Fool Portfolio Report
Friday, January 12, 1996

by David Gardner

OK, lots to go over today, so let's get down to it.

For starters, we nailed the market. Hear that hammer thudding? That's our Portfolio smashing nine-inchers right through Wall Street, Friday. Based on the strength of our two best stocks, America Online and Iomega, the Fool Portfolio ascended 1.46%, versus small drops in its competing indices.

That puts us up on the market for 1996. At one ugly point in the middle of this week, we were well down to the S&P 500. But as the smoke cleared today, we find ourselves down 1.14%, the S&P 500 down 2.29%, and the NASDAQ off 4.17%. Are we proud of ourselves? Not particularly. Still having lost money, ours is an ignoble victory thus far. But we've never been above celebrating really petty things that most people consider extremely trivial.

America Online jumped $1 5/8. The stock may have reacted positively to some bullish comments from Goldman Sachs analyst Michael Parekh. Parekh appeared today on CNN's new financial station, Fn. I didn't get to see the appearance because Fool HQ just ain't wired up with that station yet. Hey, is ANYBODY getting this new station, or does CNBC still hold a virtual financial-TV monopoly over America's cable providers? More details about Parekh's comments will probably pop up in our America Online folder, so do give a nod of the head to the Stock Boards if you're interested. I'll certainly be reading.

Iomega was our other winning stock. It was up $3/4, today. IOMG reports earnings on market close of Wednesday, January 24th. Mark that date down.

KLA Instruments reported extremely good-looking earnings today, and closed flat. The report showed second-quarter sales up 58% and net income up 74% (earnings per share were $0.57, vs. $0.35 last year). The reason the stock didn't budge is twofold: (1) KLAC rose 4 1/2 points (or 21%) yesterday in anticipation of the strong report, and (2) the report was, in the words of one of our longtime readers (Spectris) "exactly on track with analysts' expectations." In fact, it's a wonder the stock didn't drop back a bit today, with a weak NASDAQ and the specter of the old saw, "Buy on the rumor, sell on the news."

First Call, by the way, actually had a consensus estimate of 55 cents for the quarter.

KLAC now has trailing earnings of $1.99, for a price to earnings ratio of 13. With earnings per share of $2.27 estimated to come in this year (ended 6/96), and $2.72 for next year, the stock continues to look cheap. ("Well of COURSE it looks cheap, David. . . you're down 41% from your initial buy!!!") Let's do a Fool Ratio together, shall we?

Total growth from today's $1.99 per share to 6/97's $2.72 per share is 36.7%. But to get a growth rate for our PEG Ratio, we need to annualize that figure. How long from start point (12/95 quarter) to end point (6/97 quarter)? Six quarters, or one-and-a-half years. Thus, we take the 1.5 root of 1.3668. That comes out to 23.2% annual growth. OK, now all we have to do is check the current P/E (13.2) and divide it by the percentage of the company growth rate: 23.2. The Fool Ratio comes out to .57. . . in the cheap/undervalued/buy a Fool loser range.

(Want to know more about the Fool Ratio? Time to get YOUR copy of "The Motley Fool Investment Guide," now in a bookstore near you from Simon & Schuster. Also, we have a Fool's School article online entitled "The Fool Ratio," which offers a pretty background for starters, too.)

Now, are we buying more ourselves? No. That's because we virtually never ever add to our losers. . . that's one of the old saws we actually do subscribe to. (We write more about this in our book, as well.) Suffice to say that we don't like to throw good money after bad. Our instinct when we have new money is either (a) to buy a new investment, or (b) add to an existing winner. That's Foolish.

On a very amusing closing note today, Tom Gardner in his report last night mused about the rating of "Short-Term Hold" put on KLA Instruments by SoundView Financial. (The NEXT day, the stock rose 21%.) What did this most confusing of all ratings mean, Tom asked. He encouraged our readers to put up their own best guesses in the Talk with the Editors folder, and lo and behold the folder filled up with more than 50 entries over the past 24 hours. It makes for amusing reading on its own, but we have selected our three favorites and are awarding 2 hours of AOL free to the following: NessatWork, JeanieMac, and Danaloha. The contest was NOT easy to judge, as there were many very good entries. For your weekend reading pleasure, dear reader, the winning entries follow:

NessatWork's entry

Dear Friends,

I never had anything to do with the stock market until last fall, when my father left me a bunch of blue-chip stocks (also known as the "environmentalists' nightmare stocks"). And yes, for the first time ever I was sorely tempted to become a Republican. But I calmed down and decided that even an independent could make money on the stock market. And one of the first things I learned was the conceptual difference between a "buy" recommendation and a "short-term hold" recommendation.

