Thursday, February 12, 1998

Cash-King Portfolio Report
by Phil Weiss ([email protected])

TOWACO, NJ (Feb. 12, 1998) -- As those of you that are familiar with the Fool's investment philosophy know, we recommend that every investor do their own stock research rather than blindly relying on someone else's help -- particularly if they call themselves a "Fool" but even more particularly if they call themselves a "financial professional." Tonight, I thought that I'd provide some insight into the process we used to select the Cash-Kings in our portfolio. This is especially appropriate seeing as tonight we announce our fourth buy. After reading that and this column, we look forward to hearing your thoughts in the Cash-King Folder.

Rob, Al, Tom and I agreed to do individual research before coming together as a team to talk through our ideas and come up with a firm list of eight companies to part-own in the years ahead. We went our separate ways for a while. Now, although there are a number of commercially-available screening programs, I decided to screen for Cash-Kings manually. It was simple. I put the names of a bunch of companies on a sheet of paper, hung that paper on the wall, and threw darts at it from across the room. I even went to the trouble of writing the names of my favorite companies in oversized lettering to put the odds in their favor. But I missed most of them (I'm a third-rate dartist). So I went with a different strategy.

Next, I considered letting my fellow portfolio managers do all the thorough research and pick their favorites. I'd just "Yes, sir!" them to death. This approach also wouldn't require any real work on my behalf -- convenient! But that's exactly what the Wise propose to investors, blindly following their advice. If I were to meet the basic precepts of the Cash-King model, I'd have to involve myself in the selection process. After all, there's nothing wrong with using the research and opinions of others in your decision-making process. The problem comes when we thoughtlessly accept the propositions of car salesmen, insurance salesmen, brokers, realtors or Cash-King portfolio managers. To be Foolish, we must bring our reason to bear on these matters.

I finally decided that the best way to approach the task was to pre-select a number of possible Cash-King candidates and then begin performing manual screens. This accommodated my love of the Peter-Lynch philosophy -- investing in what you know and understand. I started with those companies that I have some relationship to in my daily life. This approach also accommodated my need to rank my candidates and also provided the flexibility to decide what characteristics to concentrate on. You should know that, as I'm a Fool, I'm not operating off of hundreds of proprietary indicators nor did I stew up any special-sauce, magic-serum analysis. Nope, I carried out basic, fundamental research on these companies -- ideas that could appear in an eighth-grade mind as easily as in mine.

To start, again I put together a list of companies that sell products or services that I use on a daily basis. I supplemented the list with stocks mentioned on the Cash-King message board, which I hadn't realized were supplying me with a slew of "stuff." Then, it was off to the library. Like The Fool, my local library affords me free entry on a daily basis. Very sweet. Now, one of my favorite sources of information at the local library is the gazillion-page publication, Value Line.

When looking through it, I'm really not that interested in what the Wise Analyst that follows the stock has to say about it ("Blah, blah, blah. . blah, blah. Blibbedy blah.") And I'm not so concerned with the Value Line rankings for the stock because many of the assessment factors they use aren't defined for readers. What I do like -- in fact what I love about these sheets is the data array. Their numbers include all kinds of historical financial-statement data as well as figures on cash flow, long-term debt, return on equity (if you don't know what this means, ask us, Fool!), and historical stock-price performance. They also provide five- and ten-year historical growth rates for the stocks in such things as earnings per share, revenues, dividends and cash flow. Wonderful!

So, I reviewed the Value Line sheets to see if my candidates looked reasonable from both a current and historical perspective, using the criteria we've outlined in the 11 Steps. I even took some extra time to flip around the pages looking for companies that we hadn't discussed. Finally, I xeroxed the sheets for those companies I was interested in and headed home. Back at the roost, with sheets unfurled on my computer desk, I created an Excel database for the stocks I'd selected. I supplemented the historical information from Value Line with current financial information from Zacks and the FreeEdgar site on the web www.freeedgar.com. I built my spreadsheet to accept the analytical data that I needed -- these again are standards outlined in Step 6 of the steps to Cash-King Investing.

When I finished my database, I used it to cumulatively rank the companies on the basis of the Cash-King criteria. Initially I gave equal weighting to all categories. I then looked at the rankings more carefully and narrowed my list of choices down based upon my own judgment of the information that I had accumulated (I will explain these weightings in future reports). Depending upon how much I knew or understood the company & its business, this process also involved reviewing additional information that I found on the company (like the recent 10Q's and 10K's). Now, I should note that the level of detailed research that I did here was actually less than I would normally do. Why? I knew I had three other managers working dutifully on their CK candidates and that we'd chatter on about all this in the days ahead. Plus, I was generally looking at companies with which I already had some familiarity.

After all the clicking of keys and tapping of fingers, I shared the results of my screens with all of my fellow writers. Only Tom and Al wanted a copy of the spreadsheet; my guess is that Rob, a steady opponent of Microsoft products, declined because it was Excel based! Then once we all began working off our research, decisions were actually made in a rather lickety-split fashion. Having a spreadsheet of information to work off of together can be tremendously helpful. If you're in an investment club, you should definitely have someone dedicated to building and distributing spreadsheets.

Ok, so why did I share all this?

The bottom line of this report is that it wasn't (and isn't) that hard to select candidates for long-term investment and to discuss the relative merits, strengths and weaknesses of each. We do it every day in our message folder. Any of you that have a little bit of time could compile your own database just like the one that I put together. Feel free then to bounce ideas off us on the boards. This work might take you a bit of effort up-front, but we do believe that Cash-Kings primarily represent top-flight companies that one could hold for years to come. For me, one of the beauties of this model is that it demands legwork up-front but requires increasingly less work in the years ahead. That's the way it should be -- being a veteran should mean doing less to derive greater benefits. Disciplines that lead to greater efficiency are among my favorites!

The only decision that remained for us was who would concentrate their attention on which stocks. We've generally split it up by industry groupings, and I'll be focusing a good deal on Pfizer and any other pharmaceutical/healthcare companies purchased in the years ahead. Oh, but then one thing did remain. . we also had to figure out who would buy dinner (it looks to us like it should be Tom!) when Rob, Al and I cruise in and hang out at Fool HQ for a few days later this spring!

Fool on,

Phil Weiss ([email protected])

TODAY'S NUMBERS

Stock  Change    Bid 
 ---------------- 
 MSFT  -  3/16  158.69 
 PFE   +  11/16 84.38 
 TROW  +1       69.13 
 
                   Day   Month    Year  History 
         C-K      +0.20%   0.61%   0.61%   0.61% 
         S&P:     +0.40%   2.28%   2.28%   2.28% 
         NASDAQ:  +0.34%   3.72%   3.72%   3.72% 
  
     Rec'd    #  Security     In At       Now    Change 
    2/6/98    28 T. Rowe Pr    67.35     69.13     2.64% 
    2/3/98    22 Pfizer        82.30     84.38     2.52% 
    2/3/98    12 Microsoft    156.54    158.69     1.37% 
  
  
     Rec'd    #  Security     In At     Value    Change 
    2/3/98    12 Microsoft   1878.45   1904.25    $25.80 
    2/3/98    22 Pfizer      1810.58   1856.25    $45.67 
    2/6/98    28 T. Rowe Pr  1885.70   1935.50    $49.80 
  
                               CASH  $14425.27 
                              TOTAL  $20121.27 
  
 *The year for the S&P and Nasdaq will be as of 02/03/98