Fool Portfolio Report
Tuesday, September 24, 1996
(FOOL GLOBAL WIRE)
by Tom Gardner
ALEXANDRIA, VA, September 24, 1996 -- After market close today, 3Com (NASDAQ: COMS) stepped up to the plate and announced 1st quarter results. The numbers look impressive. Earnings per share came in at 52 cents versus consensus estimates of 50 cents. Let's box the financial numbers for clarity:
INCOME STATEMENT Sales $706,968 $ 497,289 Net income $93,113 $ 57,421 Profit margins 13.2% 11.5% Earnings per share $0.52 $ 0.33 Shares outstanding 179,448 174,520 BALANCE SHEET Cash $577,146 $499,337 Current assets $1,382,083 $1,239,711 Current liabilities $458,690 $414,521 Long-term debt $110,000 $110,000
That marks sales growth of 42.2%, earnings growth of 62.2%, earnings per share growth of 57.6%, and a rise in profit margins from 11.5% up to 13.2%.
On the balance sheet, cash holdings grew by $78 million, working capital (current assets less current liabilities) rose from $825 million to $924 million, and 3Com froze it's long-term debt obligations at $110 million. By all accounts, it was a wonderful quarter for 3Com, which apparently is trading up $2 to $58 3/4 on the Instinet, an all-time high.
If we glance at a few other interesting stats from the report, things only seem to get better. Research & development as a percentage of sales held at 10%. The Company did not dilute its stockholders with loads of new shares, aggressive internal compensation plans, the like---with the shares outstanding increasing only by 3%. And lastly, 3Com gross margins rose from 52.5% a year ago to 54.0% today.
So I think what you have in 3Com is a company that right now is concentrated on the right products at the right prices. Sales are booming and yet margins are improving. And 3Com is aggressively courting new market share in a broadening industry by dropping their stuff anywhere from conglomerate mansions to small-business offices to your den.
Lastly, COMS hit the highest 1Q estimate out there, and did so by strengthening its long-term business not compromising it---a temptation for many a public company looking to outdo Street estimates. Given all this, a Fool might reasonably expect analyst upgrades toward the existing high-ends for 1997 and 1998, which run to $2.50 EST and $3.24 EST, respectively. Accepting 30% long-term growth projections, you end up with YPEGs of:Present: $75 One-Year: $97 1/4
We won't be tying our hopes to those numbers until we listen in on management's comments at the conference call. Shareholders and interested investors should certainly dial up 1-800-633-8284 (reservation # 1974669) and listen to the taped replay. A special thanks to 3Com Corporate Headquarters for its late-inning work to ensure the taping of this presentation so that Fools could hear our managers publicly consider the results. With every day, the information flows more evenly, no?
So, what of the rest of The Fool Portfolio today?
Sadly, Folly ended its Pete-Rose-style tear this afternoon, closing the day up a mere 0.55% versus an S&P 500 decline of 0.13%. That concludes our streak of days that Da Port had risen a percentage point or more at seven. But the greatest ballplayers in history always celebrated the end of their streak when it coincided with a team victory. Team play above vanity, that's our cry this evening, with the streak dead but the Port ahead of the S&P 500.
The Great Run of Autumn all started back on September 13th. At that point, The Fool Port stacked up against the S&P 500---the index that most professional investors dread----didn't look so sweet as it does now. Look in:1996 Returns FOOL S&P 500 9/13 +23.76% +10.49% 9/24 +40.71% +11.31%
The two weeks of glory. When you consider that 80% of the mutual funds being sold to your neighbors that aren't yet online have generated less than 11.31% growth in their account for the year, well, it's then that Foolishness glows like the Evening Star on a dark, clear night.
The less Wise among us no doubt have noted that this run coincides with our sale of Medicis on September 13th AND that Medicis rose another $2 a share today, closing at $45 a stub. Accountability, accountability. . . we love it. And we again invite the rest of this many-trillion-dollar industry to adopt similar principles and policies.
Medicis is now up 13.2% since we sold.
Blammo. Can't miss it.
Funny, though, I actually celebrate that.
I remember the days as an investor when this sort of performance in the wake of a sell would torment me. Pull out that Windows calculator and, clack clack, that 13% shortfall represents $2000 in lost treasures---diamond brooches, gold chalices, sapphires and rubies fluttering down to the ocean floor, an armslength out of reach. Dive, dive, dive!
Sadly, it can get to the point (and did for me, and does for most investors at some point in their career) where the $2000 in missed profits takes up more brainshare than did the $8000 in realized profit. And it's when that madness takes hold, the sort of lunacy that steals quality out of our daily lives by injecting it with ongoing bottom-line mania, it's then that a Fool goes fishing for a contrary take. Here it is:
Would you rather invest in companies whose stocks often decline rapidly after you sell them or those whose stocks continue to rise after you sell them?
The short-term player certainly chooses the former. Those that believe substantial profits can be had via daily transactions based upon price-timing strategies love to see stocks explode after they buy them and implode after they sell them. It confirms for them the power of their target-price models.
The long-term investor ought certainly choose the latter. The investor---to be distinguished from the paper trader---concentrates on long-term capital growth, not a short-term cash windfall. Consequently, she directs her motley eyes to the business realities and the financial statements, in search of high-quality companies to own.
