RULE MAKER PORTFOLIO

Rule Maker Portfolio
How I Pick Stocks

By Rob Landley (TMF Oak) (TMF Oak)

NEW JERSEY (November 5, 1999) -- It's Friday again, time for rest, relaxation, contemplation, and of course the article that stays up all weekend so I probably get more people to read it than any of the others.

We don't talk about our personal accounts here much because the Fool Lawyers get nervous. However, last month I sold another investment I'd made, a condominium I'd been renting out in Austin, Texas, and thus brought to an end my dabbling in real estate. I now have to figure out what to do with the money.

Owning rentable property can be a nice source of income, but it has its expenses, too, and was an awful lot of work from start to finish. Stocks never call you up at two in the morning and tell you the air conditioner blew up. (Your broker might, but that's another fun thing about using online brokers. They almost never call you about the status of your air conditioner.)

A week or two back, I deposited a check for $10,000 into my brokerage account at Datek Online (which I don't necessarily recommend but which I haven't had any trouble with either). And there the money has sat, earning something like 3.5 percent interest, ever since.

I have more money than that in my 401(k), but this is real money I could spend now if I wanted to. I don't have to wait until I'm age 59 1/2 to access this. I'm only 27. I've been out of college for only four years and spent most of that time paying off college loans, my car, and STUPIDLY acquired credit card debt, and this is probably the largest amount of free cash I've ever had in one place at one time.

So now I have to figure out what stocks I want to buy with it. Hmmm....

I pretty much cleaned out my Datek account to buy the rental property in the first place, a year and a half ago. Since then, most of my stock investing has been through my DRIPs into Intel, Coke, Wrigley, and IBM. I've also sent some of my newfound wealth to those accounts, above and beyond the $10,000 in the Datek account, but they are still some of my first choices when it comes to buying new shares anyway. Nice, steady, long-term cash generating machines.

I'm considering consolidating my DRIPs into my brokerage account just to cut down on paperwork. One of the things I like about Datek (and one reason I went with them at the time) is that they keep track of my transaction history for me so I don't have to root around in boxes of papers come tax time. I'm bad at paperwork. Really, really bad.

The down side of this is that if I sell my DRIP shares, I get taxed unnecessarily. If I issue stock certificates to myself and send them to Datek to be deposited in my account, when I bought them or what I paid for them doesn't show up in that transaction history. I may end up taking a tax hit just for the sake of simplicity, though I haven't decided yet.

Other than the cash, my Datek account only contains nine shares of Home Depot (NYSE: HD) and four shares of a little company called "Dallas Semiconductor" I took a fancy to once. (They make the Java iButton, which is a cool techie toy, so I bought $100 worth of their stock just as a present to myself.) The Home Depot position is the result of sending in very, very small monthly contributions and breaking down and buying something with the money after six months, when the cost of the commission for such a small purchase and the cost of staying out of the market canceled out in my mind.

I like Home Depot, and liked them even before they replaced Sears on the Dow. They're a Merchant King with a lean ship, healthy balance sheet, and great inventory turnover. And they're smaller than Sears, which gives them more room to grow. I've even considered shorting their competitor, Lowe's (NYSE: LOW), which they're beating the tar out of as far as I can tell. But I've got a lot more research to do there before I'd be comfortable doing that.

I'm also considering the stocks in our Rule Maker portfolio. Intel (Nasdaq: INTC) and Coca-Cola (NYSE: KO) I already mentioned, they're near the top of the list. Cisco (Nasdaq: CSCO) is attractive, but I'm nervous about some things I saw at the Atlanta Linux Showcase last month. Of course with the Internet growing at the rate it is, there's no shortage of demand for many players to fill. And no investment is without risk. And Cisco really does have a significant brand name in this space. But still, if I want an investment with more risk, I think I'll go with a smaller company that has commensurate growth potential.

Microsoft (Nasdaq: MSFT) is out because I just don't see their business as sustainable, or diversified enough, or even particularly securely positioned in certain ways. The other portfolio managers resoundingly disagree with me, and I won't open that can of worms here just now, but I won't put my own money into it either.

I admire Zeke's work on T. Rowe Price (Nasdaq: TROW), but it's not my area of expertise. Same goes for American Express (NYSE: AXP). I invest in what I know, and that just isn't it.

I've casually followed Pfizer (NYSE: PFE) and Schering-Plough (NYSE: SGP), but the company in that space I've followed most closely is Johnson & Johnson (NYSE: JNJ), which was in the original paper portfolios we played with back when we were still hashing out the Rule Maker philosophy, before we started playing around with real money in the current portfolio. JNJ's lower margins have kept it out of this portfolio, but I have a better handle on (and more faith in) their broad, diversified business and strong brand name among healthcare providers. The Drip Portfolio does a good job of following JNJ's business.

I feel I should study Gap (NYSE: GPS) a bit more. They've always interested me but I'm not naturally a part of the clothing retail business. Maybe next time.

When I had to choose between Yahoo! (Nasdaq: YHOO) and Amazon (Nasdaq: AMZN) for my Roth IRA last year, I picked Amazon because Yahoo!'s only source of income at the time was advertising, and I couldn't see why that made them more valuable than a television network like NBC, CBS, or ABC. Both beat out eBay, in my opinion. Even with quality being 100 times as important as valuation, eBay's price WAS over a thousand times their earnings. No matter what I thought of the company, I'd have been buying froth. No thanks.

