RULE MAKER PORTFOLIO

<THE RULE MAKER PORTFOLIO>

The Next $500
And a few digressions

By Tom Gardner

ALEXANDRIA, VA (July 27, 1999) -- As we approach the close of July, we head toward another of our $500 monthly installments to the Rule Maker Portfolio. Our first monthly investment went to Microsoft. Where will our second one go? If the spirit moves you, try your hand at influencing us by posting your recommendation in the Rule Maker Companies message board.

And I'll do the same, here.

As I scanned the historical performance of our portfolio, musing on where to add money, I was mildly pleased to note that only one of our fifteen positions is in the red -- Big Red, that is. Coca-Cola has fallen 8.75% since we grabbed our shares in late February of 1998. Outside of that, however, the Rule Maker Portfolio shows one gainer after another, from Pfizer to General Motors, from T. Rowe Price to Microsoft.

But having a bunch of moneymakers just isn't enough for us. Who cares how few or how many stocks are up in a given portfolio? What matters, in our world of low-priced index funds, is that the stock portfolio is beating the market's average return. Up to this point, we have beaten the market's return. Over the eighteen-month life of this portfolio, our Rule Makers have, in aggregate, risen 39.08% versus S&P 500 gains of 36.34%.

Keep in mind, too, that our figures do reflect the costs of transactions and taxes. We're keeping the real score out there! That's not common to the performance statements of mutual-fund managers, brokers, and financial advisors -- if, in fact, they even issue performance statements. Most professional advisors wouldn't be caught dead comparing their investment returns (let alone their cost-adjusted returns) to the performance of the overall market.

But I digress.

The subject of this column is the investment of our next $500 -- where to put it. For some investors, putting new money into the market today is heart-wrenchingly tough. They fret over lofty P/E ratios, the threat of an interest-rate hike, the oncoming point of no return on the Year 2000 problem, Nostradamus' call for impending doom, the enduring popularity of Furbies, and the possibility that -- moments after we put our money into the market -- baby boomers will, en masse, yank theirs out.

So much risk!

But for us Fools, the future holds more opportunity than risk. The chance that the U.S. stock market will lose ground over the next ten years is quite slim. And that's our projected time horizon on each investment. Since we're prospective business owners, we make investments with plans to hold on for ten years, or more. We have no credit-card debt, and no pressing need for the cash, so we're buying into the world's greatest companies with little fear of our demise.

But again, I digress.

Where should we put this money?

My simple answer is: Yahoo! (Nasdaq: YHOO). The company has strung together one successful quarter after another. On July 7th, it announced second-quarter results showing a 156% increase in revenues, to $115 million. Gross margins settled in at 86%. And Yahoo! generated more than $28 million in profits. Finally, the company closed up quarter two with not a lick of long-term debt and $638 million in cash to plow into its Internet-obsessed business.

For the scorekeepers, Yahoo!'s Rule Maker score against the competition has consistently rung in above 50 -- running in step with the outstanding rankings of Cisco Systems and Microsoft. And if you're looking for temporary pricing depressions, consider this: After the general sell-off of Internet issues, Yahoo! is now trading 43% below its highs of the year. That, dear Fools, represents a greater decline off its annual highs than any stock in our portfolio.

To put it all together, Yahoo! has a powerful consumer brand, a blistering pace of sales and earnings growth, plenty of cash to maintain its leadership position, rigorous controls over balance-sheet items, tremendous future opportunities -- and, if it means anything to you, a stock that is more than 40% off its highs of the year.

Yep, YHOO. That's my recommendation. What's yours?

Tom Gardner, Fool

Related articles:

-- Yahoo!'s Q2 review by Dale Wettlaufer (7/8/99)

-- Good Results at Yahoo! by Matt Richey (7/12/99)

-- Yahoo! Financials by Matt Richey (7/13/99)

07/27/99 Close
Stock Change    Bid
AXP   +5 7/8    142.38
CHV   -  13/16   91.56
CSCO  +1 7/8     62.94
DPH     ---      19.19
EK    +  7/8     70.06
GM    +  3/16    66.13
GPS   +  5/8     47.88
INTC  +4 11/16   67.56
KO    -  9/16    62.50
MSFT  +1 3/16    88.81
PFE   -  1/16    35.25
SGP   +  7/8     50.50
TROW  +  3/4     36.00
XON   -  7/16    77.56
YHOO  -3        131.31


                  Day     Month  Year    History
        R-MAKER  +1.66%  -1.08%  12.27%  41.38%
        S&P:     +1.12%  -0.72%  11.45%  37.84%
        NASDAQ:  +2.30%  -0.24%  22.19%  62.10%

Rule Maker Stocks

    Rec'd    #  Security     In At       Now    Change
   6/23/98   68 Cisco Syst    29.21     62.94   115.50%
    5/1/98   82 Gap Inc.      23.05     47.88   107.68%
    2/3/98   54 Microsoft     45.13     88.81    96.77%
   2/13/98   44 Intel         42.34     67.56    59.58%
   5/26/98   18 AmExpress    104.07    142.38    36.81%
    2/3/98   66 Pfizer        27.43     35.25    28.49%
    6/3/99   11 *Delphi Au    17.19     19.19    11.62%
    2/6/98   56 T. Rowe Pr    33.67     36.00     6.91%
   8/21/98   44 Schering-P    47.99     50.50     5.22%
   2/27/98   27 Coca-Cola     69.11     62.50    -9.56%
   2/17/99   16 Yahoo Inc.   126.31    131.31     3.96%

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   20 Exxon         64.34     77.56    20.56%
   3/12/98   20 Eastman Ko    63.15     70.06    10.95%
   3/12/98   15 Chevron       83.34     91.56     9.86%
   3/12/98   17 *General M    61.28     66.13     7.90%

Rule Maker Stocks

    Rec'd    #  Security     In At     Value    Change
    2/3/98   54 Microsoft   2437.28   4795.88  $2358.60
   6/23/98   68 Cisco Syst  1985.95   4279.75  $2293.80
    5/1/98   82 Gap Inc.    1890.33   3925.75  $2035.42
   2/13/98   44 Intel       1862.83   2972.75  $1109.92
   5/26/98   18 AmExpress   1873.20   2562.75   $689.55
    2/3/98   66 Pfizer      1810.58   2326.50   $515.92
   8/21/98   44 Schering-P   2111.7   2222.00   $110.30
    6/3/99   11 *Delphi Au   189.09    211.06    $21.97
   2/27/98   27 Coca-Cola   1865.89   1687.50  -$178.39
    2/6/98   56 T. Rowe Pr  1885.70   2016.00   $130.30
   2/17/99   16 Yahoo Inc.  2020.95   2101.00    $80.05

Foolish Four Stocks
    Rec'd    #  Security     In At     Value    Change
   3/12/98   20 Eastman Ko  1262.95   1401.25   $138.30
   3/12/98   15 Chevron     1250.14   1373.44   $123.30

   3/12/98   20 Exxon       1286.70   1551.25   $264.55
   3/12/98   17 *General M  1041.80   1124.13    $82.33

                              CASH    $255.59
                             TOTAL  $34806.59


Notes: The Rule Maker Portfolio began with $20,000 on February 2, 1998, and it added $2,000 in August 1998 and February 1999. Beginning in July 1999, $500 in cash (which is soon invested in stocks) is added every month.

*Although DPH is not a Foolish Four stock, it was spun-off from GM on June 3, 1999

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