Fool Portfolio Report
Friday, July 19, 1996
Friday, July 19, 1996 (FOOL GLOBAL WIRE)
by Tom Gardner
ALEXANDRIA, VA, July 19, 1996 -- Well, in between tonight and our communique to you last night, Iomega announced earnings a penny above Wall Street estimates and got crushed. The stock lost $5 1/2 in Friday trading, on volume in excess of 18 million shares. We're obviously disappointed with the result, insofar as we had been looking for higher revenues and higher earnings per share. In this space earlier this week, I echoed and affirmed analysis done by some of our closest Iomega followers that the company would bring in 14 cents per share. Announcing earnings per share of 11 cents on revenues of $283 million, it came in well below that. And the market was unimpressed.
That said, we're still talking about a strong quarter. What blew the stock up today was the market's short-term worries about Iomega's third quarter, which I'll talk about some more below.
I suppose my overall feelings run closest (as is often the case) to Fool staff member MF Ben, one of the more level-headed clear-thinking fellows I know, who wrote, "Anyone who says this was an awesome quarter is plain silly. It was good. It was fair.... Not everything has to be awesome ALL the time. Even great companies have middling, mediocre quarters. By any standard Iomega had a damn fine quarter. By Iomega standards it was JUST, PLAIN OK."
Quite right. MF Ben has been a strong, intelligent voice in our ongoing conversation from Day One, from the initial discovery of the company, to the fevered and exciting realizations in '95 that this would be a billion-dollar company in '96, to the more sobering recognition that this would not be a $2 billion company in '96. I am proud to have him on staff, and continue to appreciate his contributions to Fooldom.
As an Iomega shareholder, I value three types of comments that have emerged in the past 24 hours: (1) praise for J.P. Morgan and Hambrecht & Quist for their 2Q estimates, (2) praise for Iomega, which put up 28% sales growth and 40% earnings growth quarter-over-quarter, and (3) praise for those of our fellow Fools who rolled up their sleeves again to look again with fresh eyes at the numbers, the expectations, the real world.
In this regard, I think particularly of DavePellow, who wrote: "I now realize that IOMG is no longer a 'momentum' stock. The movements in price since JPM recommended it are those of a more stable growth stock. The up and down days of $10 a day are probably gone forever---but so what! I'm an investor, not a trader. Normally, I do not invest in stocks that I am not willing to hold for many months, if not years."
BungyJmpr, who began a post last night right off by admitting to having grossly overestimated revenues, went right on to analyze where his thinking had gone wrong. Right on, James... that's what Foolishness is about. Doing hard work in the first place, enjoying the fruits when you're right, learning from your mistakes when you're wrong. Many of us were wrong (I include myself), and learned that good lesson.
The lesson is not, as Wisemen may spout, that individual investors can't invest in stocks, can't beat the market, can't manage their own money, "just look what happened to Iomega." No... far from it. Even despite the poor show today, the Fool Portfolio still sits on profits in excess of 790% for this investment over 15 months. Many investors would be happy to have one stock in their lives do that. The lesson is, instead, that we can (and always sometimes will) err in our analysis. Mature readers and thinkers know this, and never make guarantees that a company, or a share price, would definitely do such and such by such and such time. No way. Nobody knows anything for sure, and as we've frequently said, anyone who claims otherwise is selling you a bill of goods.
No, the lesson is just to recognize that you can and will be wrong hundreds of times over your investment lifetime. Heck, you can look back at our own dear Fool Portfolio and see those names again: Paychex, Sonic Solutions, Applied Materials, KLA Instruments. The trick is -- the point is -- not to let it matter that much to your bottom line! In other words, don't borrow on margin, don't buy options, and do diversify your portfolio. Don't sell your winners short, and don't add to your losers. And did I say diversify? We have 7 other stocks in the Fool Portfolio... I hope you have as many in yours.
