Fool Portfolio Report
Wednesday, October 2, 1996

by David Gardner

ALEXANDRIA, VA, October 2, 1996 -- The Fool Portfolio pretty much closed unchanged today. That's most unfortunate, given that the market put up some rock'em-sock'em returns. (Hey, anyone remember those Rock'em-Sock'em Robots? Tom and I used to try to knock each other's plastic heads off with those things.) Anyway, AOL shares were buffeted for the second day in a row, foiling our efforts to top today's market.

An outstanding $4 jump in 3Com shares wasn't enough to tip our scales toward profitability. And all the rest was pretty much a wash.

In typical Foolish style, let's deal with our losers first. America Online is the one that jumps out -- er, down -- dropping $1 3/4 to close bidding $30 1/4. Of course, that is a quarter-point over $30, which is that key psychological, astro-physical, floating-point, reverse-sentiment technical support level. That's what our modified Elliott Wave is saying anyway, though our work with Bollinger Bands suggests something closer to $29.45. Expect breakout in 2.3 trading days, though if it drops below $27 the stock will go straight to its secondary support of $7.

(NOTE: If the previous jargon seems unfamiliar to you, you're on the right track.)

(NOTE: And lest someone write a newspaper article stating that the Fools say the thing's going to $7, this was a joke.)

(NOTE: Hate to have to ruin jokes by explaining them, but that's a precaution one sometimes has to take in this, our shoot-from-the-hip journalistic age.)

We were extremely critical of the media rehashing AOL's 10-K disclaimer material as "news" yesterday, which seemed mostly responsible for the $3+ dollar drop (all of which had already occurred before the stock opened). Ultimately, our concern was not with the drop, but the lack of journalistic principle. Whether the $3 drop was justified or not, that'll all be evident in the long term, which is really all that need concern long-term investors. That's why the point was fundamentally about journalistic practice and integrity, with Tom's additional points that the online medium will undercut and correct shoddy or unethical reporting.

Today provided no bounce back for AOL stock, though. Some investors may be concentrating on other information in the 10-K. In our AOL folder, Dan Guenther mentions the company's negative cash flow during fiscal '96, negative to the tune of $67 million. Following positive cash flow in fiscal '95, AOL burned more money than it brought in as it massively expanded its business. That can scare the market, but this still seems hardly news. Go back to Randy's Befumo's analysis for the fourth-quarter earnings report written in late August, and in the section entitled "Bullish Triad 3: Cash Flow +" you'll see that management acknowledged that it doesn't expect to be cash-flow positive until the end of 1997.

Plus, as of the close of fiscal '96 the company sported a war chest of $129 million in cash and short-term investments.

But ours is not to reason why a stock moves like it does on any given day... so many complex factors are at play on the stock market. Ours is but to do and hopefully not die on this or any other investment. We believe in the long-term value and vision of the company; our patience has continually been rewarded with a pot of gold at the end of the AOL rainbow. My feelings probably fall most closely to Randy's when he wrote (in the same report): "Quite honestly, the bears may dominate these shares for the next two to four quarters.... For someone with a time frame of longer than a year, however, these shares seem to offer uncommon value."

Now, the company's subscriber growth looks to have been only slightly net positive in the first quarter just ended. MarkN94926 points out that in the company's Monday press release on its new marketing campaign, AOL claimed "more than 6.2 million members worldwide." Considering that 6.2 million was the number bandied about all quarter long, big growth doesn't appear in the cards. (MF Templar points out to me that the company has to keep printing "6.2 million" unless or until it officially updates that figure with a press release proclaiming the new magical number.)

Fellow Fool JBenerofe went on to point out a Bloomberg comment today by AOL VP Mark Walsh, though, claiming "net increase in membership for quarter." This could be one, or 100,000. I personally doubt it's much more, though we'll see. It is these recent problems that have dogged the share price.

