Fool Portfolio Report
Tuesday, May 21, 1996
(FOOL GLOBAL
WIRE)
by Tom Gardner
Note: As far as we know, we'll be featured on C-SPAN tomorrow between 1 and 2 PM, in live coverage of our 30 minute talk then 30 minute Q&A at the National Press Club. It will be rebroadcast certainly, though times are not presently available.
ALEXANDRIA, VA, May 21, 1996---Always looking to run our savings account like the business it is, we lead tonight again with a review of the overall performance of the portfolio today. The Fool climbed another 1.05% while the competition (da S&P 500) fell 0.06%.
Two point up moves in Iomega Corporation and Medicis Pharmaceuticals washed away a $3 decline in AMER, which has fallen 26% since the Company announced earnings two weeks ago. AMER has seen its total value fall $2.1 billion in two weeks. I hope to present a further review of AOL's business in our America Online folder later this evening.
AOL's decline only slowed the portfolio's climb today, though, which drove our savings over $183,000 up from our initial investment of $50,000 just 21 months back. The growth has, in my estimation, come with limited long-term risk. Today, The Fool Portfolio is sporting the following:
10% cash
18% large-caps (GE, Gap, Chevron, Sears)
67% midcaps (AOL,
Iomega, KLA Instruments)
5% small-caps (Medicis)
The committment we make to ourselves in the management of our savings monies is to:
* maximize the LONG-TERM value of our business,
* REDUCE capital and
labor investments;
* thoroughly ENJOY the process;
That's incredibly unprofessional, we know---in so far as the Wise tie the word "professional" tightly round the words "Wall" and "Street." If the Street is professional, for the three reasons above (and many more), then we're highly, highly UNprofessional because Wall Street appears to do quite the opposite of us:
* maximize SHORT-TERM value;
* INCREASE activity and client investment;
* invent DISCOMFORT---dinnertime phonecalls, murky performance records,
self-exaltation above the consumer, etcetera etcetera. . . etcetera.
Those make for a few reasons we strap on Fool caps, focus aggressively on business research rather than price-fluctuation research, believe in the power of collaborative education, manage our portfolio in full-view and serve consumers like ourselves. We're always trying to build a service that we ourselves are addicted to---a pretty Foolish business plan.
To close this report, I'd like to review that company that is providing "yesterday's technology" and the one expected at one point to open in the mid single-digits---not even adjusted for the split. Oh boy. Let's talk a bit about Iomega: Performance, Valuation, Questions, The Story, Portfolio Management Issues, Education and Enjoyment Matters.
1. Iomega performance
Just about one year ago, we picked up $5063.13 worth of Iomega stock at a split-adjusted price of $2.52 per share. That represented less than 9% of our total assets at the time. Today, with the stock at $43 1/4, Iomega is worth $86,932.50. Total returns on our investment in twelve months are sitting at 1616.97%. A 17-bagger.
As a group, listening to our business analyses, keeping a beat on consumer demand, rigorously evaluating quarterly financial statements, and enjoying the process has garnered returns in this stock that would take 29 years to earn with market-average growth in an index fund (10.5% growth per year).
29 years.
Wow.
29.
Years.
Wow.
2. Iomega valuation
Iomega is now capitalized at $5.57 billion (priced at $43 1/4 with 128.8 million shares outstanding). Sales projections in the folder have wavered around $1.5 billion for 1996. I personally remain comfortable with a multiple of 4X year-end sales. Iomega is a consumer-branded technology outfit selling into furious demand and working up toward increasingly broader profit margins. I do like the comparison financially to US Robotics, which has $1.35 billion in sales, 11% margins, and trades today at 6X sales. If we hold Iomega to 4X year-end sales of $1.6 billion, we cap the company at $6.4 billion. Projecting shares outstanding in the 135 million range, Iomega would be fairly priced at $47 1/2.
This doesn't include growth beyond December 31st. Of which I think there will be much. Storage demands aren't going to slacken.
3. Iomega Questions
Going forward, I think IOMG investors should ask themselves these questions among others: How is the company going to spend their $200+ million from the equity offering? How might OEM deals effect 1997 sales? What sales estimates are reasonable for fiscal 1997? And how "light" can Iomega make its business---automation, a move to disk-driven sales, word-of-mouth promotions, etcetera?
And a great question asked in the blur of the Iomega folder last night: Is Iomega developing partnerships with companies that will develop products FOR their line of storage products? This seems key to me.
4. The Iomega Story
Expect many to still misunderstand this investment story---how this has happened, where it is going, and why? As the media has focused on the stock's moves, Fools have concentrated on company and industry analyses. As the media has underestimated the investment savvy of their subscriber base, Fools have relied heavily on consumer voices.
