Alexandria, VA (July 10, 1998) --For best results, check back in ten years.
The Drip Port is not even one year old. It's an infant still sucking on pacifiers and hugging its favorite blanket, while not yet crawling. We've invested $1,300, and more than half of that has been invested for only the last seven months -- and nearly half of that was invested for merely the last three months. $500, or nearly 40% of our invested funds, has been in stock for only the past five months. Yet people still ask, "What's up with the Drip Port's performance?"
To me, this means that we need to explain the approach more clearly. When you're investing money every single month, you're buying new stock at the going price every month, and your chance for a return on every single new investment at the start is low. Only if our stocks rocket higher non-stop could we expect to continually make money on funds that we invest every month for these first few years. That won't happen, and we don't necessarily want it to happen!
What will happen is this: We'll build a base over the next several years, one that will grow increasingly large and have, eventually, a much lower cost basis per share, if all goes well, compared to future stock prices. Right now, though, asking, "What's up with the Drip's performance?" is like asking your neighbor, "So, one-year-old Timmy hasn't been accepted to college yet?" with a doubtful smirk. This isn't to make excuses for the Drip Port. It's merely pointing out a reality: Most the port's funds have been in the market less than seven months, and a whole 15% of the port's money was invested in the last two months at going prices. It's difficult to beat the market early in the game like this, but we're aiming for a long-term victory.
Next up: Remember as you're investing that the stock market has been record strong for the past five and ten years. The S&P 500's four-year annualized return is over 25% -- more than double its historical average. As a result of the strong economy and booming stock market, most leading stocks have record high multiples to earnings. If the investing environment changes, we could easily see contracting price-to-earnings multiples on many stocks for several years -- at best, that could mean even leading stocks would just hold steady while earnings growth catches up to their valuations.
For what it's worth, though, I don't look at our companies' stock prices and see years and years of potential flatness ahead. A few years, sure. Five years? Hard to imagine. Though they're not the cheapest stocks on the market, they're far from the most expensive. None have taken off like a rocket -- something a la Coca-Cola again over the past six months -- but all of our holdings have solid long-term growth imbedded in their name and ticker symbol.
Let's consider our three guys...
Even though it has the PC industry down on the mat right now, Intel (Nasdaq: INTC) might be the most speculative of our holdings -- speculative in that, the technology arena is going to change much more substantially over twenty years than will the soup or healthcare world. With any technology company -- be it Intel, Microsoft, or Cisco -- you're betting on management and the entrenchment of current technology even more than you're betting on future technology. We don't know what future technology will be. We only know that these companies own the current tech landscape and are in the best position to conquer the future landscape, too. Microsoft's great headway in the Internet browser war is a fine example of past power leading to present power in new markets -- even markets that a leading company might attack a year late, as Microsoft did. Leaders have all sorts of leverage. Intel does and will, too, over the years.
Next Tuesday, on July 14 (Bastille Day for the French), both Intel and Johnson & Johnson (NYSE: JNJ) report second quarter results. Intel is expected to post earnings of $0.69 per share, and Johnson & Johnson $0.73 per share. Intel trades at 25 times the 1998 earnings estimate of $3.12 per share, and at 21 times the '99 estimate of $3.77 per share. Remember that 1999's earnings estimate was recently lowered because the new Merced chip won't be ready until 2000, instead of mid-1999. I aim to cover the Intel conference call.
Johnson & Johnson (this is such a loveable company that we have to come up with a nickname for it -- suggestions are welcome!) trades at 26 times 1998 estimates of $2.70 per share, and 23 times 1999 estimates of $3.06 per share. Old J&J has recently been able to grow earnings 11% year-over-year despite the currency crisis that impacts nearly half of its sales. The Moneypaper's "Direct Investing" newsletter recently summed up J&J well, sharing that three drugs may be responsible for as much as 15% of this year's revenue, while, as we know, $2.3 billion is being spent on research and development in '98 -- another record year of investment in the future. The company continues to raise its dividend annually, too.
Finally, Campbell Soup (NYSE: CPB) continues to sell non-core businesses. This company is like a hydra with regenerating heads -- just when you think it has really slimmed down, it shows another head, but a head that is quickly chopped off (spun off, really). In the future, we'll do a taste competition between Campbell Soup and ConAgra's (NYSE: CAG) Progresso soup, which is the soup that I always see stacked against Campbell at stores. I recently tried Progresso and found Campbell's equivalent "Home Cooking" line of soup to be better -- but my Campbell tasting experience was several weeks ago, so we need to do a close side-by-side test before long.
Campbell's fiscal year ends this month. The company should achieve $1.90 in earnings per share this year and $2.19 is expected in fiscal '99, ending next July. The stock trades at 27 times this year's estimate and 24 time's next year's. The company continues to extend its share buy-back policy and recently pumped it up by $500 million. Management was buying stock in the high $40s. We recently bought a fraction of a share at $53.48, as shown in our transaction page. I haven't received the statements yet, but we also bought more J&J on July 7, when the stock traded between $71 1/2 and $73. We also bought some Intel on July 1, when the stock traded between $72 7/16 and $75 3/8.
The Past Week. Spitting out info like a busted ATM machine spits out cash, Dale plowed ahead with his financial company analyses this week. On Monday, Dale finished his four part look at SunTrust's (NYSE: STI) business. The company didn't make the final cut, though. On Tuesday, Dale began to narrow down the list, and on Wednesday the final list of 11 banking stocks that we'll consider closely beginning next week was presented. To wrap up this week, Dale presented common banking myths on Thursday, with insightful comments on the recent merger trends (or non-trends!), the S&L crisis, and economies of scale in the banking world.
Have a very Foolish weekend!