By
Go out and have a good time celebrating with family and friends as we usher in the New Year. I did find it interesting to see an article in my local paper this week stating that many of the more elaborate celebrations planned for tonight didn't sell out and some were even canceled due to lack of interest (usually because they were overpriced). An informal survey I did in my office showed that other than one person who won free tickets to a gala from a local radio station everyone was planning to keep things relatively low key and spend the night with family and friends. Of course, it's also possible that I got that result because I asked a bunch of accountants.
For tonight's report I've put together a little table showing the performance of our stocks from the close of the market on 12/31/98 through the market's close on 12/30/99:
Rule Maker Return
Yahoo!* 230.7%
Cisco 128.8%
Microsoft 69.6%
American Express 61.7%
Intel 41.2%
Gap Inc. 23.6%
T. Rowe Price 5.1%
Coca-Cola -12.8%
Pfizer -21.6%
Schering-Plough -24.8%
(* Yahoo! was added to this portfolio on February 17th at a price of 125 13/16 per share.)
Now, here's a look at the performance of the Foolish Four component of our portfolio:
Foolish Four Return
Exxon-Mobile 10.0%
Chevron 3.1%
General Motors 1.5%
Eastman-Kodak -9.0%
Delphi Automotive* -11.3%
(* Delphi was spun off from General Motors during the year.)
We started the year with a portfolio valued at $28,444. During 1999, $2,000 of cash was added to the portfolio to purchase Yahoo! In addition, $500 was added to the portfolio each month in July through December. By month, this money was used to purchase additional shares of Microsoft, Intel, Cisco, Microsoft, Intel, and more Intel. As of yesterday, our portfolio was valued at $47,102. That's a return of 40.62%. For the second year in a row, we successfully beat the S&P 500, the leading large-cap benchmark, which returned 19.1%. All in all, it's been a pretty good year for our portfolio, and we have much to give thanks for.
Now, I'd like to take a quick survey of our companies and make a comment or two about each of them.
American Express (NYSE: AXP) had a solid year. I was most impressed by the launch of numerous Internet-related initiatives. One that your Rule Maker portfolio managers have taken advantage of is the new American Express Brokerage, which will allow us to make our monthly Rule Maker stock purchases commission-free. AmEx also opened an Internet bank.
Cisco Systems (Nasdaq: CSCO) had a very solid year both in terms of price appreciation and business performance. Over the last 12 months, Cisco sold over $13 billion worth of networking products, which represents 46% year-over-year growth. It is very unusual to find a company as large as Cisco with such dynamic top-line growth. What's even more impressive to me is that during this same period Cisco's accounts receivable balance actually declined by 5%. That's quite an impressive feat. Cisco may well be the most efficient corporation in existence, or at least within the top five. It's a poster boy for the benefits that can be realized from the very products it sells. During the year, our Rule Maker continued on its path of making regular acquisitions, of which the most important were Cerent, Monterey, and Pirelli as these should give Cisco a toehold in the optical networking market. That market is expected to be over $40 billion by 2005. The company also expanded its wireless capabilities with the acquisition of Aironet.
Although its financial statements improved during the third quarter, Coca-Cola (NYSE: KO) had a difficult year. Its biggest problems related to the product contamination health scares in Europe and the related public relations blunders. These events culminated in the announced retirement of company Chairman Douglas Ivester after only two years on the job. Ivester will be replaced by longtime Coke veteran Douglas Daft in April of 2000. I also feel that I must respond here to something that Rob wrote on Wednesday. There is no reason that a financial guy can't lead a marketing-based company like Coke. In my opinion, Ivester's biggest failing was that he either didn't have capable people advising him on issues outside his circle of competence or else he didn't listen to his advisors. If you're interested in reading more about Ivester's departure you should read this Fortune article.
The last 12 months have been a bit disappointing for Gap Stores (NYSE: GPS). Sales increased by 32%, but the amount of debt carried on its balance sheet remained at relatively high levels. This kept its flow ratio above our standard and its ratio of cash-to-debt below our standard. It was also disappointing to see the company's poor level of same-store sales growth. This performance most likely led to the resignation of Robert Fisher who had served as President of the Gap Division.
