Fool Portfolio Report
Thursday, August 8, 1996

by David Gardner

ALEXANDRIA, VA, August 8, 1996 -- I remember nine months ago when America Online's President of Services Ted Leonsis brashly predicted that his employer would produce over $1 billion of profitable revenues for fiscal 1996.

This afternoon, after market close, AOL announced just that. Their fourth-quarter sales came in at $334.5 million, bringing year-end revenues up to $1.1 billion. With $21.0 million in earnings for the quarter, America Online upped quarterly margins to 6.3%. That's notable.

To be honest, though, I haven't had a chance to dig through the reports and make determinations either on the earnings figures or the underlying financial strength of the enterprise at quarter's end. I haven't caught the quarter and year-end subscriber numbers, either. So why don't we all just agree that I'll not even pretend to have untangled the statements yet or have anything of value to offer on the report.

Whew! That's a relief.

Now those numbers came out after market-close today. The stock traded down $1 3/8 on the day, as the nation rumbled with news of America Online's outage. Oddly enough, while the service was down, the stock rose $3/4. Today it gave back those gains and a bit more.

What's interesting about all of this for me is our collective obsession with the latest information. Whether it's AOL's meltdown yesterday, or what the loss of a single day of revenues means to The Motley Fool, or AOL's fourth-quarter earnings report and the market's reaction to those figures as reflected in after-hours trading activity, or other factors and stories I've missed (the consequence of not purchasing that newsfeeding brain-chip), as a nation we're obsessed with what's going down right now. (If you need to know the latest, Steve Case has explained yesterday's events in great detail in AOL's most recent press release at AOL keyword: press.) Seems we've been conditioned to accept that the latest news is the most meaningful news.

That short-sightedness presents us all an opportunity to beat the market. In The Motley Fool Investment Guide, we wrote about that Intel fiasco. Y'remember it? The bit about their chip not accurately calculating to the seventh decimal point. The news sunk the stock for a good while. Proponents of the longer-term perspective noted that Intel was still riding dazzlingly high profit margins, historical and projected sales and earnings growth rates above 20% per year, and a market of computer users hungering for speed.

The latest news for Intel was actually some of the least significant news, when it came to valuing the enterprise and the equity. The stock doubled from there in the next six months. And, more importantly, Intel's overall business thrived. Yet if you were following the technology market then, you couldn't get away from the uniformly bad news.

If you were and are a trader of stocks, you concentrate attention on the rattling in the marketplace, the volume in Intel's stock, and the fluctuations in the pricing of the stock. Sure, you could have made money on a few quick trades of Intel's stock there. But I think when you look at the total bottom-line values, you'll agree that holding for the double in six months. . . or better yet, Intel's 45% annual growth over the past five years. . . would have afforded greater rewards. Again, that's down on the bottom-line of your personal portfolio income statement, the one that accounts for the time you spend, the trading commisssions you pay, and the ongoing taxes.

Trading can be fun. No Fool is going to disagree with that. It can give you the sense that you're in the thick of things. But I believe that professional accounting standards identify that the investor that seeks to build long-term relationships with great companies will post superior profits. The day-to-day experience might not prove as fun, for those who enjoy that activity. But if the primary aim is long-term savings growth, the standout investor will be the one that focuses on maximizing the top-line and minimizing all other lines 'twixt that and the bottom-line.

I hope together we'll focus, as we did at the end of the third quarter, on America Online as a business. What these numbers tell us about their prospects going forward into the next millenium. Whether they're on target for broad profit margins, minimal debt, strong sales and earnings growth and a brand-name that stands for service, progress, learning and delight.

So let's ring up that tape of the conference call, let's spread open the financial statements, and try to figure what's up with the business and where the stock might reasonably be priced in the months ahead.

As for the remainder of our portfolio, not much to add but that Sears rose $1 and Medicis---the latest double in Foolish Hall of Portfolios---rose another $1 3/4 to $39 1/4. The stock is now up 111% for us since late January of this year. But neither was enough to help us thump the market today. Quite the contrary, the S&P boxed us around the ears, falling only 0.23% compared to our percentage-point decline.

Let's see what happens tomorrow.

--- Tom Gardner, August 8, 1996

Today's Numbers

Day Month Year History FOOL -0.99% 8.56% 33.33% 148.96% S&P 500 -0.23% 3.54% 7.58% 44.54% NASDAQ -0.32% 5.28% 8.11% 57.95% Rec'd # Security In At Now Change 5/17/95 2010 Iomega Cor 2.52 17.50 594.73% 8/5/94 680 AmOnline 7.27 33.50 360.62% 1/29/96 375 Medicis Ph 18.57 39.25 111.32% 4/20/95 310 The Gap 16.28 34.00 108.91% 8/5/94 165 Sears 28.93 44.38 53.41% 8/11/95 95 GenElec 57.91 84.88 46.55% 8/11/95 110 Chevron 49.00 58.75 19.90% 8/24/95 130 KLA Instrm 44.71 20.50 -54.15% Rec'd # Security Cost Value Change 5/17/95 2010 Iomega Cor 5063.13 35175.00 $30111.87 8/5/94 680 AmOnline 4945.56 22780.00 $17834.44 1/29/96 375 Medicis Ph 6964.99 14718.75 $7753.76 4/20/95 310 The Gap 5045.25 10540.00 $5494.75 8/11/95 95 GenElec 5501.87 8063.13 $2561.26 8/5/94 165 Sears 4772.65 7321.88 $2549.23 8/11/95 110 Chevron 5389.99 6462.50 $1072.51 8/24/95 130 KLA Instrm 5812.49 2665.00 -$3147.49 CASH $16754.13 TOTAL $124480.38 Transmitted: 8/8/96