Fool Portfolio Report
Thursday, September 12, 1996

by Tom Gardner

San Francisco, CA, September 12, 1996 -- Well, at least it's nice that the portfolio below us on our Hall screen, The Boring Portfolio, notched up some nice numbers today. Not so for The Fool Port, which gave away 0.95% against S&P 500 gains of 0.58%.

America Online continued its dizzying south'ard spiral, falling $7/8 to $25 -- a mere half-point above its lows for the year. AOL has now shed 64.7% off its highs of 1996. At $25 a share today, America Online is being priced around $2.75 billion. A mere six months back, America Online was tagged above $7.75 billion. We've watched over $5 billion of capitalization stripped out from its digital coat.

The Company's woes have been well-documented and thoroughly considered in our AOL stock folder -- everything from increased rates of subscriber churn, to the burning of marketing capital, to its struggle for a workable business model... and much more. This has been a desperately frustrating time for the consumer-online giant, which has suffered heavy institutional selling and methodical short-selling throughout the summer. But how much of the frustration is tied to the fundamental business and how much merely to matters of short-term stock pricing?

In the upcoming week, I'll be working on a review of America Online -- what went wrong and where to from here. For now, suffice to say that AMER, the stock, is jockeying for position as a value play. And within the past two weeks, I've listened to at least a half dozen articulate investors expound on the potential for acquisition here.

Paraphrased: "With AOL capped at $3 billion, Fool, don't you think someone like AT&T will drop change on the table, claim the six million subscribers, the brand, the valuable ANS assets, the existing business relationships... da whole kit and caboodle?"

At various points West, over dinners and in meetings in San Francisco and Los Angeles and at a wedding in Sun Valley, Idaho, I've listened to these reasonings. Logical as they sound, we don't invest any of our monies or any of our hopes in the premium-priced acquisition, believing it always better to invest in growth and profitability.

Any Fool knows that in frustration can come learning. On the portfolio management side, these past two weeks have proved ideal for the re-reading of Philip Fisher's superior investment tomes, "Common Stocks, Uncommon Profits" and "Conservative Investors Sleep Well." And that's exactly what I've been up to.

Buried in the wealth of valuation principles, business strategems, and investment narrative -- which reads like a long series of fine Fribbles -- sunk right at the heart of it all is Fisher's belief in holding onto the right franchises through good times and bad. The discipline to sit through over- and undervalue, the minimization of capital gains taxes and commission fees, and even simply the learning experience of being a long-term business owner... all these have driven Mr. Fisher to endure periods of frothy and flat pricing in the companies he believes in.

Certainly the question of the day then is: Is America Online a world-beater? Is this the sort of business that careful, methodical, long-term investors should take a fairly permanent stake in? David and I have discussed this matter in great detail in weeks past -- over the telephone, over dinner, here online, and with many others... many of you face-to-face.

My feeling is that each reason to lock these shares away for a decade or more, to hold on tight, can at present be matched against one in support of a search for attractive exit points.

In one book it is writ that America Online is the runaway leader of consumer online technology, publishing and communication. "You've Got Mail" rings in the ears of millions of Americans. It is writ here that AOL's technological achievements are mostly unsurpassed. The 3.0 interface is really glorious... one of a handful of the Wonders of the Digital World. It's in this book, which counsels holding AOL shares for the long haul, that America Online is deemed the gatekeeper to the Information Age for the 88% of American households that are as of yet unwired.

But in another book, it is writ that America Online is running out of capital to spur meaningful subscriber growth and that the company's marketing efforts have been submediocre. Too many disks and too little soul. It is written here that the business has been managed unprofessionally, resulting in a narrowing base of strategic allies. That the role of heavy-handed distributor is certain to be an unattractive, low-margin occupation in the interactive age. The book which counsels "Sell" holds that America Online has lost touch with a spirit of enterprise, has abandoned an aggressive competition to win the open-standard for its defense of the proprietary, and has missed opportunities for exhilirated branding, high-margins, and meritocratic business growth.

On Monday, America Online begins trading on the New York Stock Exchange, out of the wild-n-wooly world of the Nasdaq. With pricing volatility reduced, AOL may now be able to hunker down and hammer together a better mousetrap, a better communications tool, a better educational service, a better business model. They certainly have the best out there today... but there's certainly no question in these times of burning growth and rapid change you have to be the best out there tomorrow, already.

How AOL does heading into Christmas -- into what most probably will be a blistering season for PC sales -- will direct their stakeholders to one of the two books above: To hold the great enduring franchise or to sell the short-lived promotional company.

Elsewhere in The Fool Portfolio, the threes -- 3Com and 3M -- did their best to buoy our savings account. They rose $5/8 and $7/8, respectively. Each is up just more than 5% for us since our late summer purchases.

Have a great weekend. What the heck, launch the weekend tomorrow if you can. Darn, I can't. Oh, and if you want some idle reading, pick up Fisher's book by Wiley & Sons. A rose, a gem, a library. Can we rename him "Fool-sher?"

--- Tom Gardner, September 12, 1996

(c) Copyright 1996, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool.

Today's Numbers

Day Month Year History FOOL -0.93% -5.14% 19.98% 124.04% S&P 500 +0.58% 2.94% 8.97% 46.41% NASDAQ +1.03% 2.13% 10.80% 61.88% 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 25.00 243.74% 1/29/96 375 Medicis Ph 18.57 38.25 105.94% 8/11/95 125 Chevron 50.28 61.50 22.30% 8/13/96 250 3Com Corp. 46.86 49.38 5.37% 8/12/96 110 Minn M&M 65.68 69.00 5.06% 8/12/96 130 AT&T 54.96 54.63 -0.61% 8/12/96 280 Gen'l Moto 51.97 48.25 -7.16% 8/24/95 130 KLA Instrm 44.71 18.63 -58.34% 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 17000.00 $12054.44 1/29/96 375 Medicis Ph 6964.99 14343.75 $7378.76 8/11/95 125 Chevron 6285.61 7687.50 $1401.89 8/13/96 250 3Com Corp. 11714.99 12343.75 $628.76 8/12/96 110 Minn M&M 7224.44 7590.00 $365.56 8/12/96 130 AT&T 7144.99 7101.25 -$43.74 8/11/95 280 Gen'l Moto 14552.49 13510.00 -$1042.49 8/24/95 130 KLA Instrm 5812.49 2421.25 -$3391.24 CASH $1379.61 TOTAL $112019.61