Rule Breaker Portfolio Remember the Internet Revolution?

While the days of e-commerce companies by the hundreds are gone, there are a few standouts that aren't named eBay, TMP Worldwide (Monster.com), or Amazon. Expedia is well known, but the others may not be -- yet. But their stocks and businesses are doing well.

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By Tom Jacobs (TMF Tom9)
May 7, 2002

Quietly, many e-commerce businesses have been biding their time and are now showing up as star performers both in their operations and in the stock market.

Wait a minute. Did you just read "e-commerce?" Rub your eyes. Yup, still there!

I'm not talking America Online, which turned into AOL Time Warner (NYSE: AOL), whatever that is today (I turn to Fool community member Goofyhoofy for help understanding this business). And not eBay (Nasdaq: EBAY), our fave online auctioneer, or TMP Worldwide (Nasdaq: TMPW), operator of job king Monster.com, both well-known survivors. Or even Amazon (Nasdaq: AMZN), the company investors love to hate and debate, and which may yet prove its critics wrong.

Get a room
Have you ever even heard of Hotel Reservation Network? This company, majority-owned by Barry Diller's USA Networks (Nasdaq: USAI), is the Internet's largest discount hotel and vacation rental supplier. It's also a jewel in Diller's crown of expanding online travel businesses empire that includes his chunk of Expedia (Nasdaq: EXPE). Last month the not-idle roomer joined its Web operations under one site, and changed its name to Hotels.com (Nasdaq: ROOM). I'm not kidding -- it chose a dot-com moniker to complement its already great ticker. Times do change, and back again.

Speaking of Expedia, it's growing quickly and profitably, quarter after quarter, despite the travel crunch in late Q3 and Q4 2001, notwithstanding the top five U.S. airlines forming Orbitz, and in the face of major airlines' efforts to draw customers to their own websites. The war is hardly over -- it's too early to call Expedia the eBay of online travel -- but Expedia's sitting pretty.

PayChum
Then there's the IPO of Internet payment system and favorite of eBay buyers and sellers everywhere PayPal (Nasdaq: PYPL). PayPal hoped to sell 5.4 million shares at between $12 and $14 each on Feb. 6, but a company called CertCo crashed the party with a patent infringement suit. Was the timing coincidental? CertCo somehow didn't know about a problem with its electronic transaction system? Luckily for PayBuddy, it didn't affect the IPO, which went out at $13 in its Feb. 15 debut and closed that day at $20.09. After a pullback, it finished yesterday at $27. And surprise, surprise, last week CertCo dropped its suit in exchange for a "non-consequential payment" (CertCo's words). PaySoulMate (so much for the online thesaurus) did not obtain a license from CertCo as a condition of settlement, either. Nice.

Branching out
Consider that online mortgage exchange Lending Tree (Nasdaq: TREE) started when its CEO, 32-year-old Doug Lebda, wasn't satisfied with the inefficient process for obtaining a mortgage loan for his first home purchase. With revenues growing rapidly and its finances under control, his company projects its first quarterly profit in Q3 this year. Lending Tree may face competition from traditional lenders' own online lending operations and other referral-only sites, but no other company operates an exchange between lenders and borrowers.

Earn and learn
Another success is online educator University of Phoenix (Nasdaq: UOPX), 88%-owned by Apollo Group (Nasdaq: APOL), the Olympian short track skating champion's PR firm. (Kidding!) University of Phoenix serves anyone at least 23 years old and employed -- how they verify this is beyond me, but if enforceable it would definitely create a motivated student body. I taught basic writing at a local community college and the time (night) and subject matter self-selected for maturity, experience, and dedication. Many drove great distances. Judging by increasing revenues, the University of Phoenix is attracting their successors today.

Your e-shop made easy
E-commerce infrastructure builder and operator Global Sports (Nasdaq: GSPT) was first known for building and running online stores -- including fulfillment -- for the Sports Authority (NYSE: TSA), Sport Chalet (Nasdaq: SPCH) , the Athlete's Foot, and Bluelight.com when Kmart (NYSE: KM) threw in the towel on running its own Web operation. But lately the company's been on a new business tear, branching out beyond sports. One of its new foci is media companies. New TV network and cable channel e-commerce customers are Comedy Central, Nickelodeon, The Golf Channel, TV Land, and PAX TV. Reflecting this broader business, the company plans to change its name to GSI Commerce.

With financial services company NetBank (Nasdaq: NTBK) rounding out the list, here's how revenues and earnings are growing:

Quarterly Revenue Increase vs. Prior Year
3/02 12/01 9/01 6/01 Expedia 103% 84% 89% 112% Global Sports 97% 153% 101% 118% NetBank 2% 21% 27% 29% PayPal 249% 363% N/A 805% Hotels.com 57% 42% 60% 77% Lending Tree 73% 96% 91% 105% Univ. Phoenix* 100% 87% 77% 91% *UOPX quarters end a month before. Quarterly EPS(diluted) 3/02 12/01 9/01 6/01 Expedia 0.11 0.10 -0.09 -0.09 Global Sports -0.14 0.01 -0.42 -0.24 NetBank -0.19 0.10 0.07 0.03 PayPal 0.02 -0.42 -0.68 -0.58 Hotels.com 0.22 0.08 0.03 0.08 Lending Tree -0.15 -0.27 -0.20 -0.66 Univ. Phoenix* 0.11 0.09 0.08 0.09 *UOPX quarters end a month before.

