Fool Portfolio Report
Thursday, August 1, 1996
by Tom Gardner
ALEXANDRIA, VA, August 1, 1996 -- All boats floated higher today, as a slew of economic figures were thrown out into the marketplace. Rather than try to untangle the rate of growth in our Gross Domestic Product from April to June (+4.2%), the jobless claims (off 29,000) and the leveling of manufacturing activity (NAPM index: 50.2), I direct you to the fine work that MF Merlin has been doing daily for many months: The Daily News' Economic News. There's much to learn there!
Sadly, today we say goodbye to MF Merlin, who will be devoting the time heretofore dedicated to Foolish pursuits to even greater Folly. Merlin, thank you for letting us, lowly pupils, into the enchanted tower of economic indicators for over a year.
The Fool Portfolio, as you can see on the right, kicked off August in style. I bet your personal portfolio had a smashing launch as well. Congratulations. Together we're proving that the detestable days of information exclusivity, low accountability, and rampant Wisdom are winding down. Not that Sagacity won't get bit parts on the grand stage in the decades ahead. He will. He'll occasionally tap from stage left to right in slick suit, commanding less attention each act, wailing out comparisons between the equities den and, say, the dashboard of a rocket or the gooey chambers of a human heart.
"You shouldn't be doing this yourself. You wouldn't carve into your own shoulder to fix the rotator cuff, would you?"
Yeah, yeah. Michael Murphy, who recently attacked the self-sufficient private investor in his newsletter and on morning financial television, is of course ready to guide your investments for you. Is he still offering that Overpriced Stock-Service newsletter, which according to the New York Times had lost over 85% of its total value since 1990?
Do I have to stand in line?
Mr. Murphy apparently forgot to research the fact that had you shorted the stock market over the past sixty years, on average you would have lost all your money every six years. Them's the facts. Meaning that Mr. Murphy has simply met market-average growth, albeit on the wrong side, in losing the subscribers of his shorting newsletter all of their money over the past six years. Ak!
I wonder if the business pages will quote that performance record the next time that Murphy goes on record doubting the individual investor's ability to meet or beat market-average growth. It's so easy to promote that America is but a nation of fools (Fools?). It's a bit more difficult to support it numerically.
Veteran Fools will note that Mr. Murphy was falling all over himself recommending a short of America Online below $7 a share in late 1994. Again, nothing wrong with being wrong. I just wouldn't use marked market underperformance as a platform to champion the world of professional investing. America Online rose $2.75 to $33.25 today, after announcing that it would be taking its glove and ball to a new stadium, The New York Stock Exchange. Apparently, AOL was frustrated by the volatility and market-maker activity on the Nasdaq. The decision to move seems to communicate to the business community that the Company is looking to attract pricing stability and long-term investment, both associated with the NYSE, and both noble aims.
If America Online hits its earnings projections for the fourth quarter, off the PEG ratio, the stock will be fairly priced in the mid-$40s. Their quarterly numbers are due out on August 9.
Iomega Corporation rose $7/8 to $17.25, after the Company announced plans to buy back up to 2 million shares at its leisure. Nothing like a good repurchasing, eh? We do note, though, that these announcements only indicate the maximal number of shares the company might repurchase, nothing more. And with 127 million shares out there, we're not talking about anything substantial. But it does seem to indicate that the Company thinks its shares are cheap here. We do, too.
Iomega today has $740 million in trailing revenues and profit margins of 4.9%. The Street expects earnings of $0.49 for fiscal 1996 and $0.97 for fiscal 1997. That sets the annualized growth rate at 119% and a present-day fair price for Iomega at $35.75 per share. If Iomega meets projections going into 1996 and if the company is still exhibiting financial heartiness, the shares will be fairly priced at $48 a share off the PEG. News that Barrons' survey of money managers found Iomega to be their most hated stock is, well, excellent news!
