Fool Portfolio Report
Thursday, September 5, 1996

by David Gardner

SAN FRANCISCO, Ca., September 5, 1996 -- Ouch, another rough day for stocks today, with the market down 1.59% and The Fool Portfolio off a full 3.53%. 1996 is now shaping up to be a subpar year for stocks, with the S&P 500 up 5.44% since January 1st. The average annual return for equities over the past six decades is 11%. At this rate, we won't get there before the New Year.

What happened out there today?

First, some news on a former Fool Portfolio holding and retailing stalwart, The Gap. The Company announced total sales of $441 million for the month of August, up 19% over the same period last year. However, Gap announced that its August same-store sales figures were flat over last year. Most investors in retail stocks concentrate their attention on these same-store sales comparisons.

Lemme explain.

That $441 million in revenues for this month is stacked against the $370 million in August of last year. In this instance, that $71 million difference comes entirely from products sold through new stores. What retail aficionados watch closely, though, is how well the product is moving, not how rapidly new outlets are being brought to market.

In other words, when you stack August, 1995 against August, 1996 looking at only the outlets that were open then and now, you find flat performance. Zero percent growth, month against month.

As one might expect in a momentum scenario -- and it's our belief that in the mid-$30s Gap was becoming a momentum play -- Wall Street isn't fattened in zero growth scenarios. Today, Gap shares fell $4 7/8 to $29. The stock is now trading 17% below where we sold it three weeks back.

This makes for one of those rare and blessed moments when we Fools nail a short-term price top. With our Gap money tucked over in 3Com shares, we avoided the precipitous drop and slid our capital into a company that looked to be the far better value. Retailing (Sears) isn't in The Foolish Four now, networked communication (AT&T) is.

Thus, spread out on the midnight path to market-outperformance were the breadcrumbs toward 3Com's hut and away from Da Gap. I really believe that The Foolish Four remind us which industries are too out of favor and which are too trendy.

When IBM sat in that group of high-yielders in 1994, it hinted at a monstrous turnaround in the broadly-defined technology group. Can you imagine a technology stock doling out one of the highest yields among the Dow Industrials? Clues to the 1995 boom in the technology sector, which our nation's stable of overloud investing gooroos missed, were sitting right there in The Foolish Four -- motley-clad, in belled and golden slippers.

With AT&T now in the high-yielding four, with WorldCom buying out MFS Communications which lately swallowed UUNet, it warms my heart to see MF Bogey's Industry Decathalon concentrating on investments in the various businesses tied to the networking of information and communication. And Time Magazine seems to have had its watches synchronized perfectly when it focused its recent coverage of The Motley Fool on our networking superstar, MF Mom.

But even as industries parade down Wall Street, into favor's way and out, there are some investments that we willingly hold through the brightest and darkest of hours. America Online and Iomega, both getting socked by active shorting campaigns of late, fall into that category.

Though both have been cut more than 60% from their 1995 highs, we feel confident that they hold great promise heading into the next millenium. Iomega fell $3/4 to $14 1/4 today. The old saying that it often gets worse before it gets better seems to apply here. Iomega is trading around 1x 1996 sales now.

Much as some believe this is the same-ol', same-ol' sort of disk drive business, I simply can't agree. Consumers across the country have lined up to get their hands on these drives. The drives are being loaded into machines prepped for Christmas selling. And the brands -- Iomega, Zip and Jaz -- are winning broad acceptance among graphic designers, information technologists, home PC users, et al. At the very least, Iomega begins to look attractive for acquisition. We don't spend a minute a year reviewing buyout rumors; this is simply a comment on present valuation.

America Online fell another $1 5/8 to $28 3/8 today. Boy, we're a long way from that annual high above $70. We are still sitting on a four-bagger here, and to my ear, the overall story is as compelling now as it was two years back. The real difficulty for AOL has been in acquiring new subscribers during a warm, Olympic-filled summer. Heading into the Winter, the Company needs to aggressively bring new PC buyers into the fold whilst reducing that churn rate.

How do you think they're doing?

Yesterday afternoon brought the disappointing defection of a popular social forum on AOL, NetGirl, which was named Best Interactive Forum at America Online's Partners Conference in December, 1995. The company's president, Rosalind Resnick, cited a better business environment on the World Wide Web as cause for the departure.

I hate to put things in such broad terms, but giant brushes do paint houses faster. On some level, this looks to be a uniquely East versus West Coast battle.

Over on the Atlantic, America Online seems to be adopting the very traditional role of heavy-handed distributor -- a proprietary publishing system, multiple and brand-diluting product launches, and an attention away from bottom-line margins.

Over on the Pacific, the Internet is being embraced as the destroyer of conventional, onerous distribution control. Technology businesses are primarily concentrated on open standards, targeted products and tightened branding, and a keen focus on maintaining after-tax profits above ten cents to the dollar.

Without question, the greatest technology and media businesses mix qualities from both camps. They end up trying to dominate the open standard, trying to make the open standard their own, rather than fighting to maintain the toehold of a proprietary system.

With six million subscribers and climbing, America Online certainly has defined what it means to be online. It has succeeded at brokering the online experience. The question remains whether they can structure a business model enterprising enough to attract the best electronic publishers. Increasingly it looks like all but the content online can be commoditized -- email, chat, and bulletin boards. As the new technologies -- audio and video conferencing -- roll through, it will again come down to who maximizes the value of those features, who concentrates most on improving the customer experience.

In the end, it's always the spirit of the people involved, the mission of an organization, that cannot be duplicated. My lay brain tells me that more West Coast enterprise and a greater emphasis on bottom-line profitability (mutually inclusive, I think) will put the most wind behind America Online's mast. But it is a very lay and Foolish brain I have.

The Christmas quarter is going to tell us an awful lot about the business future of this new medium.

Hope to see you in the auditorium tonight at 9 PM EDT.

Tom Gardner

Transmitted: 9/5/96

Today's Numbers

Day Month Year History FOOL -3.53% -4.74% 20.49% 124.98% S&P 500 -0.94% -0.39% 5.44% 41.68% NASDAQ -1.59% -1.39% 6.99% 56.30% Rec'd # Security In At Now Change 5/17/95 2010 Iomega Cor 2.52 14.25 465.71% 8/5/94 680 AmOnline 7.27 28.38 290.15% 1/29/96 375 Medicis Ph 18.57 37.50 101.90% 8/11/95 125 Chevron 50.28 59.75 18.82% 8/12/96 110 Minn M&M 65.68 67.50 2.78% 8/13/96 250 3Com Corp. 46.86 46.38 -1.03% 8/12/96 130 AT&T 54.96 52.00 -5.39% 8/12/96 280 Gen'l Moto 51.97 48.13 -7.40% 8/24/95 130 KLA Instrm 44.71 18.38 -58.90% Rec'd # Security Cost Value Change 5/17/95 2010 Iomega Cor 5063.13 28642.50 $23579.37 8/5/94 680 AmOnline 4945.56 19295.00 $14349.44 1/29/96 375 Medicis Ph 6964.99 14062.50 $7097.51 8/11/95 125 Chevron 6285.61 7468.75 $1183.14 8/12/96 110 Minn M&M 7224.44 7425.00 $200.56 8/13/96 250 3Com Corp. 11714.99 11593.75 -$121.24 8/12/96 130 AT&T 7144.99 6760.00 -$384.99 8/11/95 280 Gen'l Moto 14552.49 13475.00 -$1077.49 8/24/95 130 KLA Instrm 5812.49 2388.75 -$3423.74 CASH $1379.61 TOTAL $112490.86 Transmitted: 9/5/96 7:01 PM (foolnmbr)