Of course, Iomega does still represent 30% of our assets... and it's been higher than that. Has that bothered us? No... in the oft-repeated chorus, we let our winners run. That's even if they don't always run where we hope they will. Sure in retrospect it'd have been great to have sold at $55 and buy back below $25, or whatever. Yeah! And then sell again after another ten points up in order to buy back again a few points down. And then do that again. And again. The point is, we don't invest that way, because nobody can do that consistently. Nobody can get out at all the tops and in at all the bottoms, and you can read Fribble after Fribble (look in the My Dumbest Investment section) -- or our My Dumbest Investment folder in the Talk With The Editors section -- to see that very lesson so eloquently illustrated.
Long-term investors will always be at the mercy of the market's latest whim, but what we've learned is that if you don't let the latest whim matter to your investment approach, you'll do pretty well in the stock market. $55, $22 1/2... there'll all pretty much higher than $2 1/2... the Foolish cost basis on the stock.
Looking forward for Iomega, we heard from the company's conference call that CEO Kim Edwards sees a soft third quarter, and this was what really made the stock hit the skids Friday. The market just hates news like that, and of course Edwards and Iomega know this. But they're more interested in giving shareholders realism and honest expectations than dodging bullets, or creating hype. And whatever you want to call "soft," I think you're going to see decent profitable numbers, though I ain't picturing any blowouts. Me, I think I'll watch carefully what H&Q and J.P. Morgan and Emerald and H.D. Brous come up with. They were mostly right this time... chances are they're on the best track right now to be right next quarter. The fourth quarter looks like a fine one.
We plan on continuing our long-term tenure as Iomega shareholders; there's no fundamental change in the company. I'll side here with comments on the IOMG board from ChiChiX, who wrote, "IOMG could've shown explosive earnings and invited more speculators thus creating a short squeeze in the image of Zenith, Comparitor, PRST and the rest of the former 'high flyers.' Or IOMG could release a reasonable earnings report that meets yet exceeds expectations thus ensuring more stability in the stock. Be happy that they chose the conservative path." This is a fine growth company making almost all the right moves, even given the natural human screw-up (read: European 2Q sales) here and there. It can live in my portfolio.
America Online swam against the tide today, rising $3. A very pleasing move that was! Not enough of a salve to keep us from feeling the pain of an 8% loss, but certainly a step in the right direction after so much negative sentiment. America Online, which looked pretty darn beaten down to me below $30, looks now as if it's rebounding. Steve Case's comments today in the company press release that AMER would "meet or exceed estimates" of 16 cents per share this quarter turned the stock around.
It appeared that many Wall Street traders were beginning to think this was CompuServe.
To close: The Fool Portfolio posted a great big loss for the day, and it was a day I thought we'd show a pretty nice gain. Dem's da berries. Take the bad with the good. Take your lumps from time to time, and be grateful for the opportunity to learn from them. And have a Foolish weekend.
--- David Gardner, July 19, 1996
Day Month Year History
FOOL -7.59% -15.11% 36.45% 154.79%
S&P 500 -0.75% -4.76% 3.70% 39.34%
NASDAQ -1.09% -7.37% 4.33% 52.42%
Rec'd # Security In At Now Change
5/17/95 2010 Iomega Cor 2.52 22.50 793.22%
8/5/94 680 AmOnline 7.27 32.75 350.30%
4/20/95 310 The Gap 16.28 31.13 91.24%
8/5/94 165 Sears 28.93 44.13 52.55%
8/11/95 95 GenElec 57.91 82.00 41.59%
1/29/96 250 Medicis Ph 27.86 39.25 40.88%
8/11/95 110 Chevron 49.00 58.00 18.37%
8/24/95 130 KLA Instrm 44.71 19.63 -56.11%
Rec'd # Security Cost Value Change
5/17/95 2010 Iomega Cor 5063.13 45225.00 $40161.87
8/5/94 680 AmOnline 4945.56 22270.00 $17324.44
4/20/95 310 The Gap 5045.25 9648.75 $4603.50
1/29/96 250 Medicis Ph 6964.99 9812.50 $2847.51
8/5/94 165 Sears 4772.65 7280.63 $2507.98
8/11/95 95 GenElec 5501.87 7790.00 $2288.13
8/11/95 110 Chevron 5389.99 6380.00 $990.01
8/24/95 130 KLA Instrm 5812.49 2551.25 -$3261.24