Fool Portfolio Report
Tuesday, March 5, 1996

by Tom Gardner (TomGardner)

ALEXANDRIA, VA, Mar. 5 -- Are you managing your own money now? Have you swept out the heavy load of underperforming equity funds, perhaps thrown some shekels down into the Vanguard Index Fund---where you get market performance and the S&P's five hundred strongest companies in America, from General Electric to Hewlett-Packard, Johnson & Johnson, Microsoft, Morgan Stanley and more?

And from there did you collect some large-cap Dow stocks, maybe the Foolish Four, for historically market-doubling performance. Dow Dividend Investing has proven resilient in darker market hours, is a low-commission approach, and offers really zero intermediate- to long-term anxiety?

The blueprint for Folly marks this as the foundation for all market-beating portfolios. Wean yourself off the index fund which, though shiny in relationship to the 8,000 other mutual funds out there, nonetheless emits the lusterless glow of mediocrity when held in the light of the 25-year returns of high-yield Dow stock investing.

Beat the Dow, beat the S&P 500, and in so doing, outperform the long-term performance records of any investment vehicle you can dream up: baseball cards, rare collectibles, one-armed bandits, mutual funds, penny stocks, options, real estate, futures, commodities, blackjack, or (honk-honk!) ostrich farms.

From the Dow heavies, if you were Foolish, you looked around at the products and services that you love; you called up the public companies that provide them; you sectioned out the medium-sized, mid-capitalization growth stocks for consideration; you studied their financial statements; you ran the PEGs; you posted questions and comments in the appropriate stock folders in Fooldom, and invested, accordingly.

The final Foolish step, often the very most profitable one, but also the one that demands the most aggressive research, is into small-capitalization stocks. Not much cash, no debt, one or a few products, a niche player, great prospects and great risks, as well. If you're down here, you absolutely have to know how to read financial statements.

Well-managed consumer companies with aggressive marketing plans that explore wide-open new industries often make for the most memorable and profitable investments in our lifetimes. They can be a recipe for disaster, too, though. And when we at Fool HQ think of the spate of small-cap recommendations that fly out over telephones across the nation, with little or no research, well, it either rattles your head like a migraine or you announce, like Jacques in "As You Like It" that you are ambitious for a motley coat. We did the former first. . . but now increasingly invest ourselves entirely in motley.

That's the whole of the Foolish Investment approach, anatomized. Feel free to walk away from this forum tonight, for good. Large-cap high-yield to mid-cap financial strength to small-cap open market and all tightly linked back to the S&P 500---cause if you can't beat it, join it. There's nothing wrong with 10% growth per year on top of steady salaries and disciplined savings plans. Heck, you won't get it from the mutual-fund investment vehicle.

Before closing this out and returning to a review of the stocks in our portfolio and a valuation of each, take a gander at comments made by a true Fool about portfolio management principles.

Kevin Wenck of GT-Capital Management wrote in 'Small-Cap Stocks' (Probus Publishing, 1993): "I believe that sucessful investing is no different from an effective manufacturing process where the means of production are stable and well-defined. As such, a business management approach applied to investing would require a defined and unvarying process for stock selection according to the manager's defined investment style."

Run your personal finances, your savings, your investments like the business that it all is.

Ok, let's review The Fool stocks from largest down to smallest, from heavyweight to featherweight, from Dow giant to small-cap mosquito.

General Electric (NYSE:GE) rose $1/2 to $78 1/4. With over 1.6 billion shares outstanding, the total company is being valued by the market at $132 billion ($78 1/4 per share times 1.6 billion shares). The company is slated to land $4.40 in fiscal 1996, and $4.85 in fiscal 1997. The 5-year growth rate is 15%. The YPEG is $72.

Chevron (NYSE:CHV) closed down $3/8 to $55 3/8. The stock is up 13% for us. With around 650 million shares out, the Company is being valued by the Street at $36 billion. CHV won a deal today with Singapore Airlines to supply jet fuel when their planes re-fuel in South Korea. We have no idea what this will translate into for Chevron; we defer to MF Rigs in the Industry Area (keyword: sector). The stock still sits in the high-yield Dow group.

Sears (NYSE:S), oh lovely Sears. The stock closed today down $1/8 to $49. With 390 million shares out, the Street is pricing the company at $19 billion. This company has made us a pretty penny in the nineteen months we've owned it. When a company of this size pays you back with essentially a clean double on your investment in less than two years, you'd better thank management, thank Dow Yield investing, and thank Wall Street for discarding the stock for prettier faces.

Actually, it happened again today! Dean Witter Reynolds downgraded Sears Roebuck & Co. (S) to neutral from buy, citing concerns about the entire group. Curiously, Dean Witter also raised Kmart Corp. (KM) to neutral from swap. These ratings systems have gotta go, no? First of all, what exactly IS "swap?" Secondly, really, from the point of a view of an investor. . . Kmart and Sears make equally fine investments? We're holding onto Sears, thanks.

The Gap (NYSE:GPS), our other retailer, fell $1 1/4 to $54. With 145 million shares outstanding, Gap is being priced at $8 billion. Yesterday's upgrade after last month's downgrade did have us scratching our heads a bit. That's life on da Street. A full report on OUR fair pricing of GPS is available in Fooldom. The first part appears in The Gap Earnings section, which sits at the bottom of our mainscreen listbox. The second part sits in the Gap stock folder, sitting out on our stock boards.