This weekend at my tenth high-school reunion, a classmate of mine reflected on Iomega, his investment in it, Foolish coverage of it, and media and Wall Street responses to it all. He said (paraphrased):
"You guys focus on the consumer, rightly so, but I can assure you that an awful lot of "corporate" investors have made a fortune on Iomega off your research as well, from reporters to fund managers, from brokers to magazine editors. They can't always publicly champion your business for you, but what they can do is turn down assignments to write negatively about you, laugh in their offices at those who ignorantly berate you, follow your research very closely and invite others around them to be Foolish.
"It may not seem like a lot, but it's an incredibly bullish indicator for your business. The pettiest out there are attacking the most useful investment resource ever created. The shrewdest are using it. If you look at who's covering all this well, it's the technology media. The financial media is running a lap behind and hurting their readers for it."
I asked him: "Did you see the BusinessWeek article on MF Boring (Greg Markus)?"
He answered: "Of course. (And smiled.) Hey, just keep serving the people."
Not bad for a whippersnapper 28-year-old, eh?
5. A Foolish Take on Portfolio Management
Do we think we hold the crown jewels. . . that our portfolio structuring is unmatched by the industry. . . that there's no other way to invest but to buy and hold profitable consumer brands and large-cap turnarounds? Certainly not. But we do love our approach and are pleased with the performance (scroll through numbers below). In that spirit, let me make clear some things that we think might come back to haunt individual investors:
a. The undiversified portfolio on margin.
b. Options.
c. Enthusiasm
in place of business analysis.
My feeling is that just as these have gutted the portfolios of those who were shorting Iomega, it will gut the portfolios of those who are long it, at some point. Because business management of your portfolio is what matters.
If you're holding most of your portfolio in Iomega, are on margin, playing the options game, and have lost site of projections for growth in sales, earnings, EPS, and cashflows. . . I hope you know what you're doing. In the end, I think the market always rewards portfolio management over stockpicking. I've tossed out this idea since we launched the forum with a handful of message folders and a three-paragraph daily article in August, 1994. Pick the right company in the wrong way and things can get ugly.
6. Foolish Education
My experience is that life is much longer than we think. That seems only more true when we talk about the stock market and Wall Street. What will happen to your savings next month? Next week? Tomorrow morning? The market today has been constructed on the notion that tomorrow's open actually matters. Our experience tells us that it doesn't at all matter. Where will you be in 2006? And 2016? And your kids? What happens when you get hit with an extraordinary one-time charge against your savings? Are you prepared for it? Are you cashflow positive? Are you building in greater efficiencies to the management of your savings?
Are you enjoying this?
Summer's here. I hope whether you've invested in Iomega or any Fool stock or not, you plan to take significant time out this summer for enjoyment. This has been an extrordinary year. Our trailing twelve month portfolio performance ranges above 200%. Iomega is worth 18 times what we paid for it ($1,000=$18,000; $5,000=$90,000; $37,000=$666,000; $239,378=$4.3 million). But the aim remains to beat Beating the Dow which doubles up on the market which most mutual funds lose to each year. We posted our expectations in The Motley Fool Investment Guide. They weren't for 97% growth every six months. We're keeping things realistic, reading more about American business, asking people around us, trying not to talk too much. . .
. . . and enjoying it.
We hope you are, too.
Fool on.
Transmitted: 5/21/96
Day Month Year HistoryFOOL +1.05% 17.04% 96.61% 267.13%
S&P 500 -0.06% 2.84% 9.23% 46.76%
NASDAQ -0.29% 4.53% 18.28% 72.80%
*Scroll down or expand screen for full portfolio accounting
AMER -3...CHV -1 1/2 ...GE -1 1/8 ...GPS - 1/8 ...IOMG +2 1/16...KLAC -2 3/4 ...MDRX +1 7/8 ...S ---...
Rec'd # Security In At Now Change
5/17/95 2010 Iomega Cor 2.52 43.25 1616.97%
8/5/94 680 AmOnline 7.27 51.50 608.11%
4/20/95 310 The Gap 16.28 33.13 103.53%
8/5/94 165 Sears 28.93 49.88 72.43%
8/11/95 95 GenElec 57.91 83.38 43.96%
1/29/96 250 Medicis Ph 27.86 34.50 23.84%
8/11/95 110 Chevron 49.00 60.50 23.47%
8/24/95 130 KLA Instrm 44.71 26.75 -40.17%
Rec'd # Security Cost Value Change
5/17/95 2010 Iomega Cor 5063.13 86932.50 $81869.37
8/5/94 680 AmOnline 4945.56 35020.00 $30074.44
4/20/95 310 The Gap 5045.25 10268.75 $5223.50
8/11/95 95 GenElec 5501.87 7920.63 $2418.76
1/29/96 250 Medicis Ph 6964.99 8625.00 $1660.01
8/11/95 110 Chevron 5389.99 6655.00 $1265.01
8/24/95 130 KLA Instrm 5812.49 3477.50 -$2334.99
8/5/94 165 Sears 4772.65 8229.38 $3456.73
CASH $16434.53
TOTAL $183563.28