Wednesday, June 03, 1998

Cash-King Portfolio Report
by Tom Gardner
Phil Weiss

Alexandria, VA (June 3, 1998) -- Today, we're featuring the first of our three interviews about the qualities we're looking for in Cash-King nominations for the 8th slot in our portfolio. In this first interview, Phil Weiss talks a bit about our income-statement standards as well as a few words on the best-laid marketing plans of Cash-King companies.

But before getting to that interview, I wanted to briefly point your attention to our online poll this week -- which has half-frivolous and half-serious undertones. The poll this week focuses on teeny-bopper global sensation, The Spice Girls, and asks Fools whether they think the five Spice Girls will announce bankruptcy within the next ten years. I encourage you to take two seconds and cast your vote in the poll, click here: Spice Girls Going Bankrupt?

As of this writing, 83% of all respondents believe that all five Spice Girls will go bankrupt within the next ten years. Which is really amazing. I mean, in some ways it's cause for a good laugh -- given how overexposed they are. But it's also shocking to think that this "band" which won the BRIT award for best single, won MTV's best new video award, were featured in a Pepsi ad campaign, and starred in their own mediocre movie could go bankrupt.

In many ways, it's just silly, I know. But it is a reminder of how important a basic financial education can be. After all, what would life have been like for Burt Reynolds and Kim Basinger and Kareem Abdul Jabaar and Billy Joel and hundreds of other accomplished performers had they gained access to a just one-page Foolish report on the Index Fund or the Foolish Four. What heartache would've been saved if they'd spent just 30 minutes reading the 13 Steps to Investing Foolishly and the 11 Steps to Cash-King Investing.

That's a part of our mission here in Fooldom -- to help everyone secure their financial future, whether they have $1,300 in credit-card debt, $526 in a dividend-reinvestment plan, $126,000 in their retirement account, or $37 million in earnings last year. Maybe we should send a formal invite out to the world's rock stars, eh? I thought Tom Reed, on our Web boards, did a pretty good job of capturing the Spice Girls scenario:

Author: Tom Reed

Of course the Spice Girls will mismanage their money. For the most part, performing artists as young as they are have very little education; less than the average high school graduate. They are also Wise enough to put their faith in managers who treat them like hula- hoops, something to exploit until the public is tired of them, then to be discarded.

Even supposed show-biz veterans like Doris Day have been cheated in this way; her husband stole decades of her income, leaving her near-penniless when she divorced him. She had to do that terrible "Doris Day Show" in the late 60's to make enough money for retirement. And the Spice assortment haven't been around long enough to say "Que Sera, Sera."

All it takes is the 13 Steps to Investing Foolishly, and they'd be on their way. Heck, they don't even have to discover the simplicity and durability of Cash-King Investing.

Which provides a nice segue to our interview today with Phil Weiss. Evenin', Phil.

Phil: Hey, Tom.

Tom: Ok, enough about celebrity bankruptcy -- let's get to it. Phil, in our search for the Top Five portfolio nominations in the C-K folder, could you briefly outline three qualities we're looking for on the income statement?

Phil: All right. Well, the first two are pretty simple. All I have to do is think of the C-K steps to come up with them. The first thing I look for are net profit margins higher than 7%. And I like to see those margins growing from year to year.

The second quality that I look for are gross margins running higher than 50%. For this one, I'm even more interested in the trend than I am with the actual figure. Why? Because I figure that, if I've found the right company, as time goes on, manufacturing efficiencies will improve as will the company's position in the marketplace. If they're not at that 50% mark today but trending up, I can be forgiving.

And, finally, the third income statement characteristic that I look for is consistent sales growth. If sales don't grow, if their array of products and services isn't meeting with greater demand each year, then eventually the earnings will dry up. There's only so much juice to be squeezed from an orange. Over time, you need more oranges if you want more juice.

Let me restate before taking your next question, bud. 1) I like to see net margins above 7% and inching higher. 2) I look for ascending gross margins, and prefer to see them racing toward and beyond 50%. 3) I look for unabated sales growth.

Tom: Ok, duly noted. Question number two, then -- Phil, is a dividend payment important to you?

Phil: Not really. I'm investing for the long-term and don't have any plans to use the money I've invested at any time in the near future. Any dividends that I get are either going to be reinvested in the company that paid the dividend or used towards my next stock purchase.

I really prefer to see the company just invest its money directly back into its business via increased investment in research and development or expansion of existing products. Stock buybacks are another use of that cash that I consider superior to dividend payments (for a few reasons discussed in past C-K columns, so I won't go into them).

All of that said, I don't mind a small dividend because it enables the company to have a dividend reinvestment plan (DRIP). Intel is a great example of what I'm talking about here. They currently pay out a measly 12 cents per share in dividends and have one of the more investor-friendly DRIP plans out there.

Tom: So dividends are mostly a no. Ok, can you talk a little bit about the ideal Cash-King company when it comes to marketing/promotion?

Phil: Surprisingly, it doesn't really have to show itself through significant investment in advertising expense. Don't get me wrong, an investment in advertising is important.

However, one of the beauties of the majority of Cash-Kings is that they have such great mindshare that they get a lot of word-of-mouth advertising. Gradually, everyone knows who they are and what products they offer. And because, in the best cases, these products are repeatedly purchased, we grow into their names just from that frequent use. It's free marketing. In fact, sometimes the name-brand becomes synonymous with the product -- Xerox, Coke, Band-Aid, Kleenex -- Fool?

Sorry, couldn't help myself there.