These companies' revenue (and, in most cases, EPS) growth in troubled times has been rewarded, with their stocks booming and handily beating the S&P 500 and Nasdaq Composite indexes over the last year. They have also all scored well since their IPO closing prices against those same averages.

       Stock Price 12-mo. Total Return 
              1yr  RS    From IPO Close    
Expedia       193% 98    106% 11-99-99 
Global Sports 191% 80    109% 06-05-98
Net Bank       63% 93    387% 07-29-97
PayPal         --  79*    44% 02-19-02
Hotels.com     70% 91    144% 02-28-00
Lending Tree  227% 98    -19% 02-18-00
Univ. Phoenix  78% 88    254% 09-28-00

Nasdaq        -25%
S&P 500       -14%

*3 months

These companies are the survivors of capitalism's massive and messy money movement into the Internet  revolution, and they are outnumbered by painful but necessary losers. The happy survivors may not continue to perform as well or they may even do better, but we're noting them as real or potential Rule Breakers. Do any of them strike your investing fancy? Discuss them or other candidates on the Rule Breaker -- Companies discussion board.  

Have a Foolish week! Updated portfolio returns follow. 

Enjoy our best stock ideas and an in-depth feature each month in The Motley Fool Select!

Tom Jacobs (TMF Tom9) is hooked on Survivor Marquesas. At press time, he owned no shares in companies mentioned in this story. To see his stock holdings, view his profile, and check out The Motley Fool's disclosure policy. It's free!

       Rule Breaker Portfolio Returns as
            of 5-6-02 Market Close
            RB       S&P     S&P 500
           Port      500      DA*     Nasdaq
Week     -3.85%**    -1.22%   --      -4.73%
Month    -6.15%**    -2.29%   --      -6.50%
Year    -21.70%**    -8.35%   --     -19.07%
CAGR***
 since 8/4/94 23.38%  11.30%  13.58%  10.64%

*Dividends added.
**Please keep in mind that these figures will be distorted for the RB Port once a quarter when we deposit $12,500 in new cash. See next note! 
***Compound Annual Growth Rate using Internal Rate of Return. This performance measure accounts for the periodic deposits. Total return wouldn't be meaningful, because we started adding cash to the portfolio in July 2001. In a total return calculation, or (Current Value - All Cash Deposited)/All Cash Deposited, cash added shows up as returns.

Rule Breaker Portfolio

We currently provide overall portfolio returns at the end of each Tuesday column above. We present below the total gain and percentage returns for the portfolio's individual stocks, but the returns do not reflect realized gains of about $70,776 from AOL and $35,307 in Amazon, and realized losses of $27,062 in Human Genome Sciences, nor are other past realized gains reflected in the portfolio's cost basis. Please note that the Sirius Satellite Radio holding is a short position. We hope no one from that service crashes through our roof.
  Ticker Company Price
 Change
 Daily Price
 % Change
 Price 
  AMZN AMAZON.COM, INC. (0.01) (0.06%) 16.11 
  AOL AOL TIME WARNER INC. 0.01 0.06% 17.26 
  EBAY EBAY INC (0.7) (1.39%) 49.83 
  MLNM MILLENNIUM PHARMACEUTICALS INC (0.79) (4.78%) 15.75 
 SHORT  SIRI SIRIUS SATELLITE RADIO INC (0.39) (9.8%) 3.59 
  SBUX STARBUCKS CORP 0.14 0.62% 22.80 
  AMGN AMGEN INC (0.27) (0.58%) 46.54 
  HGSI HUMAN GENOME SCIENCES INC (0.04) (0.28%) 14.26 
  SPY SPDR TRUST;1 (0.37) (0.35%) 105.10 
      
  Trade Date # Shares Ticker Cost/Share Price  Total % Ret  
 09/09/97 1320 AMZN 3.20 16.11  409.14%
 08/05/94 4020 AOL 0.46 17.26  3,826.87%
 02/26/99 1145 EBAY 46.54 49.83  7.09%
 09/27/01 1560 MLNM 16.06 15.75  -1.87%
 SHORT 01/24/02 2500 SIRI 6.90 3.59  47.97%
 07/02/98 940 SBUX 13.98 22.80  63.22%
 12/16/98 1160 AMGN 21.44 46.54  117.10%
 10/29/01 590 HGSI 43.06 14.26  -66.87%
 04/24/02 410 SPY 110.12 105.10  -4.54%
      
  Trade Date # Shares Ticker Total Cost Current Value  Total Gain  
 09/09/97 1320 AMZN 4,220.20 21,265.20  17,045.00 
 08/05/94 4020 AOL 1,860.42 69,385.20  67,524.78 
 02/26/99 1145 EBAY 53,294.44 57,055.35  3,760.91 
 09/27/01 1560 MLNM 25,051.00 24,570.00  -481.00 
 SHORT 01/24/02 2500 SIRI 17,258.26 8,275.00  8,283.26 
 07/02/98 940 SBUX 13,138.62 21,432.00  8,293.38 
 12/16/98 1160 AMGN 24,875.50 53,986.40  29,110.90 
 10/29/01 590 HGSI 25,405.60 8,413.40  -16,992.20 
 04/24/02 410 SPY 45,149.00 43,091.00  -2,058.00 
Cash:510.48 
Total:307,984.03 


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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.