Drip
Portfolio Report
Thursday, March 5, 1998
by Jeff Fischer
([email protected])
ALEXANDRIA, VA (Mar. 5, 1998) -- For newcomers clicking in to see what happened -- "How could a portfolio lose nearly 7% in one day?" -- no, we're not idiots. This is a relatively new portfolio with a twenty-year goal that will be achieved by buying more stock every month ($100 worth) through commission-free dividend reinvestment plans of industry leaders.
The portfolio began last August and, as thorough as we are, we have analyzed only three industries so far and have begun to invest in only two, with Intel (Nasdaq: INTC) being the first. This history means that Intel is our largest position, at a whole 8 shares. Our cost-basis is $79 and change. With such a small portfolio, even a paper loss of $88 -- as we "lost" on Intel today -- looks large in percentage terms.
That explained, onward we can go.
Intel fell after announcing that revenue and net income would decline from the fourth quarter. At the beginning of the year Intel stated that this quarter would be, at best, a flat quarter, so the news isn't a giant surprise. In fact, I was surprised to see Intel's stock rise so strongly following the fourth quarter announcement -- though I shouldn't have been surprised. The market is less predictable than a large fish hooked on a fishing line off of the Florida Keys -- the fish will dive, soar, breach, zig-zag, bombshell the surface of the water, burst up into the sun -- and then finally your fishing line will break. Ooops.
The best thing about Drip investing is that you always invest more money on a regular basis. Our "line" never breaks. It's elastic and it stretches over twenty years.
So far we've bought the bulk of our Intel shares at $72 and $78. We now have the chance to buy more shares in the $70s, which, long-term in mind, is much more attractive than where we had to buy shares on Monday, which was around $89. So it's good to see many Fools on the Drip message board happy that Intel is down sharply.
Yes, we're building a base and lower prices are indeed better. But that doesn't mean, remember, that we just begin to buy anything at any price and hope that it eventually falls. We buy hoping that, from dollar one, we're getting decent value for our money. Sure, we'll be wrong time and again, but we're still buying stock at what we believe to be a good value, and that helps a Fool sleep better at night -- that and knowing that there is always next month to buy more stock. One beauty of dollar-cost averaging: We bought far fewer shares of Intel at higher prices, mathematically without even trying, and we'll buy more shares at lower prices while investing the same amount of money.
But why did Intel fall? For various reasons.
The first quarter is typically slow, but much more important is that the industry is going through changes. Many computer manufacturers that in the past carried high levels of inventory are now moving to a business model that more closely resembles that of Dell Computer (Nasdaq: DELL), meaning, the companies don't want to carry much inventory. So right now many of these firms are working to clear out inventory and in the meantime are ordering fewer parts. Intel said that OEMs -- computer manufacturers -- were slow to place new orders this quarter. Once these companies' inventories are cleared out, like a rubber-band, the computer orders should begin to flow again, and Intel should be able to grow revenue as the industry grows. Of course, an overall industry slowdown could be taking place, too. If so, that's not a company-specific problem and there's nothing that can be done about it.
That's not all that's happening at Intel, though.
Intel is selling chips at a much lower price than it has in the past, meaning lower margins and earnings (and revenue, of course). As Pentium II production increases over the year, and as Intel moves to 0.25 micron technology, this situation should improve. This doesn't mean that Intel is in the clear, though. The company's move into the sub-$1000 PC market will mean sales of yet more inexpensive chips, sporting yet lower margins. Gross margins of around 50% is what the company foresees. Overall, the year could be one of transition and it very well might not compare well to the earnings growth achieved last year. If anything, 1998 might result in a favorable earnings base (I mean -- a weak year) from which to grow off of going into 1999 and 2000, when Intel introduces more high end, high-margin product.
What does Drippy (our affectionate term for the Drip Port) do from here? Well, Fools, we just completed our three-week look at Intel and I feel pretty confident that we know the company and the challenges that it faces near-term. I thought that the stock was far from cheap above $90, as was written here, but I also know that an investor needs an outlook of at least five years (we have four times that), and that an investor can never know exactly what will happen next -- to a business or a stock.
This uncertainty is why simply sending small amounts of money whenever you can (ideally every single month) is best, and that's what we'll be doing here over the years -- sending small increments every month. I want little more than that once the Drip Portfolio has some balance.
So the recent "balance issue" arises again, and with Intel plummeting it brings with it more questions. Intel is too heavily weighted in the portfolio and it would take years for that to change unless we direct more funds elsewhere for a while. We'll decide by the end of next week where our $100 for April is going -- we might divide it up 70/30 or some such thing, if we don't send it all to JNJ. I'm considering some numbers for four months forward or so. Over the long-term it shouldn't make much difference at all, and as meaningless as it might be in the near-term, it's still worth our consideration. We have a few issues:
- The balance of the portfolio.
- The value that our dollar -- every one of them -- is getting, or perceived to be getting, depending on where we send it.
It's really pretty simple and it is destined to become much simpler as our positions even out and become larger in size. Our tiny monthly investments won't mean nearly as much a few years from now, and so simply sending the same amount to each company, in a balanced portfolio, will come naturally in time.
But in the near-term -- to avoid wild swings in the Port like the one that we had today, and also because J&J is as great a company as Intel, while it offers its own advantages -- we want to balance these two puppies out. I'm writing about it again only because I've received a lot of email about the issue. I hope it's more clear now. We're headed in the right direction: monthly, normal investments in each company unless something drastically changes. But for now, we're building, and we need an even foundation, much like a house does, before we can begin to build stories atop of it.
Meanwhile, more is written about Intel's first quarter warning in today's Lunchtime News. I don't have outrageously great expectations for the company near-term -- never have. But over the coming decades I certainly hope that Intel will take us down some interesting roads while on the highway to long-term success. For now, we're going to see earnings revisions downward, stock downgrades, and probably a lingering or downward moving stock. As Drip Investors who have a fairly good grasp of the long-term possibilities, this is as good a time as any to continue to send the company money every month -- and be patient.
For more discussion, please visit the Drip message boards -- linked in the top right of this page. Also, share your thoughts on the "balancing" issue if you wish. Fool on!
--Jeff Fischer
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