What this really centers around is building a brand name. Over the years, Coke has done a fantastic job at this -- probably the best in the world. A more recent example would be Intel. If you go back 5 to 10 years, who'da thunk that the majority of people would ever know who made the processor inside their personal computer. Absurd, really. But the "Intel Inside" marketing campaign pulled it off.

Tom: Ok, could you share a one-paragraph description both of your single favorite public company in the world and why?

Phil: If I look at it from an overall business perspective, I'd have to say Coca-Cola. It's amazing to me how they've been able to take the flavoring and carbonation of water and turn it into a product that people all over the world know and can enjoy. The business model is light.

And they have great mindshare. They realized that their brand name was their greatest strength (and really the greatest potential strength in the consumer world), and they went about building its value as a means of growing their business. It's really such a simple business overall, yet it's fairly sophisticated and magical. If you doubt that, just check out the stock's performance over the years -- it's provided an annualized return of over 16.5% for the last 80 years. Long-term focus, long-term benefit.

Now, one of the things that I found fascinating when doing my research for the Gap buy report was how Gap has decided to use Coke as an example of how to increase value in their business. Since they started emphasizing the value of the Gap name, business performance has grown stronger and stronger. They've even got someone from Coke on their board of directors.

Tom: Ok, we're going to change things up for the fun of it in our last question, Phil. Let's move away from the qualities of a Cash-King company. Life's more than money, don'tcha know. So, who's your favorite American writer and why?

Phil: Hmm... eyes darting over to my bookshelf -- there are three. I have more books written by John Grisham, Dean Koontz and Robert Ludlum than any other authors (and probably all combined).

When I read for pleasure I like to read books that allow me to get immersed in the story. I want to read a book that doesn't want me to put it down. Not enough writers realize how impatient their audience is -- like it or not, such is the modern world. (Believe it or not, I did actually read an entire book in one sitting. When I flew back from Australia a few years ago, I read over 500 pages cover-to-cover without pause.)

All that being said, if I were to select a single author for his message it'd be Kurt Vonnegut. I read Slaughterhouse Five in high school, which has my favorite passage in literature. The book's hero, Billy Pilgrim, fought in World War II and in trying to cope in its aftermath, he catches a movie featuring war in reverse -- the bombs come out of the ground and are swallowed up in the planes. The planes zing backwards to the airstrip; the bombs spin back to the factory where they're disassembled; and the parts are distributed to mothers who bury them deep.

That message hit me then; it still hits me now.

Tom: A fine reminder. Thanks, Phil. It was a pleasure chatting with you and we'll see you in your C-K garb next week.

Tomorrow we'll be talking with a second Cash-King writer, which we'll keep a surprise for now. In the meantime, drop by the Cash-King Companies folder with your suggestion for our 8th investment. For more guidelines, check out yesterday's report.

Have a great evening. Here comes summer.

Tom Gardner, Fool

Tom Gardner


Stock  Change    Bid 
 AXP   -  11/16 102.69 
 CHV   +  1/16  78.94 
 KO    -  3/16  79.44 
 GPS   -1       54.13 
 EK    -1 7/16  69.81 
 XON   -  15/16 69.00 
 GM    +2 1/8   75.13 
 INTC  -3 3/16  65.94 
 MSFT  -1 3/16  84.25 
 PFE   -  3/8   103.00 
 TROW  +  1/8   35.00 
                  Day   Month    Year  History 
         C-K      -0.78%  -0.86%   4.85%   4.85% 
         S&P:     -0.94%  -0.74%   8.13%   8.13% 
         NASDAQ:  -1.11%  -2.06%   5.41%   5.41% 
 Cash-King Stocks 
     Rec'd    #  Security     In At       Now    Change 
     2/3/98   22 Pfizer        82.30    103.00    25.15% 
    2/27/98   27 Coca-Cola     69.11     79.44    14.95% 
     2/3/98   24 Microsoft     78.27     84.25     7.64% 
     5/1/98   37 Gap Inc.      51.09     54.13     5.94% 
     2/6/98   56 T. Rowe Pr    33.67     35.00     3.94% 
    5/26/98   18 American E   104.07    102.69    -1.33% 
    2/13/98   22 Intel         84.67     65.94   -22.13% 
 Foolish Four Stocks 
     Rec'd    #  Security     In At     Value    Change 
    3/12/98   20 Eastman Ko    63.15     69.81    10.55% 
    3/12/98   20 Exxon         64.34     69.00     7.25% 
    3/12/98   17 General Mo    72.41     75.13     3.76% 
    3/12/98   15 Chevron       83.34     78.94    -5.29% 
 Cash-King Stocks 
     Rec'd    #  Security     In At     Value    Change 
     2/3/98   22 Pfizer      1810.58   2266.00   $455.42 
    2/27/98   27 Coca-Cola   1865.89   2144.81   $278.92 
     2/3/98   24 Microsoft   1878.45   2022.00   $143.55 
     5/1/98   37 Gap Inc.    1890.33   2002.63   $112.30 
     2/6/98   56 T. Rowe Pr  1885.70   1960.00    $74.30 
    5/26/98   18 American E  1873.20   1848.38   -$24.83 
    2/13/98   22 Intel       1862.83   1450.63  -$412.21 
 Foolish Four Stocks 
     Rec'd    #  Security     In At     Value    Change 
    3/12/98   20 Eastman Ko  1262.95   1396.25   $133.30 
    3/12/98   20 Exxon       1286.70   1380.00    $93.30 
    3/12/98   17 General Mo  1230.89   1277.13    $46.23 
    3/12/98   15 Chevron     1250.14   1184.06   -$66.08 
                               CASH   $2037.63 
                              TOTAL  $20969.51 
 *The year for the S&P and Nasdaq will be as of 02/03/98