Fool Portfolio Report
Thursday, October 5, 1995
Patience and modest diversification---the two prongs of Foolish Portfolio Theory that most befuddle the Wise---teamed up today to drive The Fool Port up 1.95% versus S&P gains of 0.20%. This leaves The Fool up 58.28% historically against S&P 500 historical returns of 27.10%.
Patience? Well, when Wall Street throws out an entire industry---and THE strongest industry over the last year---a Fool looks on unconcernedly, if he looks on at all. Honestly, Fool HQ has spent very little time over the past three weeks, contemplating institutional treatment of the high-tech industry. Sher, it makes for good print. Throw in 40% higher paper prices, an aging subscriber base, and the immediacy of the digital world, and were I a newspaper publisher, heck, I'd throw in a few "What If" articles, detailing the potential for market crash, for technology busting, the like. Good print.
Truth is, when Wall Street throws out an entire group, and that group has led the way and intuition says, it ain't going out of style anytime soon. . . welp, that's a correction, presenting buying opportunities, and not a pure rotation. After all, what happens if technology is out of favor over the next twelve months? Maybe The Fool loses to the S&P 500. Ho-hum, oh well. Or maybe The Fool beats the S&P, while America Online, Applied Materials and KLA Instruments---for example---lag their performance over the past three years.
Just a reminder, over the past three years, here are their compounded returns:
AMER: 168% growth per year
AMAT: 109% growth per year
KLAC: 125% growth per year
I ask: Are there indications out there that these companies are staring depressing earnings growth going into the 21st century? Is online communications going out of style, or coming into style? Is the world of semiconductors becoming less or more cyclical? Do compounded growth returns turn on a dime when you're dealing with financially-strong companies in budding industries?
Patience taught a little lesson today, and there's a quiver in my heart and a birdy in my ear telling me that patience has a few more lessons to teach over the next decade.
What about modest diversification, that second lesson?
Welp, this doesn't mean overdiversification: bonds, gold, options, foreign penny plays, a basket of derivatives---Banker's Trust-style. Naa, this means, according to Ibbotson Associates, a portfolio of 8-12 stocks. That's a portfolio that allows for the greatest growth potential while minimizing risk. Ibbotson says a portfolio of this many stocks is no more volatile than a portfolio of 500 issues.
But modest diversification means keeping an eye on a few other industries, and in this case, that meant retail, a group that has been discarded all year. Well, the money flowed our way today, with The Gap climbing $2 1/2 to $38 a share. The Gap is now up 16.74% and competing nicely alongside Beating the Dow. Our aim of course with all non-Dow stocks is to beat the group of five high-yielders which has compounded 21% growth annually over the last 25 years.
GPS was treated with an earnings upgrade today from Josephthal Lyon & Ross Inc. analyst Catherine DePuy, who boosted quarterly estimates from 64 to 68 cents, and year-end estimates from $2.07 to $2.11. She's still on the low-end of estimates, but the Street liked the upgrade. In a succeeding breath, DePuy docked Ann Taylor another nickel on quarterly and annual estimates, which sank ANN another $1 3/8 to $15 1/4.
Some of the Wise were badgering us to buy Ann Taylor at $26 rather than The Gap at $32 a few months back. . . but we noted then and note now that debt speaks loudly when an industry is struggling. ANN's financial position has hurt the stock. The Gap's brand and sparkling balance sheet has helped our denim-stitcher. Keep your eyes on the cash, because in the darker hours, the financial giants will actually eat up market share as the leveraged group begs out of markets.
Also today, The Gap announced comparable September total sales growth and same-store sales growth of 21% and 3% respectively, outperforming Street expectations.
But GPS wasn't alone; Sears, our other bell-capped retailer, rose $1 3/8 to $36 5/8. Mr. Martinez, thank you. Sears has been wonderful for us for 15 months now. We expect to see NYSE:S trading above $42 in the New Year.
And finally, we close with America Online which snapped back $1 1/4. We've run our per-sub valuations again and again here, and I'll go back over it in a port report next week. Suffice to say that we think by the time America Online announces its 6 millionth subscriber, sometime in the Spring-Summer, 1996, the stock should be trading closer to $110 than $10.
Course, technical analysis in late 1994 was pricing this stock somewhere below $2 a share (split-adjusted) so this is a pretty brave call for a Fool and his fundamentals to make. Likewise, just about every financial magazine out there---including a few not far from here---have named AMER a short on a handful of occasions over the past year.
So, $100 by the Summer, 1996. Pretty gutsy!
Hey, the institutions are making this a rocky road, and no Fool would bother trying to project how technology will do over the next two days, two weeks, or two months. . . but the next two years, and the two after that, and a few beyond that. . . we can see the light, we just can't see the tunnel.
- Tom Gardner, 10/5/95
AMER +1 1/4 AMAT +2 1/8 CHV - 3/4 GE - 5/8 GPS +2 1/2 IOMG + 5/8 KLAC +2 RIDE - 1/4 S +1 3/8 SNIC + 1/2
Today's Numbers
Day Month Year History FOOL +1.95% -6.30% 42.56% 58.28% S&P 500 +0.20% -0.30% 26.86% 27.10% NASDAQ +1.19% -2.81% 34.87% 40.83% Rec'd # Security In At Now Change 8/5/94 340 AmOnline 14.55 61.25 321.08% 5/23/95 510 Ride Inc. 9.91 18.50 86.74% 8/5/94 165 Sears 28.93 36.63 26.62% 5/17/95 335 Iomega Corp 15.11 19.00 25.71% 4/20/95 155 The Gap 32.55 38.00 16.74% 8/11/95 95 GenElec 57.91 62.88 8.57% 8/11/95 110 Chevron 49.00 49.38 0.77% 8/24/95 130 KLA Instrm 44.71 39.25 -12.21% 8/24/95 50 AppldMatl 115.05 95.00 -17.43% 12/23/94 340 SonicSol 14.48 10.00 -30.95% Rec'd # Security Cost Value Change 8/5/94 340 AmOnline 4945.56 20825.00 $15879.44 5/23/95 510 Ride Inc. 5052.44 9435.00 $4382.56 5/17/95 335 Iomega Corp 5063.13 6365.00 $1301.87 8/5/94 165 Sears 4772.65 6043.13 $1270.48 4/20/95 155 The Gap 5045.25 5890.00 $844.75 8/11/95 95 GenElec 5501.87 5973.13 $471.26 8/11/95 110 Chevron 5389.99 5431.25 $41.26 8/24/95130 KLA Instrm 5812.49 5102.50 -$709.99 8/24/95 50 AppldMatl 5752.49 4750.00 -$1002.49 12/23/94 340 SonicSol 4924.18 3400.00 -$1524.18 CASH $5927.47 TOTAL $79142.47 Transmitted: 95-10-05
