Fool Portfolio Report
Tuesday, April 16, 1996

by Tom Gardner (TomGardner)

ALEXANDRIA, Va., Apr. 16 -- The Fool Portfolio extended its lead over the S&P 500 today, with gains of 1.07% versus index growth of 0.39%. But the potato sack race was stolen by the NASDAQ, fueled by Intel's strong earnings report.

Intel (NASDAQ:INTC) announced earnings of $1.02 yesterday after market close, and the stock rose $4 1/4 to $64 3/4 today. The stock had traded down to $52 in early March. Intel CEO Andrew Grove offered this, "From our perspective, PC demand appears to be solid."

Intel's move up contributed to a northward ride for Microsoft today as well. MSFT climbed $1 3/4 to $105 1/4. Microsoft announces earnings on Thursday, and The Motley Fool will be reporting back from their conference call late in the day.

Zacks' consensus of analyst estimates for Microsoft sit at 85 cents for the quarter. As at $80, $90, $100. . .now here at $105, I continue to believe that Microsoft is one of the most undervalued large-capitalization companies in the world for long-term investors.

Microsoft has the strongest consumer-technology brand on an entire planet hotfooting headlong into technology. Microsoft has 25% profit margins, $6 billion in cash, $5 billion in working capital, and not a single cent of long-term debt. The stock has compounded 35% annual growth over the past five years---doubling market average performance per year. And again, this is the single strongest consumer-technology brand on the face of the earth.

But, maybe the penny stocks we get pitched over the phone during dinner make better sense for investors. Or, perhaps we should stick with those heavy front-, back- and sideways-load mutual funds. Microsoft isn't for everyone; market-outperformance isn't for everyone.

And maybe the media is right---Foolish investing is all a lot of HYPE. I tell ya. . . hype, hype, hype. We got a 900 number and we've gotta hot one for you. It's a company named Microsoft; it has $7.5 billion in sales. We expect to see the stock above $1200 by the year 2006. Get in now. Now, I tell ya! Hot.

All of that is neither here nor there; those two stocks, Intel and Microsoft, aren't in The Fool Portfolio. They did, however, influence the NASDAQ ahead of The Fool Portfolio today. Darn. And they do provide a nice segue into a review of the stocks that are in our portfolio. Get ready, because this next line might surprise you:

Sell all our stocks.

Sell, sell, sell.

Sell our portfolio tomorrow at the open.

Why? Well, we're falling in line with what we believe the folks over at Berkshire Hathaway are doing when they opine that their stock is overpriced. Our sense is that they don't want anyone to hold shares of BRK who could be motivated to cash out due to that fateful, frightful, one-word utterance: "Sell!"


In other words, if you don't understand why you hold a stock, you should move on back to the investment vehicles that you do understand.

One option is the Vanguard Index Fund, which tracks the S&P 500. The 500 stocks on the index---from Coca-Cola to Microsoft to General Electric to General Motors---have compounded 10.5% annual growth for decades running. Entirely decipherable.

The Foolish Four Dow stocks have compounded 22% annual growth over the past 25 years---that's near twice market growth. Those four stocks today are Chevron, General Motors, 3M and General Electric. If you're invested in this approach and don't understand it, we recommend selling out your entire positions and returning to the S&P Index Fund.

In our case, that has us recommending that you sell Chevron, General Electric and Sears tomorrow if you don't understand why you hold them. Wake up in the morning, dial over to your discount or full-service broker and execute a sell. SELL.

The next stop is America Online, which rose $1 1/4, sneaking back toward its all-time high. AMER is our single best performing stock since opening the digital doors on Fooldom in August of 1994; the stock is up 659% for us. America Online is estimated to announce $0.13 for the quarter, and that announcement is slated for May 9th, after market close. AOL has also made it clear that they are not going to publicize half-million subscriber marks anymore. So our sense is that the service is definitely serving more than 5.5 million subscribers now.

Our recommendation? We don't really make them. But if you don't why you're holding it, you should sell your AMER stock in the morning. SELL.

The second strongest performer in The Fool Portfolio, Iomega Corporation---curiously the subject of some controversy in the marketplace over the last year---fell $3/8 today. Iomega has been working up a challenge to AMER over the past month. One month ago, Iomega was trading at $20 a share. The stock is up 61.9% over the last four weeks. Overall, IOMG is up more than 540% for us.

Oddly, The Street seems convinced that this is the consequence of "stock hyping" on The Motley Fool. In the last week, we've spied a dozen references on the Street and in the financial media opining that IOMG and other stocks are steaming based on online chatter on The Motley Fool. Interesting. Looks like just another indication that they aren't doing thorough enough research over there.

But it does integrate nicely into today's Fool recommendation on the stock. We think Iomega is a sell for those shareholders who don't know why they're holding a position of ownership in this business. Imagine how much better off we'd be as a nation if individuals were schooled not to invest in what they didn't understand. (Course, it might also be nice if people didn't write about or gab on CNN about what they don't understand, but we don't want to get greedy). Our sense is: If you own Iomega stock and don't know why, SELL.

The Gap (NYSE:GPS), our third best performing non-Dow stock, exploded at the close today, and finished up $1 1/8 to a bid of $29. That's within a half-point of an annual *and* all-time high for the strongest consumer apparel brand in the nation, Da Gap.

A Foolish eyeball thrown at the company's financial position and at valuation of other strong retailing brands (read: Nike) tells us the stock is fairly priced in the low-to-mid $30s now. Great earnings, great recent monthly sales figures, great exposure.