A stock's enduring northerly ascent, which correlates with operational success, is confirmation of sound business research. This is true whether or not the investor still holds her ownership position. Thus, Medicis' climb to $45, up from $18 1/2 where we bought it and $39 3/4 where we sold it, is further confirmation for us that we found a company with strength in its underlying business model and great growth potential ahead of it. It is further validation of the PEG model backed by balance-sheet, cash-flow, and product reviews. Foolish to think it so.
So, as business-research investors, we lowly, wretched Fools would rather have the stocks that we've sold rise in the wake of our sale than crumble. Contrary, I know. Almost maddeningly so. Often it takes madness of another sort, though, to tame the original lunacy. . . that brainsickness which had us bemoaning $2,000 in sunken treasure rather than celebrating the $8,000 of realized gains. Better to think about the eight birds in your hand than the two chirping in the bush.
Elsewhere in da Port, Iomega whirled up another $1 1/8 today, to close at $19 7/8. The stock has risen 37% in less than two weeks. And it has risen off monster trading volume, often claiming status as the most actively traded issue on the entire Nasdaq. This has all happened, once again, during them triple witching hours. Ugh.
Now if the powers that be really want to limit pricing manipulation, they should ask themselves why they support an "investment" vehicle that richly rewards the striking of short-term price targets. Some mighty forces are using every communication tool available---telephone, newspaper, email, television, radio, online service, cup-and-string, electronic bullhorn, eccentric psychic and more----to artificially move stocks to the right prices at the right hour. Then whoosh, we rush back to a consideration of the REAL fundamentals and back toward long-term pricing efficiency.
The regulators need look no further than the triple-witching day, and this speculative vehicle, if they want to find artificial volatility, jerrybuilt valuations, pricing manipulation, and by extension, the unwanted flow of misleading information through all mediums.
If we want to steer our citizens toward savings, steer our ships toward real corporate growth, and guide our whole nation into an equities marketplace that strengthens enterprise, shouldn't we be aiming to tie real value to fundamental business growth, not short-term price moves? Buffett's 100% tax on short-term capital gains combined with a giant broomsweep of the options den would set us on a course toward true profits based on real merit.
Over in the news, Iomega announced new software tools for the Zip drive. This has been covered nicely in the Iomega folder, certainly more than I could here. . . and absolutely with greater accuracy and with more thoroughness than I could get anywhere else. This information boom, networked communications, is the single greatest development for the individual investor. . . ever.
The gap between those investors who have access to The Motley Fool and those who don't is ever broadening. The gap between self-managed accounts seeking maximal long-term profitability, while ever accounted against the S&P 500, and professionally-managed portfolios with high management fees in various forms, the majority of which consistently lose to the market once all costs are deducted, is broadening even more rapidly.
What we need to arrive at, first, in this evolution is an acceptance of the same level of accountability across all financial platforms and all mediums. Right now, digitized, networked, mass conversations are leading the way, trying to pull a string of cabooses into 21st century business. It'll be a world dominated by consumer awareness, consumer advocacy, and accountability. Bring it on; we can't wait for the greater scrutiny of all financial engines.
To close peacably tonight, I sat next to Jacques Cousteau on a flight from New York to Washington DC this morning. It was nice to see him back in coach with the rest of us! I only talked to him for a minute, just to praise him. But I glanced over at him re-reading the speech he was preparing to give in the Nation's Capital, and in his veteran days there lay vigor. In his eyes, peaked curiosity.
I'm investing for the long-term. The long, long-term. There's so much ahead of us.
Tom Gardner, Fool
PS. We will consider AT&T's decline in tomorrow's port report. The Evening News has it covered on our mainscreen.
Day Month Year History FOOL +0.55% 11.25% 40.71% 162.75% S&P 500 -0.13% 5.16% 11.31% 49.57% NASDAQ +0.31% 6.46% 15.50% 68.75% Rec'd # Security In At Now Change 5/17/95 2010 Iomega Cor 2.52 19.88 689.01% 8/5/94 680 AmOnline 7.27 33.00 353.74% 8/11/95 125 Chevron 50.28 62.38 24.04% 8/13/96 250 3Com Corp. 46.86 56.50 20.57% 8/12/96 110 Minn M&M 65.68 69.75 6.20% 8/12/96 130 AT&T 54.96 51.50 -6.30% 8/12/96 280 Gen'l Moto 51.97 48.38 -6.92% 8/24/95 130 KLA Instrm 44.71 22.25 -50.24% Rec'd # Security Cost Value Change 5/17/95 2010 Iomega Cor 5063.13 39948.75 $34885.62 8/5/94 680 AmOnline 4945.56 22440.00 $17494.44 8/13/96 250 3Com Corp. 11714.99 14125.00 $2410.01 8/11/95 125 Chevron 6285.61 7796.88 $1511.27 8/12/96 110 Minn M&M 7224.44 7672.50 $448.06 8/12/96 130 AT&T 7144.99 6695.00 -$449.99 8/11/95 280 Gen'l Moto 14552.49 13545.00 -$1007.49 8/24/95 130 KLA Instrm 5812.49 2892.50 -$2919.99 CASH $16258.37 TOTAL $131374.00 Transmitted: 9/24/96