Also down today was Lucent Technologies, our new spinoff from AT&T. LU closed down $3/4 to $43 1/8. We've received a bunch of questions from Dow Dividend Approach investors as to the textbook way to handle a situation like this one. We will be using the textbook approach, so listen up. The idea is to hold a stock spun out of your Dow company through the duration of the current Dow Div year (for us, that'll be August of '97). At that point, we'll drop out of Lucent and redeploy the funds back into whatever new Dow stocks are selected. We did just the same with Allstate in 1995. You can always check our portfolio's trading history in the Fool Portfolio Info section to see past moves.

As our Lucent holding is valued at only $1811.25, less than 2% of our overall portfolio, we may not cover it as closely as some other stocks in the Foolfolio. But you can expect some info there from time to time. Hey, did you know Lucent's (and Bell Labs's) scientists have won 7 Nobel Prizes?

Also down today? Quarterdeck, off an eighth. That's our short, which has gained us 4.71% so far.

Chevron continued its impressive rise, Wednesday. As low as $58 7/8 in September, the stock closed today with a last trade of $64 3/8, up $1 1/8 on the session. Not bad for a stodgy old oil company valued in the tens of billions of dollars. Also, as of 1/2/96, Chevron is the key 1996 Foolish Four "swing stock" with the double weighting, so it's primarily responsible for powering up this year's Foolish Four returns to a close today of 22.35%. The Dow, by comparison, shows a 15.96% return for 1996. The S&P 500 sits at 12.68%. Another nice year for Foolish Four investors.

3Com rose $4. The company yesterday received a nice plug from the Montgomery Securities director of technology research, at that firm's 26th Annual Investment Conference in San Francisco. Thornhill identified 3Com as one of his top technology recommendations.

Also today, company executive vice president Bob Finocchio made a presentation at the conference. Citing a recent success, Finocchio mentioned that 3Com now has about 45 percent market share with its fast Ethernet networking products, having recently bypassed Intel for top share. Talking about the company overall, Finocchio stated that in 1997, "We're going for as much growth as possible."

The same can be said by your Foolish Portfolio managers, except the line applies to 1996, 1997, 1998, and beyond, just as it applied in 1994 and 1995. We're going for as much growth as possible, and in so doing, aim to teach you better ways to maximize your own portfolio growth in the years to come. It'll be a long-term relationship.

Fool on!

--- David Gardner, October 2, 1996

Today's Numbers

Day Month Year History FOOL -0.05% -2.24% 49.22% 178.64% S&P 500 +0.72% 0.97% 12.68% 51.40% NASDAQ +1.20% 0.75% 17.49% 71.64% Rec'd # Security In At Now Change 5/17/95 2010 Iomega Cor 2.52 23.25 823.00% 8/5/94 680 AmOnline 7.27 30.25 315.93% 8/13/96 250 3Com Corp. 46.86 64.50 37.64% 8/11/95 125 Chevron 50.28 64.38 28.02% 8/12/96 110 Minn M&M 65.68 70.13 6.77% 9/27/96-890 Quarterdck 7.08 6.75 4.71% 8/12/96 130 AT&T 40.14 39.38 -1.91% 8/12/96 280 Gen'l Moto 51.97 49.88 -4.04% 10/1/96 42 LucentTech 45.88 43.13 -5.99% 8/24/95 130 KLA Instrm 44.71 20.63 -53.87% Rec'd # Security In At Value Change 5/17/95 2010 Iomega Cor 5063.13 46732.50 $41669.37 8/5/94 680 AmOnline 4945.56 20570.00 $15624.44 8/11/95 125 Chevron 6285.61 8046.88 $1761.27 8/12/96 110 Minn M&M 7224.44 7713.75 $489.31 9/27/96-890 Quarterdck -6304.75 -6007.50 $297.25 8/12/96 130 AT&T 5218.24 5118.75 -$99.49 10/1/96 42 LucentTech 1926.75 1811.25 -$115.50 8/11/95 280 Gen'l Moto 14552.49 13965.00 -$587.49 8/24/95 130 KLA Instrm 5812.49 2681.25 -$3131.24 8/13/96 250 3Com Corp. 11714.99 16125.00 $4410.01 CASH $22563.12 TOTAL $139320.00 Transmitted: 10/2/96