Fool Portfolio Report
Friday, August 9, 1996

by David Gardner

ALEXANDRIA, VA, August 9, 1996 -- It wasn't a great end of the week for the Fool Portfolio, as a flurry of renewed selling of America Online drove down the Foolfolio 1% yesterday and another 3% today. Friday's downer, in comparison to flat performance for the competing indices, was particularly unpleasant to watch. But as you'll see below, Monday holds the prospects of fresh blood in the Fool Portfolio, as we make our annual Dow Dividend switch!

Yesterday, AMER reported estimate-beating earnings of 19 cents per share, vs. 6 cents for the June quarter last year. The company put up strong sales numbers, as well, of $334.5 million, and announced 400,000 subscribers. A complete report on the company's conference call is mandatory reading for shareholders, and is now available in The Motley Fool's Earnings Central.

For 1996, revenues ($1.09 billion) came in roughly three times their '95 tally. And yet today, the stock stands slightly above one-third of its high. Why do such things happen? Well, the market typically trades at a rate of something like ten parts future expectations, one part past performance. And what the market has been saying for the past few months, as AOL has declined from over $70 to below $30, is that it doesn't believe as much as it once did in the company's future prospects.

The reason that we continue to hold these shares is that, quite on the contrary, we are quite confident in the company's business prospects going forward, and we believe in America Online. We're not alone; so do a spate of Wall Street brokerage firms, which reiterated buys on the stock today. Lehman Brothers Inc. and Bear Stearns Cos. reiterated buy ratings, while Alex. Brown restated its strong buy.

Why would that be? Well, heck, if you just take the company's most recent quarter ($334 million sales; 19 cents earnings per share) and multiply it by four, you come up with 76 cents earnings on $1.3 billion in sales. At the closing price today of $29 1/8, the stock is trading at 38 times year-ahead earnings assuming no further growth. With the outstanding new 3.0 version of the Windows software out, and the Mac software coming, the company will once again aggressively bring on board new subscribers in quest for its stated goal a year from now for 10+ million subscribers. I think you'll increasingly see AOL steal business from other Internet service providers, as AOL's rates go down going forward. (Please note: I'm not suggesting anything immediate. The company's $20/20 hour plan has already recently satisfied the 800,000 subscribers that adopted it.)

The reason the stock got bashed today, we are told, is that despite bullish statements from brokerage firms, the market didn't like cautious comments from CFO Lennert Leader regarding costs of new customer acquisition. What Leader effectively said was that with the corresponding push to bring on new AOL members, the costs of going out to obtain them will rise again; this is standard stuff. Perhaps it did justify a loss of another $300 million in the company's market cap, for the short-term-oriented thinker. But the stock is looking cheap enough to me today -- even if you just think of America Online five years out as the world biggest's Internet service provider, and nothing else -- that I'm now considering these shares a bargain.

Time will show if I'm right, of course, because at The Motley Fool, accountability is our bottom line. We drink accountability in huge draughts, posting all our ideas, showing right where our money's invested, making it as crystal clear when we're wrong as when we're right. Accounting for our performance on a daily, monthly, annual, and historic performance, we've made it a habit since the first day of our service always to compare our returns to the market averages. One can grow numb to that radical innovation over time, and take it for granted. But where else do we see such bizarre open-faced honesty exist? The Wise will typically hide their holdings and their doings from you, and in fact it's really only with mutual funds that you can account for performance up front on a daily basis. But unfortunately, them thangs don't do too well, overall. That may suggest why the Wise are loath to account for their own performance.

Monday, we'll be bringing aboard several new stocks for the Fool Portfolio, and saying goodbye to a few others. Gone will be General Electric and Sears, two Fool darlings that have provided much enjoyment and a decent profit or two in their year-plus in the Foolfolio. New entrants (as frequent readers of MF DowMan's outstanding Dow Approach area in the Fool's School know) will include General Motors (in the coveted #2 spot), AT&T (our new favorite among long-distance telephone companies), and 3M (our new favorite diversified industrial conglomerate), which has been in and out of the Foolish Four for a few years now and a great past performer.

Reports for each of these transactions will be up by five pm on Saturday; please click in over the weekend to hear the Foolish take. Under our new policy, we can make these trades any day next week. As we don't expect to see huge moves in these multibillion-dollar stocks following our announcements, we'll probably make the moves Monday.

Finally, I want to make sure our AOL readers are all acquainted with a new message board in Fooldom, debuting today, called The Information Desk. We've brought together some of the most service-oriented, helpful message folders in Fooldom right there, including such old favorites as Ask a Foolish Question, Talk with the Editors, and Spreadsheet Advice. Combine those with some Foolish new additions like Can We Help You? for navigational questions, and Your Predictions for when you're feeling like Nostradamus, and you have a delightfully interactive cocktail. Please feel free to hit our staff up with whatever questions you like there, and we ask in particular that long-time readers make an effort to acquaint new ones with The Desk... please mention it in our chat rooms and on our message boards.

Thanks go to MF Bogey and Tom Gardner for their fine organizational thinking and effort in centralizing the interactive help available in Fooldom. The Information Desk is your place to go to get questions answered at The Motley Fool!

--- David Gardner, August 9, 1996

Transmitted: 8/9/96

Today's Numbers

Day Month Year History FOOL -2.95% 5.36% 29.40% 141.63% S&P 500 -0.07% 3.46% 7.50% 44.44% NASDAQ -0.02% 5.25% 8.09% 57.91% Rec'd # Security In At Now Change 5/17/95 2010 Iomega Cor 2.52 16.88 569.92% 8/5/94 680 AmOnline 7.27 29.13 300.46% 4/20/95 310 The Gap 16.28 35.38 117.36% 1/29/96 375 Medicis Ph 18.57 40.25 116.71% 8/5/94 165 Sears 28.93 44.75 54.71% 8/11/95 95 GenElec 57.91 83.75 44.61% 8/11/95 110 Chevron 49.00 57.75 17.86% 8/24/95 130 KLA Instrm 44.71 19.88 -55.55% Rec'd # Security Cost Value Change 5/17/95 2010 Iomega Cor 5063.13 33918.75 $28855.62 8/5/94 680 AmOnline 4945.56 19805.00 $14859.44 1/29/96 375 Medicis Ph 6964.99 15093.75 $8128.76 4/20/95 310 The Gap 5045.25 10966.25 $5921.00 8/5/94 165 Sears 4772.65 7383.75 $2611.10 8/11/95 95 GenElec 5501.87 7956.25 $2454.38 8/11/95 110 Chevron 5389.99 6352.50 $962.51 8/24/95 130 KLA Instrm 5812.49 2583.75 -$3228.74 CASH $16754.13 TOTAL $120814.13 Transmitted: 8/9/96