Fool Portfolio Report
Wednesday, January 3, 1996
If I had known in mid-August how the market would be treating semiconductors by early January, we NEVER would have purchased Applied Materials and KLA Instruments. Semiconductors, apparently higher on Wall Street's Hate List than other assorted treasures like capital gains tax raises, Internet short sellers, and Dan Dorfman pins, semiconductors I say have been horrendous. And it's not just ours. Whether we're talking about Applied Materials, KLA Instruments, Micron Technology, or any of the Running with the Market portfolio picks, just about EVERYTHING is down at least 35%. It's sickening.
But does that ruin our investing year? We won't let it. A couple bad semiconductor picks can spoil a given DAY (like today, in which we dropped 1.52%), but a well-diversified portfolio can stand bad investments. EVERY investor EVERY year is going to buy some lemons. There is no ideal equity portfolio that doesn't have its underperformers, that always avoids losing money, etc. The alternative is of course something like T-bills. . . T-bills, a phrase virtually synonymous with abysmal long-term returns.
And so it is with disappointed confidence that we face our results at the end of Wednesday's trading. Applied Materials, off another $3 3/4 to $37 1/2, KLA Instruments down $1 5/8 further to $24 5/8. The former stock is now down 35% for us, the latter 45%. Both now look as bad off as Sonic Solutions (ill-fated former worst Fool stock) ever was.
And yet these are good companies. We continue to pore over their financial statements with glowing eyes. Cash-flow positive strength, exceptional balance sheets, and good earnings prospects. Look at Applied Material's EPS figures:
1994 1995 1996e 1997e
$1.30 $2.55 $3.91e $4.60e
Is this a stock deserving of a drop from $60 to $37 in a matter of a few months? I don't think so. But then, hey, I'm probably just bitter.
Of course, when you have two stocks that do THAT badly for you, they tend to lose significance in the overall portfolio. AMAT and KLAC added together are now worth less than $7000. . . less than 10% of the portfolio. When we first bought them, they were more than 15%. If they keep dropping, their drops will be increasingly less significant to our overall returns. Yours too, if you happen to own them.
Now, that's not to say we don't care about these investments. We would like nothing more than to see both these stocks go ripping back beyond our cost basis by the end of March. But I am trying to give us all a sense of perspective. When, for example, we sold off Ride Inc. at $21 and a fraction, and it zoomed to $34 a month later, that move would have been worth over $6500 alone to us (or better than 13% added to our overall historical return). By contrast, we've only lost some $4600 on both AMAT and KLAC combined. So you see, dear reader, that holding a single good winner is worth more than any number of barking dogs. Our experiences with America Online and Iomega are clear proof of that.
So, why DID both semis drop again today? After all, Needham & Co. had just announced yesterday that Applied Materials was one of its 11 "Single Best Ideas"! Alex Brown today cut AMAT from BUY to NEUTRAL, contributing to its status as most actively traded stock on the NASDAQ, Wednesday. Meanwhile, Cowen & Co. stepped in and actually reiterated its buy. . . whispers heard among the screams?
With the exception then of Cowen, I'm not sure anyone else is left to downgrade semiconductor stocks! Of course, in my experience a rash of Wall Street downgrades is often a very rosy future indicator. Here everyone is, dumping on the stock at $37 when they loved it at $60. Haven't I read this story before? Stay tuned.
Anyway, after a bad day for technology stocks (you can see at right that both America Online and Iomega suffered), it was pleasing to think that four of our eight stocks were NYSE heavyweights, and not a single one of'em dropped. In fact, only Sears didn't go up. Oil, we read, hit a seven-month high today. February crude closed at $19.89 a barrel. . . a day after Chevron started the New Year as the Dow Dividend Approach's second-lowest priced stock. Gotta love it.
And with $19K still sitting in Foolish reserve, we do have some further protection against market unkindness to technology. And we continue to survey the markets for our next worthy steed. . . .
By the way, if you do happen to be attending the Consumer Electronics Show this weekend, do consider dropping by the AOL Greenhouse site (I think it's at the Sands Hotel) in Las Vegas. Starting Friday, I and the esteemed MF Fletch will be hanging out doing the Foolish thing, and would enjoy meeting any of our technophilic readers.
---David Gardner, January 3, 1996
AMER - 7/8 AMAT -3 3/4 CHV + 1/8 GE + 1/8 GPS + 5/8 IOMG -1 1/4 KLAC -1 5/8 S ---
Day Month Year History FOOL -1.52% 2.57% 2.57% 91.53% S&P 500 +0.10% 0.88% 0.88% 35.54% NASDAQ -1.17% -0.56% -0.56% 45.28% Rec'd # Security In At Now Change 8/5/94 680 AmOnline 7.27 39.13 437.96% 5/17/95 335 Iomega Corp 15.11 50.13 231.65% 8/5/94 165 Sears 28.93 40.38 39.58% 4/20/95 155 The Gap 32.55 45.00 38.25% 8/11/95 95 GenElec 57.91 73.50 26.91% 8/11/95 110 Chevron 49.00 52.88 7.91% 8/24/95 100 AppldMatl 57.52 37.50 -34.81% 8/24/95 130 KLA Instrm 44.71 24.63 -44.92% Rec'd # Security Cost Value Change 8/5/94 680 AmOnline 4945.56 26605.00 $21659.44 5/17/95 335 Iomega Corp 5063.13 16791.88 $11728.75 4/20/95 155 The Gap 5045.25 6975.00 $1929.75 8/5/94 165 Sears 4772.65 6661.88 $1889.23 8/11/95 95 GenElec 5501.87 6982.50 $1480.63 8/11/95 110 Chevron 5389.99 5816.25 $426.26 8/24/95 100 AppldMatl 5752.49 3750.00 -$2002.49 8/24/95130 KLA Instrm 5812.49 3201.25 -$2611.24 CASH $18981.96 TOTAL $95765.71