Fool Portfolio Report
Tuesday, August 13, 1996

by Tom Gardner

ALEXANDRIA, VA, August 13, 1996 -- Not a single Fool stock, new or old, rose today. It was extremely ugly out there. The Fool Portfolio dropped 2.95%, while the Nasdaq and S&P 500 losses were in the 1 percentage point ballpark. What happened out there?

Well, first, we formally waved goodbye to The Gap (cf. Gap Sell Report). Dave threw on his Daytrada Cap and tried to pick up the best price possible. He hit a bid of $35 1/8 and woosh, we were gone.

Fools, the Company did us proud while renting out some of our capital for the last 16 months. Sixty thousand Gap employees around the globe served the planet with casual clothing at reasonable prices---and turned 100%+ returns for shareholders over the past year. Outstanding. The first responsibility of a public company is to reward the stakeholders, who have taken on capital risk upfront. When businesses take their operations to the public marketplace, they move into a world where primary obligations lie with their shareholders. Speak with management at Coca-Cola, General Electric, Hewlett-Packard and other great companies, and you'll find that serving the long-term interests of stakeholders does not only allow them to do great business for customers and employees, it promotes it.

With some the broadest of profit margins in its industry and without compromising future growth through borrowing, Gap has done just that. Consequently, they've built the broadest-reaching and strongest consumer brand in apparel retailing, while honoring duties to their owners, employees and customers. Highly-profitable, well-marketed, unleveraged consumer businesses won't be going out of style anytime soon.

Now stepping up in their place, the mighty 3Com Corporation (NASDAQ:COMS), which met our purchase price of $46.86 per share with a prompt $1 drop to close out the day. Our reasoning for the purchase is detailed in our 3Com Buy Report. This morning the Company announced enhancements to its OfficeNet products for small businesses. Priced in the $1500 range, OfficeConnect runs on Fast Ethernet, which enables highspeed Internet access and capacity to handle rich multimedia applications. 3Com Vice President Edgar Masri offered the following in the announcement:

"Small business is big business for 3Com. There are over 22 million businesses within Europe and the US alone which have fewer than 20 employees. This presents a tremendous new market opportunity for 3Com."

Veteran Fools know that we like to find highly-profitable businesses looking for lower price-points, a broader business reach, and brand identity. Hopefully 3Com will fit that bill. Hopefully AT&T's placement in the Foolish Four group identifies other networking and communications stocks as... due!

America Online dipped $1 1/4 to $29 today. The Company announced the launch of its AOL on the Move! campaign, designed both to attract the vast majority of Americans that are not users of online and the Internet and to strengthen ties with existing users. The tour begins August 15-16 in Boston and Chicago and will hit 29 cities between then and September 16.

KLA Instruments took another shot to the chops today, losing $1 1/2 to $18 1/4. There has been some grumbling in Fooldom about our inadequate coverage of klickety-KLAC, which has hammered us with 59% losses, or nearly $3500. KLAC announced fourth-quarter earnings of 61 cents, two cents below Street estimates. 4th quarter margins fell from 17.5% to 16.6%. But fiscal 1996 profit margins rose to 17.3% from 13.2% last year.

With $690 million in trailing sales, KLAC is now selling at less than 1.5x sales. With $2.31 in earnings, KLAC is now selling at less than 8x earnings. Projections for fiscal 1997 sit at $2.50 with an estimated long-term growth rate of 25%. My trusty calculator spits out a 16% growth rate and a fair price of $37 per share for this issue. Our purchase price was $44.71 per share, with a target price above $80. Things have definitely changed. To emphasize how different today is than when we opened our position in KLA Instruments a year ago, consider this paragraph from our buy report:

As you can see, we're buying two semiconductor companies this week. It's The Fool Portfolio's first foray into the industry, and it comes after a tremendous amount of past success for companies like Intel, Micron Technology, and many others. Both of our new buys have doubled in the past year. Do we feel late to the party? Nope.

