Fool Portfolio Report
Tuesday, June 25, 1996

Tuesday, June 25, 1996 (FOOL GLOBAL WIRE)
by Tom Gardner (TomGardner)

ALEXANDRIA, VA, June 25, 1996 --The market bashed The Fool Portfolio again today as our stocks gave back 4.10% versus a flat day for the S&P 500. This puts June's depreciation rate at a frightful 23.31%. Unless we can convince a band of financial titans to methodically acquire something on the order of half of the businesses in the Portfolio, we're staring our first red month of the year right in the ojos.

Make no mistake, 1996 has been an extraordinary year. Iomega, America Online, The Gap and Medicis Pharmaceuticals have carried us to market-obliterating returns. Not surprisingly, all have posted stellar earnings since the turn of the New Year. The investor that lets a mix of consumer intuition, quarterly earnings report and composure direct their investment decisions may stake permament claims to Folly.

Composure, be with us today in June. Our portfolio has shed 23% of total value since May sent us into summer swelter. To these smashing gains---

May: + 20.20%

April: + 32.17%

March: +11.06%

Februrary: +7.93%

January: +6.03%

---it appears we will add something on the order of the following:

June: -25.00%

Ladies and gents, Fool and Sage, the streak's over. And the best way to end an investing streak like this is to return to the bottom-line, to recount the stories of the businesses you've invested in, to reconsider the financials, and to re-calculate valuations. So, now's as good a time as any to roll the sleeves up and peer down into the companies that we own.

Tonight, I'll work through valuations for the four largest businesses in The Fool Portfolio. On Thursday, I'll walk through pricing analyses of our four smaller-cap issues. On Tuesday and Thursday of next week, if I can stick to schedule, I'll walk through coverage of the eight businesses---and their subsidiaries---in the same order.

If you've worked through our "Thirteen Steps to Investing, Foolishly" here online and curled up around The Motley Fool Investment Guide, you're awake to our suggestion that you invest in large-capitalization stocks first---and exclusively if you have no interest in digging deeper. For those that want to dig, we don't think you should take on the additional risk and go after the potential for truly outstanding returns via mid-capitalization and small-capitalization growth stocks until you've learned how to read financial statements, to assess the businesses behind them and to utilize the mass financial conversation in Fooldom.

Thus, we tackle the large-caps today, the sorts of stocks we think new investors should concentrate on. Let's take a moment to compare the total value (or market capitalization) of the eight companies that we have invested in. We recommend taking a moment to calculate these values for the companies in your portfolio as well. Here's what ours looks like:

General Electric (NYSE:GE) $141.0 billion

Chevron (NYSE:CHV) $39.8 billion

Sears (NYSE:S) $19.2 billion

The Gap (NYSE:GPS) $9.5 billion

America Online (NASDAQ:AMER) $4.7 billion

Iomega Corporat'n (NASDAQ:IOMG) $3.3 billion

KLA Instruments (NASDAQ:KLAC) $1.1 billion

Medicis Pharma. (NASDAQ:MDRX) $182 million

Those are the going rates for the companies in our portfolio. It is so important to understand the sizes and shapes of the businesses that you invest in, and we think a simple measurement like this will help clarify how aggressive or conservative you're being in the management of your savings.

Now let's start with General Electric.

General Electric has trailing one-year sales of $77 billion, and thus the overall enterprise is trading at 1.8x sales. GE is paying out a 2.1% dividend, which does not qualify it for the Foolish Four or high-yielding ten Dow stocks. The Company is projected to land between $4.90 and $5.00 per share of earnings in the year ahead, and Fools estimate a multiple off cashflows of 17-18x earnings. Our higher-end fair price target for General Electric is between $85-$90 per share. The stock is trading at $87 3/4, up $1/2 on the day. GE is up 51% for us since we jubilantly bought into the best mutual fund on the market ten months back. Barring a dividend hike or price drop, we will be cashing out of these shares come mid-August.

Chevron closed the day flat today. The Company has $38 billion in sales, and thus is trading at about 1x sales---a rich valuation relative to its competitors. Now, I'm not going to pretend to know how to value this business. We somewhat mechanically purchase these Dow stocks, basing the decision on the dividend yield, and we're tickled about the returns we've generated over the past decade with this approach. Fools know that when you date the model back 25 years, you see in excess of 22% annual growth. That said, I hereby offer 10 free hours---or a $30 gift of your choosing---to any Fool willing to throw up a comprehensive and numerical review of Chevron: da stock and company. Chevron closed today flat, at $60 7/8. The stock is up 24% for us since August.

Before moving onto Sears, I fear my Chevron confession might come back to haunt The Fool. "These guys don't know how to value what they're buying!?" To this I offer two striking confessions from two of the brightest financial minds of the century: Warren Buffett and Jack Welch.

At the Berkshire Shareholder's Meeting, Mr. Buffet asked if there was anyone out there who could help with his valuation of Salomon Brothers (NYSE:SB) since he couldn't himself construct a valuation model for it.

And Jack Welch, in a business glossy earlier this year that I won't advertise for since they aren't terribly Foolish, admitted that there were subsidiaries to General Electric whose products he could not name, and if he could, he couldn't understand 'em.

The point is not that Welch and Buffet are Foolish, since I imagine they would quite unmistakably scoff at the notion. Nope, the point is that sometimes numbers tell the only story that matters. Other times, it is seemingly impossible to extract meaningful numbers and reasonably assess their significance. Knowing that, we plod along with our Foolish Four Dow Investing. . . the single easiest way to mash the market, historically. We expect the logic (and performance) to continue playing out in the decades ahead.

