Fool Portfolio Report
Tuesday, October 1, 1996

by Tom Gardner

ALEXANDRIA, VA, October 1, 1996 -- I had an interesting but brief conversation with a Foolish investor last night, sitting high above the uncomely astroturf at Veterans Stadium, during the Eagles-Cowboys football game last night. MFs Fletch and Chill and I drove up to the game last night, to participate in America Online's kickoff and celebration of The New AOL.

During the 1st quarter, a gentleman, daringly clad in Cowboy blue amidst the sea of frogreen Eagle jerseys, leaned over and remarked on our Fool ballcaps. "I subscribe to the Evenings News. I love it. Oh, and I bought KLA Instruments. I jumped in KLAC 40% below you guys, so that's in my favor. I'm in for the long haul on this one." We then talked for a moment about our Fool news services, about The Fool on CNBC, about the future, then all eyes fell back on Herschel Walker hoofing a kickoff return across the 50-yard-line.

This morning, with America Online down over $3 a share on strange news, I remembered last night's conversation, particularly the discussion of our Fool News service, really the only interactive one of its kind. This is one of the great advantages that online communications will deliver in the decade ahead: interactive news, the ability to question the assertions and potential biases of the media. In a city where the right-leaning Washington Times battles the left-leaning Washington Post, we Fools can truly look forward to the networking in of tens of thousands of other voices.

Even though I know this transition will take time, I found it simply stunning that news organizations from Reuters to Dow Jones to the Associated Press would report, as headline news, boilerplate language from America Online's 10-k filing and statements made during AOL's conference call with analysts made at the end of last quarter.

True, we saw similar substandards of journalism wielded during the perplexing coverage of Iomega Corporation earlier this year, which among other things implied criminal behavior on the part of Iomega management as well as insinuations that their business model was crumbling -- according to language in their secondary-offering filing with the SEC.

Iomega's recent partnership agreements with Intel, Texas Instruments and Motorola raise some very serious questions about the financial television, newspaper, and magazine world, more specifically about the capacity of non-interactive services to adequately research and accurately represent business developments, particularly in the evolving world of technology.

Fools should know that this is one of the reasons we have pushed and will continue to push the securities regulators to caution private investors not only about the authenticity and usefulness of published materials online, but about all information flowing through all mediums. Whether it be a journalist parroting the recommendations of his buddy at a local hedge fund, or a broker mass-communicating a firm recommendation over the telephone, or a mutual fund manager talking about the value of Micron Technology shares in a national newspaper, or JAston34 praising Gillette's purchase of Duracell Batteries on The Motley Fool Online. . . verify all information before making investment decisions.

Interestingly, throughout 1996, corporate America has been on the offensive, trying to teach those covering public businesses how to read financial statements, what sort of legal language to expect in all SEC filings, and how to properly assign reasonable values to public enterprise. Today, the financial media is doing a better job than ever before of dissecting businesses, deconstructing financial statements, assessing an entire industry, as well as evaluating published materials---which includes distinguishing between a company press release and language in an SEC filing. (Geez.)

The bar has been raised, with publications like Fast Company magazine attracting attention, and an increasing number of traditional media outfits diving into conversations with their readers online. The average private investor is certainly better served today by the financial press than he was twelve months ago. And the ongoing and oncoming communications and information revolution will continue to relentlessly transit media from an ego-driven to a service-driven industry.

It is because of these recent improvements that today's coverage of America Online's 10-k report is so baffling. Is legal language in a 10-k filing news? Is the restatement of public comments offered three months ago worth reporting today, let alone as a business-news headline? This Fool did a lot of head-scratching today. I wasn't surprised to hear America Online labeling these stories insignificant and immaterial. I certainly was not surprised to see analysts lining up to challenge the gloom-and-doom repackaging of old content. Merrill Lynch analyst, Lauren Fine, appearing on CNBC, asserted that the Associated Press ran an inappropriate news story based on the boilerplate language of the recently filed 10K. And I thought Huibs put it succinctly this morning in our AOL stock folder:

..spin piece..

..and a lovely gift to the folks shorting AOL..

Huibs went on this evening to transcribe the words of Lauren Fine at Merrill Lynch:

" The AP Newswire cited an SEC filing as indicating that competion might negatively impact financial results. We believe this was entirely misleading. In fact, the company filed a 10-K and had all the standard language one would expect. They did indicate that subscriber retention was less in FY96 then FY97 - old news. They did indicate that there is a lot of competition - old news. They did indicate that marketing costs would increase in FY97 - old news. They did indicate that any of the foregoing events (competition, increased spending on marketing, content procurement) could, we repeat, could adversely impact financial results.

"We have met with the company recently and sense no change in their outlook. We believe that cash marketing costs could be close to $500MM this year but that is not a change in our outlook. We believe that the September quarter will hold few clues as to the outlook for the company for the remainder of the year as the new marketing campaign was just launched and the relationship with AT&T Worldnet and Windows 95 are just starting to take hold. We believe the market is overreacting to no new news here and we would use the weakness as an opportunity to accumulate shares."

Interactivity, a conversation, not a one-way, but a two-way or ten-thousand-way communication of information and opinion.

Oddly enough, Reuters did a shuffle step this evening, after most likely having just repeated the Associated Press report. Reuters released what reads like a refutation of their morning report on AOL, framed as it was as a hot-off-the-presses warning from the company that competition and subscriber churn might hamper their business in the year ahead. Under its new headline, "AOL Slumps as Investors Overreact to 10-k" Reuters asserted that Wall Street had mistaken the rehashing in a 10-k filing for current news.

