Dly Pr Chg Price
AMGNAMGEN INC-3 13/16$80.06
AMZNAMAZON.COM-3 3/4$62.25
AOLAMERICA ONLINE-3 1/2$87.50
ATHMAT HOME CORP CL A-2 1/8$36.19
CATCATERPILLAR INC-1 7/8$54.31
CHVCHEVRON CORP-7/16$89.19
DDDU PONT (EI) DE NEMOURS-1 9/16$60.75
EBAYEBAY INC-10 7/8$138.25
GTGOODYEAR TIRE & RUBBER CO-1 3/16$44.25
IOMIOMEGA CORPUnch.$3.13
SBUXSTARBUCKS CORP2$23.00
TDFX3DFX INTERACTIVE23/32$8.75

  Day Week Month Year
To Date
Since
8/5/94
Annualized
Rule Breaker -4.26% -1.72% -2.84% 12.39% 1,030.21% 60.34%
S&P 500 -2.27% -4.09% -3.00% 4.19% 179.40% 22.15%
S&P 500(DA) -2.27% -4.09% -3.00% 4.77% 193.66% 23.34%
NASDAQ -3.79% -4.17% .38% 25.41% 281.83% 29.80%

Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
8/5/942200AOL0.917$87.509,440.94%
9/9/972640AMZN3.188$62.251,852.93%
5/17/951960IOM1.280$3.13144.06%
12/16/98580AMGN42.889$80.0686.67%
2/26/99300EBAY100.527$138.2537.53%
12/4/98900ATHM28.040$36.1929.06%
2/23/99300CAT46.964$54.3115.65%
2/23/99180CHV79.169$89.1912.65%
2/20/98260DD58.844$60.753.24%
2/23/99290GT48.715$44.25-9.17%
7/2/98470SBUX27.955$23.00-17.72%
1/8/98425TDFX25.667$8.75-65.91%

Trade Date # Shares Ticker Cost Value LT $ Val Ch
8/5/942200AOL$2,017.62$192,500.00$190,482.40
9/9/972640AMZN$8,415.03$164,340.00$155,925.00
12/16/98580AMGN$24,875.50$46,436.25$21,560.75
2/26/99300EBAY$30,158.00$41,475.00$11,317.00
12/4/98900ATHM$25,236.13$32,568.75$7,332.63
5/17/951960IOM$2,509.63$6,125.00$3,615.37
2/23/99300CAT$14,089.25$16,293.75$2,204.50
2/23/99180CHV$14,250.50$16,053.75$1,803.25
2/20/98260DD$15,299.44$15,795.00$495.56
2/23/99290GT$14,127.38$12,832.50($1,294.88)
7/2/98470SBUX$13,138.63$10,810.00($2,328.63)
1/8/98425TDFX$10,908.63$3,718.75($7,189.88)
  Cash: $5,954.23  
  Total: $564,903.00  



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.