Fool Portfolio Report
Friday, August 16, 1996

by David Gardner

ALEXANDRIA, VA, August 16, 1996 -- Tonight's report is a dramatically abridged form of the full 15-paragrapher I had typed up just before Fool HQ got buried under a massive downpour, complete with a full pyrotechnics show, free of charge. It was one of those green-sky storms. The 2% drop in our portfolio today in no way compares to the frustration of having lost a few hours of writing and analysis produced on deadline. The power outage knocked out our computers temporarily, our TCP/IP link to AOL, and the modem on my computer, leaving me no way of sending my writeup online. Following that difficulty, I lost the whole document in a misfired macro.

I had written about my feelings on Medicis's secondary offering. Here's the skinny:

* company is raising $60 million through a 1.85 million offering announced at market close yesterday

* company's operating expenses last year were only $12 million

* company is cash-flow positive

On the face of it, Medicis doesn't appear to need the cash. But considering that MDRX is in a perfect position to grow by acquisition, I'll speculate that that is the reason for the dilutive offering. What seems most probable would be the acquisition of a dermatological product line from a larger pharmaceutical company. That would be right in keeping with the company's long-term aim of cornering the market for dermatological products by focusing on that niche, in a business world in which most pharmaceutical companies are behemoths trying to develop products for every conceivable category.

Importantly, none of the company's insiders or management is selling any of its stake... these are all new shares. A good sign.

The market didn't like it anyway, which it never does when you consider that the share offering will dilute shares outstanding -- and earnings per share -- by 20%. But that assumes that earnings per share will in no way benefit from the war chest that's about to be created (MDRX has $8 million in cash on the balance sheet -- this'll shoot that figure up to $70 million, at present prices). The reason that the market only dropped this darling stock 10% today, despite the 20% dilution, is because it has confidence the company will make a smart acquisition, or some other beneficial use for the cash.

Medicis was the big news, down $4. The Fool Portfolio closed down 2.31% today, and about 3.5% for the week (against flat overall indices). Following this disappointing week, which started so well with a 1.5% gain on our Dow switch Monday, we are now losing to the market for the third month in a row. But at least we're showing a profit this month!

Iomega's Friday drop of $7/8 hurt once again, and the stock is now trading at a crummy $15. I've almost about closed my eyes to IOMG at this point, content to open my eyes back up in six months to find a share price significantly above its present beaten-down status. Syquest's disastrous earnings report of yesterday appears to have weighed down IOMG shares... as if that makes much sense. It's kinda like selling your shares in USA's Olympic basketball Dream Team because you heard a key player on its next opponent's team got injured!

This company, with its outstanding products, profits, management, consumer brand recognition, and future, is now selling at less than 2 times conservative sales estimates for this year. We'll continue to watch this one closely for the great lessons it teaches us -- some full of pleasure, some full of pain -- going forward. Fool on.

--- David Gardner, August 16, 1996

Transmitted: 8/16/96

Today's Numbers

Day Month Year History FOOL -2.31% 2.00% 25.27% 133.92% S&P 500 +0.44% 3.95% 8.00% 45.12% NASDAQ -0.14% 4.87% 7.70% 57.34% Rec'd # Security In At Now Change 5/17/95 2010 Iomega Cor 2.52 15.00 495.48% 8/5/94 680 AmOnline 7.27 31.50 333.12% 1/29/96 375 Medicis Ph 18.57 36.75 97.86% 8/11/95 125 Chevron 50.28 59.13 17.58% 8/12/96 110 Minn M&M 65.68 67.00 2.01% 8/12/96 130 AT&T 54.96 55.50 0.98% 8/12/96 280 Gen'l Moto 51.97 52.25 0.53% 8/13/96 250 3Com Corp. 46.86 44.88 -4.24% 8/24/95 130 KLA Instrm 44.71 19.13 -57.23% Rec'd # Security Cost Value Change 5/17/95 2010 Iomega Cor 5063.13 30150.00 $25086.87 8/5/94 680 AmOnline 4945.56 21420.00 $16474.44 1/29/96 375 Medicis Ph 6964.99 13781.25 $6816.26 8/11/95 125 Chevron 6285.61 7390.63 $1105.02 8/12/96 110 Minn M&M 7224.44 7370.00 $145.56 8/11/95 280 Gen'l Moto 14552.49 14630.00 $77.51 8/12/96 130 AT&T 7144.99 7215.00 $70.01 8/13/96 250 3Com Corp. 11714.99 11218.75 -$496.24 8/24/95 130 KLA Instrm 5812.49 2486.25 -$3326.24 CASH $1297.96 TOTAL $116959.84 Transmitted: 8/16/96