But that's internally our fair price for a stock in our portfolio, a portfolio that we've just thrown up in full-view for all participants in the forum. If you hold The Gap stock on your own, in your own portfolio, and you don't know why you hold it or what to expect, we think you should sell at the open tomorrow. SELL.

If you're wondering why you're holding Medicis Pharmaceuticals (NASDAQ:MDRX), tomorrow morning is an excellent time to punch in a sell to your telebroker. Medicis is exclusively a dermatological products marketer in a pharmaceutical world sprinkled with companies that try to do everything. MDRX is focused on dermatology. Medicis closed today up $1 1/4 to $27 1/2.

MDRX is slated to announce sales of $7 million, earnings of $1.5 million, and earnings per share of $0.31 for this their third quarter. Earnings are set to be announced on May 8th. If Medicis hits those numbers, they'll have $0.96 of trailing earnings, with Fool estimates of $1.65 in 1997, which is 1.25 years hence. That's 54% annual growth and a Foolish fair price of $51 3/4. 'Course those are just earnings valuations. . . eyes are going to have to be thrown to the balance sheet and cash-flow statements.

Now, those are Fool-generated estimates for Medicis, so here's another example of a stock that we believe you should sell tomorrow if you don't understand why you hold it. SELL.

Applied Materials (NASDAQ:AMAT) and KLA Instruments (NASDAQ:KLAC) are the two worst investments in our portfolio today. AMAT has fallen 35.7% since we purchased it, and KLA is off 40.5% since we gobbled up shares last Autumn.

Yesterday, KLA Instruments announced sales of $187 million for the quarter, earnings of $32 million and earnings per share of $0.62. All three were up more than 50% over the same period last year, and those EPS numbers beat estimates by a penny.

Quarterly profit margins are sitting at 17%; analysts estimate 25% annual growth over the next five years; we see hiccups in chip demand---and thus equipment hunger---in the years ahead, but those are hiccups in a strong upward trend. The stock closed up $1 1/8 to $26 5/8.

That said, if you are holding shares of KLA Instruments or Applied Materials in your portfolio and aren't sure why, we think you should free yourself from these companies. There's no reason to EVER hold a position of ownership in a company that you don't understand or in a situation that you makes you uncomfortable.

Daggone it, there are just too many great consumer companies that you ARE familiar with (Microsoft, Nike, Gillette, Coca-Cola, Pepsi, Johnson & Johnson, et cetera) to spend anytime worrying or waiting for OTHER people's *hot baby dumpling picks*. Those companies above are ones with strong cashflows, convincing sales, earnings and managerial histories, and global consumer brands. They're each mutual funds in their own right. It's just too damned easy. You know them; you invest in them by purchasing their products; they dominate; think seriously about following your consumer dollars with your savings money.

Now if they make you uncomfortable, just sit on your Dow Dividend stocks. And if you're not comfortable with that approach, tuck your savings into the S&P 500, add to it each month, quarter or year and wake up smiling, on a brilliant Sunday morning with the light of Saturn rings and moons bursting through your bubble-plastic viewing window from Spacestation Fool.

What other people do with their money, they do. What The Fool does, it does. What the media chooses to say about all this, and the Street, playing competitor rather than consumer servant, they do. And what you choose to do with your savings in the years ahead, you do.

We have every faith that if you keep enjoyable, enlightening, that if you maintain the disciplines you set for yourself and think about passing capital around you and to the generations below you, you'll do quite fine. Quite fine without business magazines, quite fine without professional traders, quite fine without plodding mutual funds, and certainly, quite fine without The Fool.

We just aim to add value in excess of the cost, and beat the damn market in the decades hence. Onward!

Transmitted: 4/16/96 6:54

Today's Numbers

Day Month Year History FOOL +1.07% 7.58% 36.74% 155.32% S&P 500 +0.39% -0.08% 4.72% 40.71% NASDAQ +1.30% 2.14% 6.92% 56.20% AMER +1 1/8...AMAT +1 1/4...CHV ---...GE - 1/2...GPS +1 1/8 ...IOMG - 3/8...KLAC +1 1/8...MDRX +1 1/4...S + 1/2... Rec'd # Security In At Now Change 8/5/94 680 AmOnline 7.27 55.25 659.67% 5/17/95 1005 Iomega Cor 5.04 32.38 542.62% 8/5/94 165 Sears 28.93 53.13 83.66% 4/20/95 310 The Gap 16.28 29.00 78.19% 8/11/95 95 GenElec 57.91 77.75 34.25% 8/11/95 110 Chevron 49.00 56.63 15.56% 1/29/96 250 Medicis Ph 27.86 27.50 -1.29% 8/24/95 100 AppldMatl 57.52 37.00 -35.68% 8/24/95 130 KLA Instrm 44.71 26.63 -40.45% Rec'd # Security Cost Value Change 8/5/94 680 AmOnline 4945.56 37570.00 $32624.44 8/24/95 100 AppldMatl 5752.49 3700.00 -$2052.49 5/17/95 1005 Iomega Cor 5063.13 32536.88 $27473.75 8/5/94 165 Sears 4772.65 8765.63 $3992.98 4/20/95 310 The Gap 5045.25 8990.00 $3944.75 8/11/95 95 GenElec 5501.87 7386.25 $1884.38 8/11/95 110 Chevron 5389.99 6228.75 $838.76 1/29/96 250 Medicis Ph 6964.99 6875.00 -$89.99 8/24/95 130 KLA Instrm 5812.49 3461.25 -$2351.24 CASH $12147.13 TOTAL $127660.88