Thursday, March 19, 1998
by Al Levit
Glendale, CA (Mar. 19, 1998) -- On Tuesday, I wrote about why I think Dell Computer (Nasdq: DELL), though a phenomenal company, is not a Cash-King business. Rob Landley stepped up yesterday, insulted me Foolishly, and rebutted my analysis of Dell. If you didn't get a chance to read either of these reports, check them out. They're useful and a breezy read. Here they are (click them to read):
Now because of all that jabbering, we had to push back our Q&A day from Wednesday to today. Let's get right to it with an unusual first question.
Ordinarily the questions we see in the Cash-King message board are about Cash-King investing. But something different happened last week. As promised, we went out and purchased a Foolish Four variant to blend in with our Cash-King holdings. As a result, many of the recent questions in our message folder were related to the Foolish Four. Our purchase stirred up some confusion... as evidenced by this post from one of our favorite contributors, AnFool:
"I can't believe the CK portfolio is buying Eastman Kodak. Erg! I just sold mine yesterday to buy Cisco. Oh, help! I'm excited about Cisco and I do still have Chevron & Exxon, but this Eastman Kodak thing makes me very nervous. I just know it will soar now!"
AnFool, you emphasize a little Murphy's Law there and so close to St. Patrick's Day. Pretty Foolish of you. My opinion is -- don't fret about it; you have absolutely nothing to feel bad about. As Boring Portfolio managers Greg Markus and Mark Weaver will tell you, and as Fool Portfolio managers Dave Gardner and Jeff Fischer wish they could tell you, no one ever need apologize for buying Cisco (Nasdaq: CSCO). The company is, to my eyes, clearly a Cash-King. It was part of both of Tom Gardner's original Cash-King portfolios (even though back then Tom was instrumental in buying competitor 3Com for The Fool Portfolio... ack!).
We haven't bought Cisco yet for the Cash-King portfolio, but give us time. We've got three more purchases left for our original eight, then a new purchase every six months. It's hard for this Fool to believe that Cisco won't someday be added to the Cash-King portfolio. Cisco has $7.3 billion in trailing sales, gross margins of 65%, net profit margins of 18.1%, $1.6 billion in cash & equivalents, no long-term debt, and a brand name that is going to grow more global and reach down further into the consumer markets in the decade ahead.
Re-read that last sentence; it's pretty impressive. The one concern we have about Cisco is its Flow Ratio of 1.44. We'd like to see it bear down much more aggressively on its accounts receivable, but that's just one violation of our standards amidst a slew of shining performances on the rest.
Now, what about Eastman Kodak (NYSE: EK)? It's important for everyone to realize that our purchases of Eastman Kodak, Chevron, Exxon, and General Motors had nothing to do with our choices of Cash-Kings to buy. These were decisions made based on a mechanical approach to value investing that is outlined in our Fool's School in work done by Robert Sheard, Bob Price, and many others.
The Buy Report that we published last week spells this out in greater detail. No one should confuse those buys with the Cash-Kings. Click here to read the CK Buys the RP4 Report. Finally, AnFool, don't feel like you missed the boat on any stocks in our portfolio simply because we selected them. Believe us when we say that we'll find more than just one dog in this portfolio in the years ahead. One day, you might just be rushing to buy the dog-to-be in our portfolio. Some patient research might have guided you away from it. Remember that Murphy's Law will nail us, too.
Ok, we also had plenty of discussion about the Foolish Four from some of the most senior members in Fooldom. None other than Jeff Fischer dropped by the Cash-King message folder and wrote:
"I have a question about your Foolish Four selections. Tom would be the first to admit to tweaking the Foolish Four. Witness his aversion to the tobacco side of Philip Morris' business. Further, look at the Fool Portfolio's decision to hold Lucent, even if AT&T had fallen out of the mechanical selection.
"For this reason, I'm here to ask you guys if buying two oil companies (2 out of 4 of your value investments) is much like buying the same thing twice. Aren't you just buying 3 Foolish Four positions? Unless something really makes Chevron different from Exxon... over the coming 18 months, I expect them to perform similarly.
"As for the Foolish Four in the Cash-King: I know that your portfolio is well-diversified outside of the four Dow stocks and that the two oils should never hurt it much. I was just wondering if the C-K guys would recommend to Fools (especially those Fools just buying the four Dow stocks right now) that they forego one of these oil stocks in favor of the next Dow stock that is in a different industry?"
A few points in response to this. In general, we're not crazy about "tweaking" mechanical methods in the Cash-King Portfolio. We prefer to let the tried and true do its thing. The one exception for us is with ethics. We would have avoided Philip Morris (NYSE: MO) for that reason alone. That said, we did discuss actually buying Philip Morris and becoming very active shareholders, letting our company's managers know that we were disappointed that they were selling smoke sticks to 12-year-olds in Malaysia.
As I've noted before, ethics is a strictly personal decision. For the four of us personally, Philip Morris was out. Of course, we didn't complain when we discovered that the RP variation rules, as we understood them, left Philip Morris off the selection list to begin with.