Sears. Ah, Sears. The turnaround is in full bloom now, and I propose again that anyone tackling investing as a life's work ought get their hands on Sears' fiscal 1995 annual report. They're telling the ultimate consumer story out there in Chicago right now.

Sears has trailing sales of $35 billion. Thus they're trading at 1.9x sales. Sears is projected to land $3.50 in earnings for the year-ahead, with a long-term annual growth rate estimated at 15%. That prices the stock fairly at $52 per share (15 x $3.50). Fools who have been digital for two years with us know that together we've really nailed down the pricing on this stock since day one. Sears closed the day down $5/8 to $48 5/8 today.

I hereby issue 5 free hours to any Fool who can come up with a correct calculation for our returns on Sears dating back to August 4, 1994. It must include gains from the AllState spinoff. You know what? At $3 an hour, that's $15. I don't think it's worth it! Just nice to know it's smashed the market.

The Gap has been a joy. With sales of $4.4 billion, the company is trading at 2.2x sales. The Company has 8% profit margins, a consistent, decipherable and meaningful brand, and earnings projections that range from 15-18% annually going forward. What you no doubt have noticed, Fool, is that the higher and purer (no debt) the sales and earnings growth rates, and the broader the profit margins, and the stronger the brand, naturally the greater the multiple off sales. Gap is 1.5x more profitable, and projected to grow at 1.5x the rate of a company like Chevron, with a more identifiable brand. Expect an equally richer valuation.

In the case of Gap, earnings are projected to grow to $1.70 in the year-ahead, with high-end growth estimates of 18% annual growth. That prices Gap today at around $31 a share. Additional brand and cashflow values push our fair-price target up into the mid-$30s. Gap closed the day down $7/8 to $32 3/4. The stock is up 101.23% in just over a year.

Before covering the news and the more significant moves in the Fool Portfolio here at the close, I'd like to revisit a line from The Motley Fool Investment Guide:

"But do always remember that if your dory
does start taking in water, you have the
strongest, handsomest, and most
dependable dock on the lake in Beating
the Dow."

Companies that are capitalized above $10 billion are going to provide ballast to your overall portfolio. If you don't have them, we think you're making a potentially very harmful mistake. If the winds change on the market, some of your smaller businesses will get hit hard, some might even go under. Of course, we think that if you've screened out debt problems, low margins, brandless products and/or services, and low-grade management, your companies will survive the darker hours. But we can't imagine managing savings denarii without the stability and market-smashing returns that high-yielding Dow (and non-Dow) stocks have generated over the past handful of decades.

Now to Fool News and the real hurt.

Iomega continued it descent, dropping $2 3/4 on no news. The stock was priced at $26 1/2 at market close.

America Online rose $1/2 to $42 1/2 on two important bits of news. First, Company COO Bill Razzouk stepped down today, after a brief four-month tenure with America Online. No details on the why of that resignation available. And Morgan Stanley analyst, Mary Meeker, upgraded AOL to a strong buy this morning. The stock traded as high as $45 1/4 before settling back to $42 1/2.

Medicis fell $2 1/4 on no news. And KLA Instruments dropped another $3/4 without news as well. On Thursday, I will run back-of-da-envelope valuations on these four smaller-cap issues in The Fool Portfolio.

To close, to the extent that you can, train yourself on patience. Composure and long-term gratification have won the equities market since the first company sold portions of itself on the open market.

Fool on.

Tom Gardner, June 25

Transmitted: 6/26/96

Today's Numbers

Day Month Year History

FOOL -4.10% -23.31% 54.85% 189.14%

S&P 500 -0.06% -0.10% 8.53% 45.83%

NASDAQ -0.87% -5.70% 11.45% 62.82%

*Scroll down or expand screen for full portfolio accounting

AMER + 1/2 ...CHV ---...GE + 1/2 ...GPS - 7/8 ...IOMG -2 3/4 ...KLAC - 3/4 ...MDRX -2 1/4 ...S - 5/8 ...

Rec'd # Security In At Now Change

5/17/95 2010 Iomega Cor 2.52 26.50 952.02%

8/5/94 680 AmOnline 7.27 42.50 484.36%

4/20/95 310 The Gap 16.28 32.75 101.23%

8/5/94 165 Sears 28.93 48.63 68.11%

8/11/95 95 GenElec 57.91 87.75 51.52%

1/29/96 250 Medicis Ph 27.86 40.00 43.58%

8/11/95 110 Chevron 49.00 60.88 24.23%

8/24/95 130 KLA Instrm 44.71 21.25 -52.47%

Rec'd # Security Cost Value Change

5/17/95 2010 Iomega Cor 5063.13 53265.00 $48201.87

8/5/94 680 AmOnline 4945.56 28900.00 $23954.44

4/20/95 310 The Gap 5045.25 10152.50 $5107.25

8/5/94 165 Sears 4772.65 8023.13 $3250.48

1/29/96 250 Medicis Ph 6964.99 10000.00 $3035.01

8/11/95 95 GenElec 5501.87 8336.25 $2834.38

8/11/95 110 Chevron 5389.99 6696.25 $1306.26

8/24/95 130 KLA Instrm 5812.49 2762.50 -$3049.99

CASH $16434.53

TOTAL $144570.16