Since last year, Yahoo! has diversified into auctions and online financial transactions, and now seems worth a closer look. But I might just buy some more Amazon, since I've already got a position there. I'll see how the numbers look.

I might start a position in the RP4 Beating the Dow strategy. I can afford it now.

And in previous columns, I mentioned the initial public offerings of Red Hat (Nasdaq: RHAT) and United Parcel Service. I might want to look into those, not because they're IPOs but because they're companies I admire and follow.

So, my potential investments to make with the cash in my brokerage account include Intel, IBM, Coke, Home Depot, and JNJ. I have a second tier of candidates in the RP4, Yahoo!, Amazon, Pfizer, Schering-Plough, The Gap, Cisco, Wrigley, Red Hat, UPS, and even Dallas Semiconductor. (Since I've already got a position in that last one, I might as well study up on it again and see if I still like it.)

Now comes the hard part: Doing my homework and poring over a lot of annual and quarterly statements from the SEC's "edgar" database at www.freeedgar.com. I'm trying to narrow down the list to about five investments of $2000 each, and I already have five top picks, but I may let an extra company or two slip through, or replace a top pick with a second tier candidate after seeing what edgar has to say.

That's how I pick stocks, using my real money instead of Tom Gardner's. There's no magic to it, just thinking over the companies I'm most familiar with to find the ones I think will be most successful and most profitable in the foreseeable future, and then doing some research to see how my assessment is borne out by the numbers as reported in the SEC filings. No charts, graphs, dice, dart boards, Ouija boards, analyst recommendations, or hot tips from CNBC.

The financial industry at large may never forgive me.

- Oak

What do you think?
Come post your thoughts about tonight's report on our Rule Maker Strategy board. Alternatively, if you have ideas, analysis, or questions about a particular Rule Maker company, take a seat at the roundtable discussion on our Rule Maker Companies board. Finally, if you're new to all this stuff, the Rule Maker Beginners board is the place to get your questions answered.


 




Rule Maker Portfolio

11/5/99 Closing Numbers
Ticker Company Dly Pr Chg Price
AXPAMER EXPRESS7/16$149.75
CHVCHEVRON CORP-2 3/4$85.50
CSCOCISCO SYSTEMS7/16$73.44
DPHDELPHI AUTOMOTIVE SYSTEMS-11/16$15.81
EKEASTMAN KODAK-9/16$68.69
GMGENL MOTORS-3/8$68.88
GPSGAP INC-1$32.75
INTCINTEL CORP13/16$82.38
KOCOCA-COLA CO7/16$58.13
MSFTMICROSOFT CORP-3/16$91.56
PFEPFIZER, INC-2 1/2$34.75
SGPSCHERING-PLOUGH11/16$56.69
TROWT.ROWE PRICE ASSOC3/16$37.38
XONEXXON CORP-2 3/8$70.63
YHOOYAHOO INC5/16$183.44

  Day Week Month Year
To Date
Since
2/2/98
Annualized
Rule Maker .52% -.83% -.83% 15.43% 43.72% 22.92%
S&P 500 .56% .54% .54% 11.47% 39.78% 20.99%
S&P 500(DA) .56% .54% .54% 12.05% 41.55% 21.86%
S&P 500(DCA) n/a n/a n/a n/a 25.41% 13.75%
NASDAQ 1.52% 4.58% 4.58% 41.48% 91.58% 44.75%

Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
6/23/9875CSCO32.865$73.44123.45%
2/3/9859MSFT49.352$91.5685.53%
2/13/9859INTC50.624$82.3862.72%
2/17/9916YHOO126.309$183.4445.23%
5/1/9882GPS22.708$32.7544.22%
5/26/9818AXP104.067$149.7543.90%
2/3/9866PFE27.433$34.7526.67%
8/21/9844SGP47.993$56.6918.12%
3/12/9817GM60.399$68.8814.03%
2/3/9856TROW33.673$37.3810.99%
3/12/9820XON64.335$70.639.78%
3/12/9820EK63.148$68.698.77%
3/12/9815CHV83.343$85.502.59%
3/12/9811DPH17.202$15.81-8.08%
2/27/9827KO69.107$58.13-15.89%

Trade Date # Shares Ticker Cost Value LT $ Val Ch
6/23/9875CSCO$2,464.86$5,507.81$3,042.95
2/3/9859MSFT$2,911.79$5,402.19$2,490.40
2/13/9859INTC$2,986.79$4,860.13$1,873.34
2/17/9916YHOO$2,020.95$2,935.00$914.05
5/1/9882GPS$1,862.06$2,685.50$823.44
5/26/9818AXP$1,873.20$2,695.50$822.30
2/3/9866PFE$1,810.58$2,293.50$482.93
8/21/9844SGP$2,111.70$2,494.25$382.55
2/3/9856TROW$1,885.70$2,093.00$207.30
3/12/9817GM$1,026.78$1,170.88$144.10
3/12/9820XON$1,286.70$1,412.50$125.80
3/12/9820EK$1,262.95$1,373.75$110.80
3/12/9815CHV$1,250.14$1,282.50$32.36
3/12/9811DPH$189.22$173.94($15.28)
2/27/9827KO$1,865.89$1,569.38($296.51)
  Cash: $135.63  
  Total: $38,085.44  


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.