Fool Portfolio Report
Wednesday, May 8, 1996


by David Gardner (MotleyFool)

ALEXANDRIA, VA, May 8, 1996 -- OK, ummmm. . . so I guess the market didn't like America Online's earnings!

America Online had its worst day in recent memory, dropping $7 1/8 or 10% Wednesday after reporting its third-quarter earnings at something like 3 AM this morning. (I know. . . I was up, and I can tell you that it hit Fooldom with a full news package concurrently with the story on the wires. Thanks and congrats to MFs Debit and Czar for their great work.) Obviously, I'm disappointed that AMER DROPPED $7 1/8 rather than rose $7 1/8 but if the stock always rose and rose and rose and rose, pleasure as a concept would have no meaning.

For the full news take on the report, just click the America Online listbox link to the upper right and read all about it. What follows below are my Foolish thoughts on that reported news.

First off, the quarter was a good one, in line with---or slightly exceeding---estimates. Steve Eskenazi, the Alex Brown new media analyst who called this stock his "single best bet" earlier this week, had essentially predicted these very numbers. Fourteen cents in earnings per share (EPS), he said, with $305 million revenues. Turned out to be $0.14 EPS, and $312 million in revenues. Hey, wasn't like the market didn't think this was coming.

Or was it? Momentum investors eager to hop into one of the best stocks on the U.S. markets over the past four years may have expected significantly more in earnings. Maybe they were hoping for 18 cents, or 20 cents, for the quarter. Who knows? Clearly, expectations were jilted, so we saw another repeat of the old chorus (repeat after me): "Buy on the rumor, sell on the news."

Reasons given for the drop today include an expected slowdown in subscriber growth for the fourth quarter, a new Japanese partnership that will supposedly drain funds, a low expected valuation for Prodigy (if and when it ever does sell), and (the best news of all for our readers), a new pricing plan in which you can pay $19.95 for 20 hours a month.

Does that make YOU happy? A lot of AOL members are jumping for joy tonight, probably nowhere more so than at The Motley Fool, where our readers have been spending huge hours and big bucks for a long time now. Under the new plan (which you can read more about in the news package, or at keyword FULL DISCLOSURE---AOL's investor relations area), you can spend even more hours for fewer bucks. . . that sounds like a medium coming into its own, a business moving into its next phase of maturity. Steve Case said the following: "As the market leader, we believe we have sufficient critical mass and momentum to attract and retain content and marketing partners, to provide a rich, engaging and ever-expanding service for our subscribers, to control our network destiny, and to generate new revenue streams (from transactions, advertising, and merchandise sales.) This should enable us to price our services affordably while still investing heavily in innovation and build the subscriber base while reinvesting network gains to insure great customer value." That's exactly the stuff I need to hear as an investor, coming from the market leader in the fastest-growing and most important industry (to my mind) for the foreseeable future.

That's why we own the stock. As anyone who's spent a lick of time following the Fool Portfolio knows, we invest in COMPANIES, not short-term price movements. With America Online, we believe we've located a world-beater for years to come. A quarterly report that DIDN'T cause the market to convulse with ecstatic pleasure? Hey, that happens.

On a purely Foolish note, I had to quote one of today's AMER message folders postings from STOCKGIRL, one of our longtime readers, who reminded us that despite America Online's drop today, it's still up for the week! This in itself is fairly irrelevant (I mean, who but unFoolish options investors care what happened this week?), but it remains a nice face-slapper, doesn't it? It's Wednesday, America Online dropped $7 1/8, and it's up for the week.

I'll be honest. . . as I said today in the hallowed halls of Fool HQ, I like it when the stock gets whacked. Why? It knocks out short-termers, and restores a sense of realism to us all. . . a sense that some people lose in the euphoria of a seemingly constant rise. Maybe we'll continue to get whacked, whacked for the rest of 1996. I have no idea! True investors, those whom I think of as Fools, understand that stocks don't ALWAYS rise, and further, that this fact is not troubling or unfortunate.

Perhaps the greatest lesson we've demonstrated with our Fool Portfolio is that if you hold through the bumps and the down times, you make a lot more money than those others playing things to drop three points, then rise two more, etc. The gains we have in America Online and Iomega have occurred through some big drops: heck, THREE separate times last year, AMER dropped more than 25% off its high. Not once, my fellow Fools, but three times! But when the smoke clears, those still holding their shares break out the most champagne bottles of all, because they can afford to throw the big party for everyone else.

In the coming days, we'll talk more about the advertising revenues, about the Japanese deal, the pricing plan, and other stuff, but tonight we just wanted to give you our "investor's reaction" to the report.

Helping the Fool to its 4.23% loss today (well below the S&P 500's 1% gain) were Iomega (down $2 5/8) and KLA Instruments (off $1), as well. No news on either of those.

On the plus side were our NYSE stocks (pronounced "NICE" tonight), with Chevron up $1 5/8, General Electric up $5/8, and The Gap (due to report earnings tomorrow) striding forward $5/8.

Finally, I need to issue one retraction regarding the Historical Quotes feature on AOL (accessible through the Search button at the bottom of our Fool screens). It's currently only available to Windows users. . . when I wrote about it last week, I made it sound generally available to all, but it's not up for Mac users yet. Sorry. I guess I take some small solace that Steve Case's monthly letter, which I just read yesterday (keyword STEVE CASE), makes the same mistake. I figure he got more mail about it than I did. . . though, ummmm, maybe not.

Fool on.

---David Gardner, May 8, 1996

Transmitted: 5/8/96

Today's Numbers

Day Month Year History

FOOL -4.23% 4.54% 75.60% 227.89%

S&P 500 +1.02% -1.44% 4.68% 40.66%

NASDAQ +0.04% -0.61% 12.46% 64.29%

*Scroll down or expand screen for full portfolio accounting

AMER -7 1/8 ...CHV +1 5/8 ...GE + 5/8 ...GPS + 5/8 ...IOMG -2 5/8 ...KLAC -1...MDRX - 1/4 ...S ---...

Rec'd # Security In At Now Change

5/17/95 1005 Iomega Cor 5.04 63.25 1155.47%

8/5/94 680 AmOnline 7.27 62.88 764.51%

4/20/95 310 The Gap 16.28 30.00 84.33%

8/5/94 165 Sears 28.93 50.75 75.45%

8/11/95 95 GenElec 57.91 76.00 31.23%

8/11/95 110 Chevron 49.00 56.75 15.82%

1/29/96 250 Medicis Ph 27.86 24.75 -11.16%

8/24/95 130 KLA Instrm 44.71 29.75 -33.46%

Rec'd # Security Cost Value Change

5/17/95 1005 Iomega Cor 5063.13 63566.25 $58503.12

8/5/94 680 AmOnline 4945.56 42755.00 $37809.44

4/20/95 310 The Gap 5045.25 9300.00 $4254.75

8/11/95 95 GenElec 5501.87 7220.00 $1718.13

8/11/95 110 Chevron 5389.99 6242.50 $852.51

1/29/96 250 Medicis Ph 6964.99 6187.50 -$777.49

8/24/95 130 KLA Instrm 5812.49 3867.50 -$1944.99

8/5/94 165 Sears 4772.65 8373.75 $3601.10

CASH $16434.53

TOTAL $163947.03