Applied Materials (NASDAQ:AMAT) climbed $1/2 to $34 3/8. The company is capitalized at $6.2 billion. Arf. This one has been a real dawg for us, down 40%. We keep looking around, but beyond the slowdown in personal computer sales, the fundamentals look hearty. It may take time for AMAT to rebound, turn profitable, and beat the market. . . but we expect to wait around until it does.

America Online (NASDAQ:AMER), capitalized at around $4 billion, rose $7/8 to $46. CEO Steve Case spoke today at the National Press Club, and spoke favorably of The Motley Fool. Reach up a paragraph to the Applied Materials review, and you'll see that note about slowing PC sales. From our vantage point, much more of all this than we think is the consequence of unequal or unpackaged marketing.

The semiconductor companies have to explain their business to consumers and the Street, tying it to PCs, online communications systems, software companies, and content providers. The links exist at times between PC and online, or software and PC, or parts-supplier and PC. . . but the future *pure* growth in technology will rise up out of marketing ties between ALL of these: from the best hardware to the best software to the best online providers to the best content. Link the chain, and the booming and busting of all this will dilute out.

As for the valuation of America Online, on February 6, they reported their 5 millionth subscriber. We continue to think that AOL will announce their six-millionth subscriber in May, 1996, at which point we think the stock will be fairly priced somewhere north of $60. America Online closed today up $7/8 to $46.

Iomega (NASDAQ:IOMG) closed up $1 1/4 to $17 3/4, an outstanding day. The company is capitalized at $1 billion. We think many Fools are too concerned about Kim Edwards' treatment of the press and Wall Street. Why give publicity to lesser products? The newest Compaq drive may have carriage delivery, but the competition in the PC industry and the strength, early-entry, and marketing prowess behind Iomega's revamped product line have us about as concerned about CEO talk AND daily price moves as we are about. . . well. . . the valuation of Vancouver stocks trading under $5. Not very.

KLA Instruments (NASDAQ:KLAC) was flat today, closing at $23 5/8. The company is valued at $1 billion. The stock is now down 47%. We continue to believe in the long-term viability of their business, and we're pleased with their financial position. . . these appear to be the worst of times for the group.

Medicis Pharmaceuticals (NASDAQ:MDRX), the wee little mosquito in The Fool Portfolio, rose $1/4 to $28 1/2. This company is capitalized at $125 million. Those of you who have read our Medicis Report in the Hall of Portfolios listbox know that we've estimated earnings per share of $1.10 in fiscal 1996 and $1.65 in fiscal 1997. MDRX has 86 cents trailing. Our growth rate from here to the end of 1997 is 54%. That's our fair-price multiple against trailing earnings. Thus, 54 x $0.86 = $46.44, or $46 1/2. We'll be watching the quarters ahead quite closely.

And there you have it, from largest to smallest. . . we think it's an excellent way for indidivual investors to build market-beating portfolios. Sure, the conventionally Wise are telling you to stick to those sleepy mutual funds. But why underperform? At least return to that first step, the index fund and its 500 common US stocks. . . eh?

Oh, The Fool Portfolio was up 1.7% today versus S&P gains of 0.77%.

Fool on.

Tom Gardner, March 5, 1996

TODAY'S OTHER FOOLISH STUFF: (to be read in Casey Kasem voice): The Motley Fool Invesment Guide debuted on the charts at number five this month. The New York Times Business Book Best Seller list shows Bill Gates' "Road Ahead" at number two. A little more momentum, a touch of old guard-new guard rotation, and Foolishness edges out the founder of the most profitable company of the 21st Century. Set to!

Today's Moves

AMER + 7/8
AMAT + 1/2
CHV - 3/8
GE + 1/2
GPS -1 1/4
IOMG +1 1/4
KLAC ---
MDRX + 1/4
S - 1/8

Today's Numbers

Day Month Year History FOOL +1.70% -1.84% 12.34% 109.76% S&P 500 +0.77% 2.40% 6.47% 43.06% NASDAQ +1.10% -0.29% 4.25% 52.30% Rec'd # Security In At Now Change 8/5/94 680 AmOnline 7.27 46.00 532.49% 5/17/95 1005 Iomega Cor 5.04 17.75 252.33% 8/5/94 165 Sears 28.93 49.00 69.40% 4/20/95 155 The Gap 32.55 54.00 65.90% 8/11/95 95 GenElec 57.91 78.25 35.11% 8/11/95 110 Chevron 49.00 55.38 13.01% 1/29/96 250 Medicis Ph 27.86 28.50 2.30% 8/24/95 100 AppldMatl 57.52 34.38 -40.24% 8/24/95 130 KLA Instrm 44.71 23.63 -47.16% Rec'd # Security Cost Value Change 8/5/94 680 AmOnline 4945.56 31280.00 $26334.44 8/24/95 100 AppldMatl 5752.49 3437.50 -$2314.99 5/17/95 1005 Iomega Cor 5063.13 17838.75 $12775.62 4/20/95 155 The Gap 5045.25 8370.00 $3324.75 8/5/94 165 Sears 4772.65 8085.00 $3312.35 8/11/95 95 GenElec 5501.87 7433.75 $1931.88 8/11/95 110 Chevron 5389.99 6091.25 $701.26 1/29/96 250 Medicis Ph 6964.99 7125.00 $160.01 8/24/95 130 KLA Instrm 5812.49 3071.25 -$2741.24 CASH $12147.13 TOTAL $104879.63