Fool Portfolio Report
Tuesday, September 10, 1996

by Tom Gardner

SAN FRANCISCO, Ca., September 10, 1996 -- Equities trading on September 10, 1996 is no more.

All the performance numbers are in and, amen for this, a greater number of Americans than ever before will spend a few minutes this evening accounting for their returns... typing the numbers into financial software or penciling the prices into their looseleaf binder in the den. This sort of fifth-grade mathematical accountability is reforming the stock market.

How very, very Foolish.

We'll do as much with our portfolio again tonight.

9/10/96 was a fine day for Foolish monies which grew 4.92% on standout performances by Iomega and Medicis Pharmaceuticals. All numbers toted up, The Fool Portfolio is now up 24.94% in 1996, just more than 17 percentage points above the Standard & Poor's 500 for the year.

This morning, Iomega Corp. announced a worldwide licensing agreement with Matsushita Communication Industrial (MCI) which enables the Japanese behemoth to manufacture disk drives that are compatible with the Zip. Matsushita will market and distribute the drives under the MCI brand. The deal is non-exclusive.

The market embraced the news, sending shares of IOMG up $2 1/8, or 16%, to $15 3/8. Today's announcement provides further evidence that Iomega is wedded to the disk side of this business -- the platform of higher margin -- and is willing to run an end-around some short-term, lower-margin sales growth to lock in enduring and peak profitability.

MCI, a subsidiary of Matsushita Electronics, will mass produce, distribute and even ink OEM deals for the drive, and Iomega will follow in its wake, selling the patented and branded disks. The challenge for the Company going forward then, which has been discussed in great detail in our Iomega stock folder, is the defense of its disk patents, and far more importantly, the continuance of a spirited and aggressive promotion of its products.

Certainly, the underlying structure of this business model is still not evident to most in the investing community. What the market is labeling a "low-margin, unbranded, single-product enterprise" looks like a rising phoenix of a very different feather to me.

Iomega is rolling through an unbranding of the Zip *drive* -- outsourcing its production -- as it concentrates on branding the Jaz. This makes for a highly transitional business, as the Company controls and releases its platforms. And yet this procedure of marketing and then licensing out these drives is designed primarily to lay a foundation for disk sales.

What I think Wall Street has lately missed -- in affording Iomega the moderated sales multiple of a commodity drive manufacturer -- is that this company really is in the much lighter, higher-margined business of The Disk. MFs Ben and Chiros and others have dealt very eloquently with this matter in the folder.

But hey, this sort of mistaken interpretation is what summer on the stock market is all about. In June, July and August, Wall Street's brightest minds run to the Rockies to fish for trout, scamper to lead a walking tour in Donegal, Ireland or have taken over management of the local little league squad. Thankfully, Manhattan's greatest investors, and our nation's greatest investors, know that the higher authority put white sands, fertile valleys, 15" trout, infield grass, willow trees and starlit nights here for a reason -- a breather.

When their expertise returns, and as we head into the winter buying season, I suspect that the realities of Iomega's business model will again surface in the valuation of its stock. The two seem to have been greatly divorced of late.

Medicis Pharmaceuticals rose a full $3 to $43 in the wake of favorable coverage in Forbes magazine and a nod from Louis Navallier. The stock is now $2 below its all-time high of $45. On January 29 of this year, we opened our position in MDRX at $18.57 per share. Today, short of eight months later, we're announcing our intention to cash out our 375-share ownership position in the company at some point over the next five trading days.

Medicis has risen 131.5% for us. It's been a wonderful investment, and I think exemplifies both the notion that rapidly growing, well-managed, debt-free, profitable small-cap stocks hold the greatest potential for appreciation AND the notion that a blend of simple business research and common sense renders long-term capital growth via equities reachable by any Fool in America.

Rather than detailing here some of the reasons for closing out our position in this marketer of dermatology products, I point you to David's transaction report this evening. Thank you, Medicis... continued good luck with the business going forward.

Elsewhere in Fool-land, 3Com Corporation rose $7/8 to $48 7/8 without news. COMS is up 4.30% for us now. We continue to think that growth opportunities in the deregulating world of communication will play very much into our company's favor in the year ahead.

And let's end tonight with the numbers on our Foolish Four.

AT&T rose $1/4, General Motors gave away $3/8, as did 3M, and Chevron closed even on the day. The Foolish Four provides the foundation for all of our work here in the Hall of Portfolios. We're grateful to MFs Templar, Numbers and DowMan and many others for their unmatched backtesting and analysis of this group of stocks over the second half of the 20th century.

We certainly wouldn't be buying the Medicises, Iomegas, America Onlines, 3Coms and Gaps without, first, putting a load of our capital into large-cap turnarounds and, second, having proven to ourselves over time that we can indeed outperform The Four. Until a Fool has proven that she can beat the 20% annualized returns of the four high-yielders on paper... she should not be investing in any other common stocks. From the standpoints of risk and reward and opportunity costs, it just doesn't make sense.

Funny. As simply logical as that statement is, we live in a financial world where the multi-trillion-dollar mutual fund industry has averaged around 8% annual growth. That's less than half the *per year* returns of The Foolish Four, and it marks substandard performance when measured against the Dow Jones Industrials Average and the Standard & Poor's 500.

:::Fool scratches head:::

(Don't touch that one, Huibs)

Tom Gardner

Today's Numbers

Day Month Year History FOOL +4.92% -1.23% 24.94% 133.29% S&P 500 +0.01% 1.81% 7.77% 44.81% NASDAQ +0.06% 0.69% 9.24% 59.60% Rec'd # Security In At Now Change 5/17/95 2010 Iomega Cor 2.52 15.38 510.37% 8/5/94 680 AmOnline 7.27 26.88 269.52% 1/29/96 375 Medicis Ph 18.57 43.00 131.52% 8/11/95 125 Chevron 50.28 60.38 20.07% 8/13/96 250 3Com Corp. 46.86 48.88 4.30% 8/12/96 110 Minn M&M 65.68 68.00 3.54% 8/12/96 130 AT&T 54.96 53.63 -2.43% 8/12/96 280 Gen'l Moto 51.97 47.88 -7.89% 8/24/95 130 KLA Instrm 44.71 18.00 -59.74% Rec'd # Security Cost Value Change 5/17/95 2010 Iomega Cor 5063.13 30903.75 $25840.62 8/5/94 680 AmOnline 4945.56 18275.00 $13329.44 1/29/96 375 Medicis Ph 6964.99 16125.00 $9160.01 8/11/95 125 Chevron 6285.61 7546.88 $1261.27 8/13/96 250 3Com Corp. 11714.99 12218.75 $503.76 8/12/96 110 Minn M&M 7224.44 7480.00 $255.56 8/12/96 130 AT&T 7144.99 6971.25 -$173.74 8/11/95 280 Gen'l Moto 14552.49 13405.00 -$1147.49 8/24/95 130 KLA Instrm 5812.49 2340.00 -$3472.49 CASH $1379.61 TOTAL $116645.24 Transmitted: 9/10/96