C-K Thumping Market
by Rob Landley
Austin, TX (Aug. 17, 1998) -- In the past few weeks, we've had a lot of days like Friday where our portfolio beat the market by falling more slowly than the indices did. While that might not sound comforting, we believe that it counts just as much to beat the indices on down days as it does to finish ahead of the market on up days.
The final aim is outperformance of the market's average return, as measured by the S&P 500. Given that nine out of ten mutual funds have lost to that average in the 1990s -- while charging considerably more than a simple index fund -- and given that the Cash-King Portfolio is free for anyone on the planet to read (with trading commissions down to $5 through online brokers), you can understand why we expect this column to be one of the most popular financial features online over the next decade. It's simple, convenient, logical, and aren't we a bunch of fun to hang out with each afternoon?!
Ok, strike the last one.
Now, why did we beat the market again this past week? Stock market gurus like to call it a "flight to quality," but then they rely heavily on the latest news without much concern for financial education. If they'd flip flop those, we'd have less drivel about why the market did what it did on any given day, in any given hour, and we'd have much more focus on how to find that quality that people are ever flying to.
But, that's just me being a curmudgeon again.
Let's take a look at the numbers for the week:
Cash-King Last This Change Gap Inc. $62.56 $62.94 +0.6% Cisco $96.88 $96.44 -0.5% Intel $86.69 $86.19 -0.6% T Rowe $35.13 $34.63 -1.4% Microsoft $105.88 $104.25 -1.5% Pfizer $103.63 $101.19 -2.4% Coca-Cola $80.44 $76.81 -4.5% AmEx $101.13 $93.69 -7.4% Fool Four Last This Change Chevron $77.38 $80.13 +3.6% Exxon $66.94 $68.38 +2.2% Kodak $83.56 $82.50 -1.3% GM $71.06 $67.81 -4.6% S&P 500 1089 1063 -2.4% Total C-K $22,703 $22,337 -1.6%
All told, since our inception the Cash-King portfolio is up 11.69% versus gains by the S&P 500 of 6.14% (as of Monday market open). Imagine for a second that those were annual gains, and play along as we compound the differences between the two rates over the next 40 years. If the S&P 500 were to grow 6.14% per year over the next four decades, then our $22,337 would grow to over $242,000. If, instead, our portfolio grew at that 11.69% per year over four decades, the account would grow to $1.86 million.
Seemingly small differences today can prove enormous tomorrow.
Ok, let's take a look at the news from our companies last week:
Possibly the best news of the week was that Pfizer (NYSE: PFE) sold the last of its Medical Technologies group, the Howmedica orthopedic products unit, to surgical products make Stryker Corp. for $1.9 billion. Pfizer has decided it needn't try to be Johnson & Johnson, instead choosing to focus tightly on its high-margin drug business. (Isn't it nice to own a company that sells off a subsidiary for nearly 2.5x sales because it wasn't valuable enough for Pfizer shareholders?)
That's a big part of the reason we picked Pfizer over J&J. Since we can diversify our portfolio into as many different stocks as we want, why would we want the individual companies we invest in to diversify away from whatever makes them the most money? The sale of Howmedica gets Pfizer out of the orthopedic products business and leaves it with another $2 billion to invest in its higher-margin pharmaceuticals business. Way to go Pfizer!
There is no force on earth that can stop Tom Gardner from talking at length next week about Gap's (NYSE: GPS) recent conference call (click that to read it), but I would recommend dropping by the Cash-King companies folder to run the numbers on this most recent quarter. In terms of our C-K criteria, they look pretty darn nice! This made for the second-best news of the week for our portfolio.
I didn't see a whole lot of news from Coke (NYSE: KO) this week. Here are a couple of articles. On the fifth of the month, TMF compared the current market to the Nifty Fifty in the Evening News, using Coke as the first example. And Reuters released an article a few days later comparing the current market to the Nifty Fifty, using Coke as its first example (High Nifty Fifty valuations). Let's just hope folks recognize that the investor who bought Coke stock at its high in the winter of 1972, right before the bear market, and then held it through to today would have earned pronounced market OUTperformance. Pretty nifty.
T. Rowe Price
As always, there was little news on T. Rowe Price (Nasdaq: TROW), but the company was footnoted in an interesting AP article on how individual investors ignored the recent market turbulence: Slide Doesn't Panic Small Investors.