Medicis Pharmaceuticals continued its fiery ride north, climbing another $1.25 to $47.75. The stock is now up 71% for us in the six months we've owned it. Nothing like strength on all three pages: the balance sheet, income statement and statement of cash-flows. If Medicis continued to outperform estimates at its present rate, it would post $1.87 for fiscal 1997, making for 65% annual growth and a fair price of $63.75 per share. We await the coming fourth-quarter numbers from the little engine that is.
Our third best performer, Gap, rose $7/8 back to $30 5/8. With estimates trending up toward $2.00 for fiscal 1997, with a 16-19% projected growth rate beyond, with $4.7 billion in trailing sales, healthy 8% margins, plenty of cash in short-term vehicles, no debt, and the strongest brand in the industry, The Fool believes the stock is fairly priced in the mid-$30s.
KLA Instruments was the only non-Dow stock that didn't do a thing today, closing neither up nor down. Gads, the market won't even reward this healthy company with 10x earnings---even with long-term annual growth rates projected above 20%! Maybe we should have stuck with consumer growth. It looks like we've really blundered with this one. Anyone care to share their valuation of the semiconductor equipment companies in the KLA folder?
General Electric rose $1 with the rest of the market, but was the subject of some bad news today. The Justice Department announced that it is suing General Electric for violating antitrust laws by forcing hospitals to sign exclusive medical-equipment service contracts. Hey, that sort of behavior comes with the territory. But, you know what, if it's true, that's a shame. Best-performance, best-price contracts are what our giant, high-yielder should commit to.
Sears rose $1.25 and Chevron was up a quarter. No news from either.
And so we close out a very fine opening to August. As ugly as the last two months have been---and they've been UGLY---we're still riding 27.66% returns for 1996 versus S&P growth of 5.53%. And you're probably doing a lot better than we are.
Fool, every step of the way we broadcast to the Wise on Wall Street that we're looking for market outperformance, bottom-line accountability, long-term equities positions, and heck, a little bit of respect, too. We're not so idiotic that we don't recognize that a goodly portion of Wall Street isn't Wise. We hear from camoflauged Fools on the Street every day---at newspapers, in brokerage houses, in mutual fund offices, at magazines.
Soon enough we'll all be able to show our colors---and they aren't gaudy, aggressive, insurgent colors. The aim here is increased savings, the managing down and away of consumer debt, and enduring market outpeformance or the Vanguard Index Fund. Not terribly revolutionary. Not even controversial, unless you live in a nation where there is no investment education.
In ten years' time, this will all seem funny.
Tom Gardner, Fool
Day Month Year History FOOL +3.94% 3.94% 27.66% 138.37% S&P 500 +1.57% 1.57% 5.53% 41.80% NASDAQ +1.69% 1.69% 4.43% 52.57% Rec'd # Security In At Now Change 5/17/95 2010 Iomega Cor 2.52 17.25 584.80% 8/5/94 680 AmOnline 7.27 33.25 357.18% 4/20/95 310 The Gap 16.28 30.63 88.17% 1/29/96 250 Medicis Ph 27.86 47.75 71.39% 8/5/94 165 Sears 28.93 42.13 45.63% 8/11/95 95 GenElec 57.91 83.38 43.96% 8/11/95 110 Chevron 49.00 58.13 18.62% 8/24/95 130 KLA Instrm 44.71 18.88 -57.78% Rec'd # Security Cost Value Change 5/17/95 2010 Iomega Cor 5063.13 34672.50 $29609.37 8/5/94 680 AmOnline 4945.56 22610.00 $17664.44 1/29/96 250 Medicis Ph 6964.99 11937.50 $4972.51 4/20/95 310 The Gap 5045.25 9493.75 $4448.50 8/11/95 95 GenElec 5501.87 7920.63 $2418.76 8/5/94 165 Sears 4772.65 6950.63 $2177.98 8/11/95 110 Chevron 5389.99 6393.75 $1003.76 8/24/95 130 KLA Instrm 5812.49 2453.75 -$3358.74 CASH $16754.13 TOTAL $119186.63 Transmitted: 8/1/96