Wednesday, April 15, 1998

Cash-King Portfolio Report
Al Levit

Glendale, CA (Apr. 15, 1998) -- For starters, yep, all of our companies are announcing earnings. And yep, on Monday we'll thoroughly review the numbers before then digging through all the reports in more detail in the weeks ahead.

Ok, I'm going to deviate a bit from our normal format and bypass Q&A day to share my recent search for a new stock in my personal portfolio. It has yielded interesting results. Why deviate from Q&A day this week? Well...

* First and foremost, several of our most prolific veterans, including but certainly not limited to DoubleEntry and DougFool, continue to answer questions from our Fool members as soon as they are posted. It was an enlightening week on the Cash-King message folder.

* Secondly, I did have this personal investment situation that included a number of issues of interest to Cash-King investors. I will use the remainder of this column and tomorrow's column to share those issues with you.

I was looking for an additional stock for my family's portfolio, and I started with these initial ground rules:

1. No more high-tech stocks! We had enough of those already! Mind you, I'm well aware that it's very difficult today to define boundaries for the term "high technology." Even so, it's pretty easy for me to label a few of my major holdings "high-tech" stocks: Microsoft (Nasdaq: MSFT), Dell (Nasdaq: Dell), Cisco (Nasdaq: CSCO) and Intel (Nasdaq: INTC) -- so it really was time to look elsewhere.

2. Since we have a core holding in the Foolish Four, in our case in the RP variation (just like the Cash-King portfolio), naturally I was looking for an investment whose performance would match or outmatch this RP-4 variation. Otherwise, we might as well just increase our RP-4 allocation.

Now, in my situation, this investment will be in a taxable vehicle, so I converted the historical returns of the RP-4 to an after-tax basis. Over a 10-year investment horizon, my calculation of the returns worked like this. The numbers look nasty, but step by step, you'll see it's pretty simple:

a. I assumed the RP-4 stocks would turn over 5 times during the 10 years.

b. I used the 20% capital gains tax rate for each transaction.

c. Further, I set a 19% annual growth rate for the RP variation. So after two years of 19% growth, the average stock had risen

42% (1.19 x 1.19 = 1.42, or 42%).

d. Again, 20% of this gets taxed away, which leaves us with 34% of two-year growth after taxes (42 x 0.8 = 1.34, or 34%).

e. So, at the end of 10 years we're working off a portfolio whose value has increased, after tax, by 332% (1.34 x 5 = 4.32, or 332%).

f. This equates to an after-tax yield of about 16% per year.

Thus, when I went out in search of a non-tech stock for the portfolio, but one that could beat the historical returns of the RP-4 portfolio, I was looking for a business whose value could possibly increase at 16% per year after taxes. Remembering that there are no guarantees that the RP-4 will continue to perform this well (even though it has for forty years, something the financial media often casually skips over), I wanted to aim high as I went in search of my new stock.

Of course, I wanted it to be a Cash-King-like stock, so I set about my task to find a non-tech Cash-King expected to grow at 16% per year.

I started by digging up several potential Cash-Kings, outside of the traditionally defined technology sector, with projected yearly growth rates comfortably above the 16%. In fact, every one of the companies in our Cash-King portfolio, including the one that the Phil will introduce next week (yep, we have another buy report coming), meets this standard.

BUT... because we're talking after-tax returns, we actually had to dig out companies growing at an average annual rate of 20%. The returns would be taxed at the long-term rate of 20%, bringing performance in at the 16% after-tax growth of the RP-4. Hmph. It turns out that, in our existing C-K portfolio, only Intel and Microsoft meet those growth estimates. But I was looking for non-high tech stocks. Hmph. I asked myself the following questions:

1. Should an investor ever purchase a Cash-King stock if she thinks she can do better with the Foolish Four? If so, when? One argument for the Foolish Four is that 37 years of back-tested history is hard to beat. A reason that some investors might go with a Cash-King anyway is that you probably want more than just four stocks in your portfolio, especially after it grows to more than a few thousand bucks.

2. Does that awful V-word (valuation) come into play in this decision? In certain times, it may be difficult or impossible to find a Cash-King that beats the Foolish Four's after-tax growth characteristics.

After all this consideration and calculation, after the search for steady, high-powered large growth companies outside the world of technology, I'm now thinking very seriously about just adding more moola to my existing RP-4 portfolio. I'm still debating this in my mind. If those 16% after-tax yearly returns from the RP-4 play out over the next 37 years, am I going to be able to find any Cash-Kings outside of the tech industry that can beat it? I don't know. Do you?

Fool on,



Stock  Change    Bid 
 CHV   +1 3/16  80.06 
 KO    -1 3/16  76.69 
 EK    +1 1/8   71.94 
 XON   +1 9/16  68.69 
 GM    +1 1/4   71.13 
 INTC  -1 1/8   74.88 
 MSFT  +2 7/8   91.31 
 PFE   -1 5/16  97.75 
 TROW  -2       70.75 
                  Day   Month    Year  History 
         C-K      +0.10%   0.68%   4.65%   4.65% 
         S&P:     +0.32%   1.59%  11.79%  11.79% 
         NASDAQ:  +1.10%   1.50%  12.73%  12.73% 
     Rec'd    #  Security     In At       Now    Change 
    2/3/98    22 Pfizer        82.30     97.75    18.77% 
    2/3/98    24 Microsoft     78.27     91.31    16.67% 
    3/12/98   20 Eastman Ko    63.15     71.94    13.92% 
    2/27/98   27 Coca-Cola     69.11     76.69    10.97% 
    3/12/98   20 Exxon         64.34     68.69     6.77% 
    2/6/98    28 T. Rowe Pr    67.35     70.75     5.05% 
    3/12/98   17 General Mo    72.41     71.13    -1.77% 
    3/12/98   15 Chevron       83.34     80.06    -3.94% 
    2/13/98   22 Intel         84.67     74.88   -11.57% 
     Rec'd    #  Security     In At     Value    Change 
    2/3/98    22 Pfizer      1810.58   2150.50   $339.92 
    2/3/98    24 Microsoft   1878.45   2191.50   $313.05 
    2/27/98   27 Coca-Cola   1865.89   2070.56   $204.67 
    3/12/98   20 Eastman Ko  1262.95   1438.75   $175.80 
    2/6/98    28 T. Rowe Pr  1885.70   1981.00    $95.30 
    3/12/98   20 Exxon       1286.70   1373.75    $87.05 
    3/12/98   17 General Mo  1230.89   1209.13   -$21.77 
    3/12/98   15 Chevron     1250.14   1200.94   -$49.20 
    2/13/98   22 Intel       1862.83   1647.25  -$215.58 
                               CASH   $5666.26 
                              TOTAL  $20929.64 
 *The year for the S&P and Nasdaq will be as of 02/03/98