Our dog of the month of August, American Express (NYSE: AXP) continued lower on concerns about its exposure to the Asian markets.
Cisco (Nasdaq: CSCO) sold more stuff, got some big contracts, and was challenged by new start-ups, none of which I'd actually call news...
Microsoft (Nasdaq: MSFT) spent the week in court again. (Did I really NEED to say that?) It hasn't had much luck lately, having been forced to turn over the Windows 95 source code. (It turns out it can't force the Department of Justice to sign a non-disclosure agreement -- no surprise there.) It also can't limit the amount of testimony Bill Gates and other Microsoft executives will give to the court. And it can't even keep reporters out of the courtroom while he's testifying. Naturally, Mr. Softy has filed a motion to dismiss the entire case.
But, the boxers aren't even in the ring; the real action hasn't yet started. And I expect cases like this to play a very large role in Microsoft's business over the next fifteen years. Here are some interesting recent articles about Microsoft:
1. Judge Says Gates Must Face Prosecutors
2. Web Developers Criticize Microsoft and Netscape
3. Computer Users Fight 'Bloatware'
4. Microsoft Countersues Justice Department
5. States Still Probing Microsoft Office
6. Microsoft Office 2000 to Open on the Web
7. Microsoft Wants Dismissal of Antitrust Suit
That's enough reading for the week. I'll postpone discussion of Intel for now, but wow, how about that rebound?! Go Intel.
I hope everybody survived last Monday intact. I'm told there was another one scheduled for today, and that Mondays are slated for every week over the next fifty years at least. Even when the markets are down, I think we can get through them, Foolishly.
- Rob Landley (Oak)
Stock Change Bid AXP +2 7/16 96.13 CHV + 13/16 80.94 CSCO +1 11/16 98.13 KO +2 1/4 79.06 GPS +1 5/8 64.56 EK +3 1/16 85.56 XON +1 3/16 69.56 GM --- 67.81 INTC +3 3/8 89.56 MSFT +3 1/16 107.31 PFE +3 7/16 104.63 TROW + 3/8 35.00
Day Month Year History C-K +2.44% -1.00% 14.41% 14.41% S&P: +1.97% -3.30% 8.23% 8.23% NASDAQ: +1.56% -2.90% 9.99% 9.99% Cash-King Stocks Rec'd # Security In At Now Change 2/3/98 24 Microsoft 78.27 107.31 37.11% 2/3/98 22 Pfizer 82.30 104.63 27.13% 5/1/98 37 Gap Inc. 51.09 64.56 26.37% 2/27/98 27 Coca-Cola 69.11 79.06 14.41% 6/23/98 23 Cisco Syst 86.35 98.13 13.64% 2/13/98 22 Intel 84.67 89.56 5.77% 2/6/98 56 T. Rowe Pr 33.67 35.00 3.94% 5/26/98 18 American E 104.07 96.13 -7.63% Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 20 Eastman Ko 63.15 85.56 35.50% 3/12/98 20 Exxon 64.34 69.56 8.13% 3/12/98 15 Chevron 83.34 80.94 -2.89% 3/12/98 17 General Mo 72.41 67.81 -6.34% Cash-King Stocks Rec'd # Security In At Value Change 2/3/98 24 Microsoft 1878.45 2575.50 $697.05 5/1/98 37 Gap Inc. 1890.33 2388.81 $498.48 2/3/98 22 Pfizer 1810.58 2301.75 $491.17 6/23/98 23 Cisco Syst 1985.95 2256.88 $270.93 2/27/98 27 Coca-Cola 1865.89 2134.69 $268.80 2/13/98 22 Intel 1862.83 1970.38 $107.55 2/6/98 56 T. Rowe Pr 1885.70 1960.00 $74.30 5/26/98 18 American E 1873.20 1730.25 -$142.95 Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 20 Eastman Ko 1262.95 1711.25 $448.30 3/12/98 20 Exxon 1286.70 1391.25 $104.55 3/12/98 15 Chevron 1250.14 1214.06 -$36.08 3/12/98 17 General Mo 1230.89 1152.81 -$78.08 CASH $94.76 TOTAL $22882.39 *Please note: On 8/4/98 $2,000 cash was added to the
portfolio for future investment. This will be reflected
in the numbers as soon as possible.
*The year for the S&P and Nasdaq will be as of 02/03/98