Fool Portfolio Report
Wednesday, January 10, 1996

Yesterday, The Fool watched our savings sink 3.82% as our semiconductor holdings took another downgrade from Rick Whittington in the chops. And today, we casually follow up yesterday's performance with a 2.8% drop, as our two largest holdings gave back $2,200 to the Wise. America Online fell $1 5/8 and Iomega dropped $3 1/8. We lost by a full percentage point to the S&P 500, which slipped back 1.8%. A look at the historical and 1996 numbers show:

Year History

FOOL -5.43% 76.58%

NASDAQ -5.89% 37.49%

S&P 500 -2.83% 30.56%

The Wise tell us that if the market turns down, we young whippersnappers are going to learn why prudent investors buy mutual funds, why individual-stock picking should be left to the "pros," and why real life should not be played like a game---with valuation models, da PEG, cash-flow analyses, product reviews, brand appraisals, logic, common sense and, verily, wit. "A couple grey hairs on your heads and then. . . " Blah blah blah blah, you've heard it all before---give your money to da pros; quit educating yourself, Fool.

In that spirit, I offer up a short valuation on each of our holdings, even our semiconductor stocks, which are holding over $5,200 of our savings ransom right now. Let's proceed alphabetically:

America Online (NASDAQ:AMER) closed the day down $1 5/8 to $33 3/8. The stock is up 359% over the last 17 months, but since late summer, AMER has actually lost ground, falling from above $36. Longer-term investors know that America Online has compounded annual growth of 156% over the past three years. Street estimates run to $0.88 for fiscal 1997, and with a five-year growth rate of 46.3%, the Year-Forward PEG (YPEG) prices the stock at $40 3/4.

Truly Foolish investors, however, price this one off subscriber value, just as the cable companies are targeted. With 4.5 million readers priced at $720 per sub, the Company is valued at $3.2 billion. With 80 million shares outstanding America Online is priced off subs at $40 a share.

The problem for bears is that AMER is adding hundreds of thousands of new subscribers each month. . . with nary a competitor to slow them. So $40 is a snapshot fair price, as we head toward five and then six and then ten million subcribers. And the problem for bulls is that America Online is issuing loads of dilutive options in compensation to management and employees. We don't sweat options too much, though; they incentivize. Off subscribers and alternative businesses, we continue to believe America Online is fairly valued closer to $50 than $30 over the next half year.

Applied Materials (NASDAQ:AMAT), ouch. The stock rose $3/4 today, but is still off 40.5% since we bought in. Maybe it takes Fools to be fairly supremely confident of an AMAT turnaround. The Company has $500 million more cash than long-term debt, working capital sits at $1.2 billion, they're running 10%+ profit margins, the stock has compounded 85% growth annually over the last five years---even with the cycles, and they're following one of Lynch's favorite business models, building shovels for the gold miners. With $4.68 estimated in fiscal 1997, the stock is trading at less than 8x year-ahead earnings, and this with a 5-year estimated growth rate of 26.6%.

Chevron (NYSE:CHV). . . ya can't PEG it. . . and we're not going to pretend to know a lot about the international oil business. But that's the beauty of Beating the Dow. . . we're beating the market handily in our Chevron investment, and we haven't sent a single employee over to Kazakhstan to check out their drills. Ya might want to stop by our oil and gas site in the Industry Research area (keyword: Sector), though, where Rigs can work on pricing this one. We'll be holding it through to August.

The Gap (NYSE:GPS) announced strong same-store sales figures for December, and the stock has stepped up 8% while the market has been hit. Today, with the Dow off 97 points, GPS fell a whopping $1/8. We think fair estimates for 1996 run up to $3.00 per share and accept five-year estimates hovering in the range of 17-18% per year. Conservative pricing sets this one between $51-$54. With cash, with competition crumbling around them, and with 4-year-olds through to 44-year-olds stomping around our urban centers in red Gap sweatshirts, we're comfortable waiting for the next 15-20% from Da Gap.

General Electric (NYSE:GE) fell $1 5/8 to $70 3/8. The stock is up 21% for us since we threw our hats into the ring with Jack Welch. A long-time GE shareholder recently posted in our GE folder that he believed in the short-term and off traditional pricing of the stock, General Electric was getting a bit pricey. Not long ago, when the stock was in the low-$60s, Fools targeted it in the $72-$75 price range.

It's sure tempting to just shoot our target higher, but alas Fool, in good faith, we can't. 18 times year-forward earnings looks reasonable, and that would target the stock at $77, or around 9% above its present pricing. BTD investors note also that GE is no longer in the select group of high-yielders. General Electric and Jack Welch make for an excellent long-term investment, but barring a short series of earnings surprises, General Electric looks pretty fairly priced. 'Course we'll be holding through to the middle of August. Discipline, that's what Mr. Snyder taught us in 6th grade.