Over the last 12 months, we have seen Intel (Nasdaq: INTC) rebound from a rather lackluster 1998. Of all the companies in our portfolio, Intel probably had the biggest improvement in terms of financial statement quality, as it now sports a Rule Maker ranking of 54. For the second time in its history, Intel's business hit an inflection point in 1999. Intel expanded its business model outside of its traditional microprocessor business as it made nine acquisitions directed towards increasing its presence in the networking and communications sector. The total cost of these acquisitions was $6 billion, a figure that exceeded its capital expenditures for the year.
Microsoft's (Nasdaq: MSFT) stock price and financial performance continued to shine during the year, despite a plethora of negative news related to the company's ongoing dispute with the Justice Department. All of this culminated in the release of Judge Jackson's findings of fact against the company. On the positive side, Microsoft recently announced that its long awaited Windows 2000 product is finally ready for production. We also learned that our company will have a new Chief Financial Officer, John Connors, who will replace departing CFO Greg Maffei on January 6.
Pfizer (NYSE: PFE) had quite a difficult year, including a number of disappointments related to its drug pipeline. Antibiotic Trovan was once believed to be a potential blockbuster, but health-related problems earlier this year caused that drug to be taken off the shelves, resulting in a substantial write-off of Trovan inventories. In addition, Pfizer's financial statements have deteriorated as I discussed in this series of columns: 10/21, 10/26, 10/27, and 11/2. Finally, there have been the battles with American Home Products (NYSE: AHP) related to the potential merger with Warner-Lambert (NYSE: WLA). You can follow this ongoing story with this merger news timeline. By the way, I ultimately expect Pfizer to win this battle.
Like many of the other big pharmaceutical stocks in 1999, Schering-Plough (NYSE: SGP) saw its stock price decline. There really was not a lot of major news on this company during the year. On the financial side of the equation, its balance sheet has weakened a little bit as it has added some debt to its capital structure. Its flow ratio increased from 0.98 a year ago to 1.20, and its ratio of cash-to-debt declined from 5.09 to 2.40.
I have to admit that even though I own shares of T. Rowe Price (Nasdaq: TROW) in my own portfolio (Disclosure: I own shares of each of our Rule Makers), it's the stock in our portfolio that I follow the least. Like Schering, there's not much news to share here. The best article that I recall reading was the August 5 RM Report, penned by Zeke before he became one of the co-managers of this portfolio. The company's operating performance did improve during the year, but its stock price was relatively stagnant.
Last but certainly not least is the only stock that was purchased by our portfolio for the first time in 1999 -- Yahoo! (Nasdaq: YHOO). Yahoo! continued to be one of the best performing Internet companies as its sales increased by an astounding 157% over the last 12 months. Even more amazing to this Fool is that Yahoo! has actually grown its free cash flow at a faster rate than revenues during this period. As of September, Yahoo! had 105 million unique monthly users. From a long-term perspective, the most important events related to Yahoo! in 1999 were its acquisitions of Geocities and Broadcast.com. Also this year, Yahoo! significantly expanded its international presence, which now includes 21 foreign properties.
Yahoo! was our runaway leader in price gain during the year. Even so, I don't think Yahoo! will take the title again in 2000. Wait one second while I take off my Foolish hat, look into my crystal ball, and make an unFoolish prediction as to which stock will be our best performer in the year ahead. I think that it will be... Never mind, one year is too short a time frame for me to get excited about. I'll pass on the prediction. Besides, if 2000 is anything like 1999, it will be some stock that we haven't even added to our portfolio yet.
One thing that I can be sure of is that whether the market -- or more importantly, our Rule Makers -- are up or down next year, we'll be sticking with this same investment strategy. It's important to remember that the hardest thing for an investor to do isn't to develop an investment strategy; rather, it's to stick with it.
I want to wish each of you a Happy and Foolish New Year. May the year ahead for all of us be filled with much joy, happiness, and success. Thanks to all of you for your support over the past year. I've enjoyed talking to you through my columns, our message boards, and the e-mails that have been sent my way. I'll talk to you again next century.
Phil Weiss (TMFGrape on the boards)
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