A "buy" recommendation is strictly for people like my father, who never returns anything, even if he doesn't like it. It's for the kind of people whose investment adviser says "buy" and they say "okay" and enter into a sort of financial marriage with the stock. Till death do they part.

A "short-term hold" recommendation is strictly for my father's children, the ones who trade on line and who haven't the patience of a bull (or bear) in heat. We prefer to live together rather than marry. No commitment. Anything we buy has to prove itself to us or back it goes. These are stocks that have a pretty good chance of going up within 24 hours, and might even continue to rise for an entire week. But maybe not. It's up to us to hover closely over them, and ditch them when the going gets boring.

In sum: Buy = Marriage, and Short-Term Hold (as the term implies) = Hold until better comes along :)


(aka Mary)

JeanieMac's entry

So, an analyst downgraded KLAC from Buy to Short Term Hold, huh? This one is easy. It means they want to buy it, but they don't want us to buy until they have, then they'll re-issue their Buy Recommendation.

Methinks someone jumped the gun on this. Can't you just hear the backroom conversation?

"Whaaat, you gave a Buy on KLAC??? Are you nuts??? We haven't got our buys in yet. For gawdsakes, get back out there and tell 'em something else!"

"Well, what do I tell 'em, boss---that it's a hold?"

"No... that will scare some people into selling and if the stock goes any lower, it will take too long to get back up. We're looking for a quick runup on this."

"I got it, boss---how 'bout we say it's a short term hold? That way they'll think we know something is coming very soon---could be good, could be bad, but they'll hold to find out. New buyers will wait to buy, and the price remains stable until we finish buying. Then, we issue another strong buy rec., and the stock soars!"

"Brilliant idea, son---you've just insured your bonus this year!"


Danaloha's entry

A "short-term hold" is a somewhat malleable term used by a stock analyst in order to be correct no matter what happens to his or her recommended issue. Let us consider some possibilities:

1. Stock goes up quickly

Analyst: "I told you to buy quickly and hold it for the short term."

2. Stock goes down quickly

Analyst: "I told you to only hold it for a very short term."

3. Stock goes sideways.

Analyst: "I told you you should only be in it a short term."

4. Stock crashes then skyrockets (or vice-versa).

Analyst: "No, no, no, I meant hold it briefly while it's going up, not while it's going down."

Alternative definition: attention span, measured in micro-seconds, of Dan Dorfman, even within the same sentence.


Today's Moves

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

Today's Numbers

Day Month Year History FOOL +1.46% -1.14% -1.14% 84.60% S&P 500 -0.06% -2.29% -2.29% 31.29% NASDAQ -0.24% -4.17% -4.17% 40.00% Rec'd # Security In At Now Change 8/5/94 680 AmOnline 7.27 36.75 405.30% 5/17/95 335 Iomega Corp 15.11 43.75 189.47% 8/5/94 165 Sears 28.93 43.00 48.66% 4/20/95 155 The Gap 32.55 46.38 42.47% 8/11/95 95 GenElec 57.91 70.13 21.08% 8/11/95 110 Chevron 49.00 52.63 7.40% 8/24/95 100 AppldMatl 57.52 35.25 -38.72% 8/24/95 130 KLA Instrm 44.71 26.25 -41.29% Rec'd # Security Cost Value Change 8/5/94 680 AmOnline 4945.56 24990.00 $20044.44 5/17/95 335 Iomega Corp 5063.13 14656.25 $9593.12 8/5/94 165 Sears 4772.65 7095.00 $2322.35 4/20/95 155 The Gap 5045.25 7188.13 $2142.88 8/11/95 95 GenElec 5501.87 6661.88 $1160.01 8/11/95 110 Chevron 5389.99 5788.75 $398.76 8/24/95 100 AppldMatl 5752.49 3525.00 -$2227.49 8/24/95130 KLA Instrm 5812.49 3412.50 -$2399.99 CASH $18981.96 TOTAL $92299.46