ALEXANDRIA, VA (Jan. 16, 1998) -- Friday, oh, Friday. As we do every Friday here in Drip Portfolio land, let us examine the highlights of the week's Drip Portfolio reports and catch up on any news or other relevant stuff that might have slipped through the cracks.
Although it might not seem the case to many long-suffering readers, we are nearing the end of the food investment quest. Our mission has been to find one branded, packaged food company that offered excellent value and represented an solid opportunity for the Drip Portfolio. This week we have clicked past two of the finalists, Philip Morris (NYSE: MO) and PepsiCo (NYSE: PEP). Next week, we will nail down Quaker Oats (NYSE: OAT) and Campbell Soup Co. (NYSE: CPB), and then hopefully with a full three months of diligent, detailed and careful analysis (with nearly all of it in public view, aside from going so far as to tape our rambling conversations on the subject) we will make up our minds.
If this seems a bit overlong to some of you, well, it really isn't. Although I cannot speak totally for Jeff, I know in my own personal investing it sometimes takes many months to work up to a decision. The reason for this is that I believe the two great risks of investment are knowledge and valuation. Knowledge, in that if you do not know the company very well, you will probably lose money. Valuation in that if you do not buy the company at the right price, you risk either losing capital (the one cardinal sin) or seeing that very capital underperform the market (not much better). The reason I take my time, and I believe Jeff does as well, is because we like to really understand the businesses we buy. If you were to stop us on the street and ask us for the Chief Financial Officer's middle initial, we would like to be able to come up with it. Now, maybe this is a high mark to shoot for, however, it certainly does minimize unsettling surprises that might occur at some future point.
Monday's report was on Philip Morris (NYSE: MO), which was all we needed given the financials were pretty straightforward, Tuesday, Wednesday and Thursday we sweated through PepsiCo (NYSE: PEP), whose financials are made difficult by the recent divestiture of the restaurant operation now known as Tricon Global Restaurants (NYSE: YUM). Tuesday was particularly fun as I got to question Coca-Cola (NYSE: KO) and the questionable thesis some investors advance surrounding Coca-Cola that due to the stunning historical performance, it is a can't lose and perhaps equally stunning investment opportunity going forward. As similar ideas were very prevalent about IBM (NYSE: IBM) in the late '80s, you can see how brilliantly sometimes the "can't lose" thesis can fail.
Sure, we are all now steeped in the notion that Big Blue is Big Boring, but those of you who can remember that far will definitely recall that time and time again the compounded annual returns since the initial public offering of IBM were one of its main selling points. Certainly the shares are above their '87 high again, but that means that many investors had to wait more than a decade to break even. The only point here, folks, is that future returns are contingent on current valuation. Plain and simple.
As for our two holdings, Intel Corp. (Nasdaq: INTC) announced earnings this week (here's a Web link to Intel news), reporting $0.98 earnings per share. The company warned that gross margins would fall, which makes sense given that they have warned this now for two years, but investors didn't like being reminded. Unit volume on Pentium II sales was good, indicating that the price cuts are creating demand and that low-end PCs are not taking over the world. Just in case they are, though, Intel has accelerated price cuts on the P5 (Pentium) chips. Dunno if anyone agrees, but I think it is hysterical that what was cutting edge in 1995 is now the low-end chip in sub-$1000 machines. Yikes! Intel is to be applauded for moving to meet the market for sub-$1000 machines and I believe long term any drop in gross margins will be countered by an increase in unit volume. We are down about $4 a share on our investment, but will keep dripping in as long as the prices look good. How many global franchises with 80%-ish market share sell for 19 times annualized earnings? Not many, we think. (And how many of those companies match Intel's margins? Very few if any.)
This week we received our statements of purchase regarding both Intel and Johnson & Johnson (NYSE: JNJ). Since December we've sent $100 to Intel and $50 to Johnson & Johnson, and by the end of this month we'll send $50 to each. For the latest transaction prices, please see the transaction page and the portfolio numbers.
According to our current numbers, the not-fully invested Drip Portfolio is up a little more than 3% this year, which we are quite happy about. We are going to double-check the historical numbers this weekend just to be certain (the spreadsheet may be off a tad), but only being down about 8% since beginning while considering that we have spent $70 out of $1,100 on subscriptions and commissions (or 6.3%) is quite admirable, in my opinion -- particularly relative to the competition. Look for the Drip to pull even with the S&P 500 as we continue to add more money and get more of our money invested in high quality, low to medium valuation companies.
Until next week, adios.