Huh? Reminds me of a famous conversation between a pot and a kettle.

So, all told America Online fell $3 1/2, or 9.9%, to $32 a share, leading the over 2% drop in The Fool Portfolio. I believe this is another example of a short-term pricing inefficiency rolling through the marketplace. These beasts come through every hour of every market day. I hold with George Soros, who maintains that there is a greater carelessness to stock-market pricing than an efficiency to it.

Incidentally, I am not proposing that America Online has a clear pathway to equity appreciation. There certainly are many challenges facing the company. We've quite thoroughly considered the strengths and weaknesses of their business models in the AOL stock folder -- accounting procedures, pricing strategies, marketing plans, competitive factors, et al. We're not sitting on a sure thing here; no Fool would stake such a claim.

I am optimistic that if America Online can execute the fundamentals, can commit itself to serving America, and can aggressively manage its bottom line, the consensus of earnings estimates from eighteen Wall Street analysts is reachable and justifies a richer valuation for this stock. Remember that Wall Street is projecting $0.94 for fiscal 1997 and $1.60 for fiscal 1998. That targets a fair price for AOL shares today of $39 1/2, and considerably higher a year forward.

But while I am optimistic, my overriding point today is that the Associated Press, Reuters, and Dow Jones did a disservice to their readers. It's happened before, it will happen again. It comes with the territory. And for the most part, all three do a standout job of covering The Street. All of that said, networked communications are going to further the advancement of interactive news, analyses and opinions at a dizzying pace into the next century. Readers are right to expect greater sophistication, and it simply cannot come from one reporter trying to dig out news, and all other reporters playing parrot. Debate, a public forum, mass communication. . . they're coming to a PC near you.

General Motors today announced comparable sales for the month of September. Their comparable car sales fell 10%, while truck sales rose 13%. Industry analysts maintain, though, that overall sales pace is strong. GM rose $1 3/8 to $49 3/8.

Today brought a new stock of a business we already owned to our portfolio. AT&T officially spun off Lucent Technologies, which inauspiciously dropped $2 to $43 7/8. Daggum. AT&T went the other way, climbing $1 1/2 to its new perch at $38 7/8. For those investors not certain how to account for the spinoff, I'm linking in our FoolWire coverage: AT&T Spins Off Lucent.

T shareholders are all too familiar with the recent news swirling around Ma Bell's head. The Company is on the lookout for new management and the buzz about its heavy investments into NCR Corporation, which will be spun out later this year as well, hasn't helped any. Yet our investment has lost us a mere $240. How much lower for a multi-billion-dollar giant? The Dow Turnaround investor wonders and waits.

Finally, our latest addition to The Fool Portfolio -- or subtraction from it, depending on how you look at things -- Quarterdeck, fell $1/4 to $6 7/8. It seems the Company's corporate communications director and chief technologist decided to depart with the CEO this morning. As far as our news-searching hounds can tell, only the resignation of the company's CEO had been preannounced. We'll be following up on this in the days ahead.

A bad day for The Fool Portfolio, but I think it was a worse day for traditional media coverage of the Internet. I anticipate a correction from the Associated Press in the next twenty-four hours, in the wake of that Merrill Lynch appearance on CNBC. But what do I know? I'm but a lowly Fool, trying to learn more about business, employ various numbers-driven valuation models, and beat the S&P 500.

Tom Gardner

Today's Numbers

Day Month Year History FOOL -2.19% -2.19% 49.29% 178.77% S&P 500 +0.25% 0.25% 11.87% 50.32% NASDAQ -0.44% -0.44% 16.10% 69.61% Rec'd # Security In At Now Change 5/17/95 2010 Iomega Cor 2.52 23.38 827.96% 8/5/94 680 AmOnline 7.27 32.00 339.99% 8/13/96 250 3Com Corp. 46.86 60.50 29.11% 8/11/95 125 Chevron 50.28 63.25 25.78% 8/12/96 110 Minn M&M 65.68 69.38 5.63% 9/27/96-890 Quarterdck 7.08 6.88 2.95% 8/12/96 130 AT&T 40.14 38.88 -3.15% 10/1/96 42 LucentTech 45.88 43.88 -4.36% 8/12/96 280 Gen'l Moto 51.97 49.38 -5.00% 8/24/95 130 KLA Instrm 44.71 21.63 -51.63% Rec'd # Security In At Value Change 5/17/95 2010 Iomega Cor 5063.13 46983.75 $41920.62 8/5/94 680 AmOnline 4945.56 21760.00 $16814.44 8/11/95 125 Chevron 6285.61 7906.25 $1620.64 8/12/96 110 Minn M&M 7224.44 7631.25 $406.81 9/27/96-890 Quarterdck -6304.75 -6118.75 $186.00 10/1/96 42 LucentTech 1926.75 1842.75 -$84.00 8/12/96 130 AT&T 5218.24 5053.75 -$164.49 8/11/95 280 Gen'l Moto 14552.49 13825.00 -$727.49 8/24/95 130 KLA Instrm 5812.49 2811.25 -$3001.24 8/13/96 250 3Com Corp. 11714.99 15125.00 $3410.01 CASH $22563.12 TOTAL $139383.37 Transmitted: 10/1/96