As regards other tweaks, I realize that the Fool Portfolio would have left Lucent in the Foolish Four, even if AT&T had dropped out of the group. We think that decision makes good sense (and, Jeff, you all have made good money on Lucent, early and often). For us, we would have looked at the company spun off from one of our Dow turnarounds and made the following moves:
Asked ourselves: Does Lucent fit our general Cash-King model?
If so, let's port Lucent to the CK portion of the portfolio.
Let's enjoy the fact that we bypassed capital-gains taxes on a sale of Lucent.
Let's follow its quarterly earnings figures in the years ahead.
So, we could see doing much the same thing as the Fool Portfolio did on that score. But that's a tweak that led a Foolish Four stock to remain, not one that fundamentally altered the model at the outset.
The final point, Jeff, comes from Fool Web guy "Guch," who wrote:
"Actually, Jeff, history would suggest that the two oil companies Chevron and Exxon will not necessarily act the same in the next 18 months (or any 18-month period). Click this link -- The History of the Foolish Four -- and take a look at the 1976, 1984, and 1985 stocks and their performance. There were two oils in each of those groupings and they all performed very differently."
Guch's response shows us once again the danger in trying to generalize with mechanical methods. The numbers jump up and bite us when we do. Thanks, Guch, for doing that bit of research. And Jeff, thank you for an excellent question.
To close off that question: 1) We like to let the mechanics work their magic. 2) We do, however, use ethics as a determiner in mechanical models. 3) We would consider carrying over an appropriate Foolish Four stock (or spin-off) into the Cash-King side of the portfolio. 4) But otherwise, for us, the model remains intact.
Our last Q&A comes from Jester, a first-time poster on the Cash-King board, who writes:
"I am a new Fool, much more like a Cash baron than a Cash King. We don't have the money up front to pursue the Cash King portfolio as "quickly" as it develops. So we bought one Cash King, and have saved money over the past couple of months to make another...
"But which one should we acquire next?
"I know according to the Cash-King philosophy that "it doesn't matter" what order we buy great companies in, but shouldn't we, for example, wait on Intel until the impact of Wall-Street analyst Kurlak's prophecy settles down?
"The question on the order or sequence of purchase is a different angle on Cash King, but I would appreciate any wisdom from a Fool."
Neat question, Jester!
First of all, congratulations on your initiative and persistence in saving to buy two Cash-Kings already. You're right when you say that in the long run the order of your buying doesn't much matter. Many long-term shareholders of Coca-Cola (NYSE: KO) couldn't tell you offhand their initial cost-basis or even the year they purchased the stock. But they're extremely happy.
But that doesn't mean blind buying is right for you. If it makes you feel better to buy Intel (Nasdaq: INTC) last, after Wall Street's short-term philosophizing has played out, then go ahead and do so. That said, I will point out that Intel has been most attractively priced during periods of indecision or negativism about it in the public markets.
And... that's it for today. I'll be back with you tomorrow when we'll, again, do something a little different. NCAA fans, enjoy the basketball games tonight. Stock Madness Fans... check your results by clicking here: Stock Madness Begins!
Stock Change Bid ---------------- CHV + 3/16 83.81 KO - 1/4 74.56 EK + 3/8 62.44 XON + 3/16 64.81 GM -1 1/4 70.06 INTC + 5/16 77.25 MSFT + 3/16 81.94 PFE +1 13/16 90.06 TROW +2 1/2 73.25
Day Month Year History C-K +0.53% 0.09% 1.86% 1.86% S&P: +0.39% 3.85% 8.83% 8.83% NASDAQ: +0.65% 1.66% 8.90% 8.90% Rec'd # Security In At Now Change 2/3/98 22 Pfizer 82.30 90.06 9.43% 2/6/98 28 T. Rowe Pr 67.35 73.25 8.77% 2/27/98 27 Coca-Cola 69.11 74.56 7.89% 2/3/98 24 Microsoft 78.27 81.94 4.69% 3/12/98 20 Exxon 64.34 64.81 0.74% 3/12/98 15 Chevron 83.34 83.81 0.56% 3/12/98 20 Eastman Ko 63.15 62.44 -1.12% 3/12/98 17 General Mo 72.41 70.06 -3.24% 2/13/98 22 Intel 84.67 77.25 -8.77% Rec'd # Security In At Value Change 2/3/98 22 Pfizer 1810.58 1981.38 $170.80 2/6/98 28 T. Rowe Pr 1885.70 2051.00 $165.30 2/27/98 27 Coca-Cola 1865.89 2013.19 $147.30 2/3/98 24 Microsoft 1878.45 1966.50 $88.05 3/12/98 20 Exxon 1286.70 1296.25 $9.55 3/12/98 15 Chevron 1250.14 1257.19 $7.05 3/12/98 20 Eastman Ko 1262.95 1248.75 -$14.20 3/12/98 17 General Mo 1230.89 1191.06 -$39.83 2/13/98 22 Intel 1862.83 1699.50 -$163.33 CASH $5666.26 TOTAL $20371.07 *The year for the S&P and Nasdaq will be as of 02/03/98