Oh, boy. Could we have been any more misguided about the state of things in Denmark? Semiconductor stocks fell off the roof in the immediate weeks that succeeded our purchase, and they haven't recovered. We expect KLA to rally back up toward and past $30 in the year ahead, but what good have our growth valuation tools been for semiconductor and semi-equipment stocks? Not much.

You're going to find, however, that we'll make mistakes, lose money on select investments and look oafish in the process. This is one of the few guarantees we'll make about our portfolio---that we'll make mistakes. Some of the others are that we'll always account upfront for all commissions and spreads, that we'll always announce our trades in advance of making them, that we'll always stabilize our savings account with Dow yielders, and that we'll always aspire to beat the US stock market... the best place to have had your long-term bucks over the past century.

As for our coverage of KLAC going forward, you should know that our bias is toward following the stocks that are making us money and that take up more space in our Port. Every good business out there phases down unsuccessful products and concentrates additional energies to analyzing successful products. As investors we must understand our mistakes and work to eliminate them. The simplest, least frustrating road toward continual improvement is to thoroughly comprehend what has been successful and why.

Thus, expect more heavy weighting of concentration toward our larger positions. When KLAC dropped $1 1/2 today, or 7.6%, we lost approximately $200. That in an account presently valued in excess of $119,000. I truly believe that the best lesson to be learned from this is that you cannot PEG or YPEG semiconductor stocks. Lesson re-learned in this case, since we wrote as much in our investment guide. Darn it!

Now having briefly explored what went wrong and identifying a mistake we hope never to make again, we will continue to focus the majority of our attention on those investments that are thriving, that are becoming a larger percentage of the business that is our portfolio. We're not trying to shuffle this under the rug or behind that armoire in the corner. Concentrating on your winners---both because they grow to mean more to your portfolio and because they can lead you to other monster companies and stocks---is an investing discipline to master.

I'll close tonight with our Dow stocks, encouraging all Fools to download, print, copy and paste or read online our Foolish Four Switch Report. Tomorrow, Chevron and General Motors go ex-dividend... so we'll be picking up some chump change there. Those monies will only in some small way make up for the broader Dow decline today. AT&T fell $1 1/2, GM dropped a buck, and 3m and Chevron tossed back quarters and eighths.

It's a new portfolio now. Allocation adjusted, in anything from automobiles to acne creams, from online communication to sticky tape. This should be a year to remember.

Tom Gardner, Fool, August 13, 1996

Today's Numbers

Day Month Year History FOOL -2.95% 3.84% 27.54% 138.15% S&P 500 -0.84% 3.16% 7.19% 44.02% NASDAQ -1.07% 4.22% 7.03% 56.36% Rec'd # Security In At Now Change 5/17/95 2010 Iomega Cor 2.52 16.63 559.99% 8/5/94 680 AmOnline 7.27 29.00 298.74% 1/29/96 375 Medicis Ph 18.57 39.25 111.32% 8/11/95 125 Chevron 50.28 58.25 15.84% 8/12/96 110 Minn M&M 65.68 65.75 0.11% 8/12/96 95 Gen'l Moto 51.97 52.00 0.05% 8/12/96 130 AT&T 54.96 54.13 -1.52% 8/13/96 250 3Com Corp. 46.86 45.75 -2.37% 8/24/95 130 KLA Instrm 44.71 18.25 -59.18% Rec'd # Security Cost Value Change 5/17/95 2010 Iomega Cor 5063.13 33416.25 $28353.12 8/5/94 680 AmOnline 4945.56 19720.00 $14774.44 1/29/96 375 Medicis Ph 6964.99 14718.75 $7753.76 8/11/95 125 Chevron 6285.61 7281.25 $995.64 8/12/96 110 Minn M&M 7224.44 7232.50 $8.06 8/11/95 280 Gen'l Moto 14552.49 14560.00 $7.51 8/12/96 130 AT&T 7144.99 7036.25 -$108.74 8/13/96 250 3Com Corp. 11714.99 11437.50 -$277.49 8/24/95 130 KLA Instrm 5812.49 2372.50 -$3439.99 CASH $1297.96 TOTAL $119072.96 Transmitted: 8/13/96