Iomega Corporation (NASDAQ:IOMG), who wants to take a shot at this one? Very loose Street estimates target earnings at $2.63 in fiscal 1996. Many Fools think those are too conservative. . . with some calling for anywhere from $4-$6 in the year ahead. With a 3-for-1 split and a 5 million share offering coming up, there will be MUCH confusion over the numbers. . . and you can bet there are petty scoundrels out there looking to bewilder the competition.

We expect all sorts of silliness, all kinds of gibberish to flow through the forum. . . not only in the Iomega folder but in a number of volatile issues---heading into options expiration. That's what gamblers do while investors invest. Be sure of one thing, Fool: This sort of nonsense is alive and kicking outside of the digital world, and has been for some time.

But why bother listening in much? With earnings due, then a split, then a share offering. . . even the least sophisticated logician can name that a fairly bullish sequence. With the loosest of estimates of $4.00, a reasonable multiple of 20-25X earnings would set this stock in the $80-$100 range. Time will tell us if that's too aggressive or too conservative a valuation. . . but time is what Fools love to keep on our side. Can't wait for the 4th quarter numbers.

KLA Instruments (NASDAQ:KLAC) has done its darnedest to undermine Fool Savings growth. Since we bought in last August at $44.71 per share, the stock has fallen off a cliff. Today found KLAC down $1/4 to $21 1/4. Youch. Estimates run to $2.77 in the year-ahead, and there's been no change to that 5-year growth rate of 25%. KLA has $104 million in cash, no long-term debt, runs working capital to $240 million, and its stock has compounded 60% annually over the last five years. Trading at less than 8x year-forward estimates, we'll hold right through Whittington's downgrades, thanks.

Sears (NYSE:S), thank heavens we get to end things on a positive note! This stock has been phenomenal, and as with Gap, December sales were strong. $3.00 in the year-ahead, a fair multiple of 15x, and you have a stock at $45. With the sales growth, with management's committment to controlling their selling platform---offering their own products nationally, with Arthur Martinez at the helm and with the momentum behind them, $45 a share seems too conservative. Fortunately for us, we're just Beating the Dow, so we don't have to bother with price targets. August will find us selling this only if it's fallen from the select high-yielding group.

I'll close this evening with a short excerpt from Peter Lynch and John Rothchild's recent book, "Learn to Earn." A fine book, though we think Lynch's first two offerings "One Up on Wall Street" and "Beating the Street" were superior works. But there are some real gems in here, like the following:

"Before the Crash of 1929, it was common practice for some of the robber barons and their cronies to run the price of a stock up and down for their own benefit. They knew how to manipulate the market in their favor, scaring the public into selling stocks at a low price, then luring them back to buy those same stocks at a ridiculously high price.

"Few investors bothered to learn much about the companies they owned, because they realized that the gyrations in any stock had little or nothing to do with the fundamentals of the company."

In the translated words of Jorge Luis Borges: History repeats itself. Let us, however, not be among the group of investors who, falling prey to the short-term whimsy of da bigger money, did not bother to focus on the fundamentals: financials, demand, supply, product, marketing, growth. Long-term fundamental investing. . . will it win out?

Tom Gardner, January 10, 1995

Today's Moves

AMER -1 5/8
AMAT + 3/4
CHV -2 3/8
GE -1 5/8
GPS - 1/8
IOMG -3 1/8
KLAC - 1/4
S - 1/8

Today's Numbers

NOTE: Due to inclement weather, this area is current through 01/08/1996 Day Month Year History FOOL -2.82% -5.43% -5.43% 76.58% S&P 500 -1.80% -2.83% -2.83% 30.56% NASDAQ -0.86% -5.89% -5.89% 37.49% Rec'd # Security In At Now Change 8/5/94 680 AmOnline 7.27 33.38 358.90% 5/17/95 335 Iomega Corp 15.11 41.63 175.41% 8/5/94 165 Sears 28.93 42.00 45.20% 4/20/95 155 The Gap 32.55 45.25 39.02% 8/11/95 95 GenElec 57.91 70.38 21.52% 8/11/95 110 Chevron 49.00 52.63 7.40% 8/24/95 100 AppldMatl 57.52 34.25 -40.46% 8/24/95 130 KLA Instrm 44.71 21.75 -51.35% Rec'd # Security Cost Value Change 8/5/94 680 AmOnline 4945.56 22695.00 $17749.44 5/17/95 335 Iomega Corp 5063.13 13944.38 $8881.25 8/5/94 165 Sears 4772.65 6930.00 $2157.35 4/20/95 155 The Gap 5045.25 7013.75 $1968.50 8/11/95 95 GenElec 5501.87 6685.63 $1183.76 8/11/95 110 Chevron 5389.99 5788.75 $398.76 8/24/95 100 AppldMatl 5752.49 3425.00 -$2327.49 8/24/95130 KLA Instrm 5812.49 2827.50 -$2984.99 CASH $18981.96 TOTAL $88291.96