Fool Portfolio Report
Tuesday, October 8, 1996
By Jeff Fischer (MF BudFox)
ALEXANDRIA, VA, October 8, 1996 -- What an auspicious first day for me. Yesterday David wrote, and I quote: "We look forward to... y'know... maybe, like, beating the market at some point soon. Maybe. Y'know." David got his wish today with flying colors. While an autumn rain fell in Alexandria, the Fool stomped through puddles in the market to put up a healthy 3.09% gain, the first market-beating day of the month. The Market took the mood of the rain, and fell, especially the Nasdaq which dropped 0.85%.
The Fool gained mainly on the drop of its recent short, Quarterdeck (QDEK), which gave up $5/8 today to an ask price of $6 1/2 -- a significant 9% fall. Reports today included that Quarterdeck has laid off 440 of its 1,100 employees, including 90 sales-persons and staffers said to be hired in 1995 to facilitate future growth. That growth isn't happening. It was also reported that the company was brought to court last month by two plantiffs seeking class-action lawsuit status on a claim that Quarterdeck's MagnaRAM 2 software fails to offer what it promises, or to help users in any significant way whatsoever. Not a great day for Quarterdeck, but good for the Fool.
Also benefiting the Fool was Iomega (IOMG), up 8%, to a bid of $23 5/8. There was no major news, but I'll talk about Iomega anyway. Autumn has been kind to Iomega, but before the fall season takes full effect and summer is laid to rest in photo albums, let's cast off the gray skies and return -- return back to summer!
We've now returned to the dog days of summer, swimming in sun and water, enjoying late evening strolls, and sleeping until noon... er, maybe not. Let's go back to July 27, 1996, when Barron's Magazine ran it's quarterly "Big Money Poll." It's entertaining when "Big Money Managers" make swami predictions about the Market, and it can be thought provoking to read their lists of favorite and least favorite (or "most hated") stocks. As David mentioned here in August soon after this particular Barron's issue, the fund managers voted Iomega as one of their least favorite stocks. The article states they made this choice on a valuation level. Iomega at the time of the article was about $17 a share. Before we get to specifics, consider this:
-- On one side we have Iomega, the best performing stock of all in 1995, and currently on track to becoming one of the best performing stocks again in 1996.
-- On the other side we have some of the largest money managers in the country, 20% of whom manage over 5 billion dollars, 50% managing at least 250 million dollars, stating that Iomega is one of their least favorite stocks.
There's a disparity here, no? Or is there? Maybe not. Since funds consistently underperform the market, it actually makes perfect sense that fund managers would dislike one of the best performing stocks of the last 18 months. But let's try to see why they feel so dispassionate towards Iomega. They must have some very good reasons. So, let's see here...
Well, Iomega's sales revenues have grown 287%, 453%, and 440% the last three quarters, year-over-year. 1995 sales were $326 million, or 2.3 times 1994 sales. 1996 sales are on a run rate which promises to top $1 billion. Earnings have exploded from the Sub-Basement Level to the Mighty Impressive Stratosphere, while margins have levitated at a healthy 27%, even while the company ramped up new products and set forth wide marketing blitzes. The company is estimated to grow earnings more than 500% this year over last, and about 85% more in 1997 over 1996, and is projected to have an overall three-year annualized growth rate of 30 to 35%. Hmmm... Sounds very healthy to me so far. How about you?
The stock was around $17 when the "Big Money Poll" gave it the Big Thumbs Down. Now the stock is $23.62 (39% higher). Yet it still trades at only 23 times the 1997 earnings estimate of $1.00 per share, which was issued at a recent Emerald Conference. So even with the stock 39% higher from late July, it currently represents a substantial discount to the company's three year annualized growth rate. See what we have here at $23 a share: A projected 1997 price-to-earnings ratio of 23, with an annualized projected growth rate of 30 to 35%. That doesn't at all spell "overvalued." In fact, in late July when Iomega was $17, based on trailing earnings and projecting a three year annualized growth rate of 30 to 35%, the stock looked extremely undervalued. You could even say it was 100% below fair value. High growth stocks often trade at 90 to 100% of their annual growth rate, so growing at 35% would put Iomega around $35 before being considered "fairly valued." (Interestingly, $35 is the same price of the early summer secondary offering.) Though these simple numbers alone should be enough to give even the most skeptical of money manager reason to rethink his position on Iomega's valuation, there are other factors to consider.
Importantly, these by-the-book valuation numbers don't take into account Iomega's immense lead over the competition, or the distinct possibility of Iomega becoming the next "standard" in the removable storage industry. The numbers also don't consider the various strategic agreements Iomega has recently entered. Companies associated with Iomega include the likes of IBM, Hewlett Packard, Motorola, Matsushita and Canon, to name just some of several. Most importantly, though, in my mind, is the quick and wide-spread success Iomega has had marketing its products and brand identity. This wouldn't be possible if they didn't have superior and needed products. And it wouldn't be possible if Iomega didn't have brilliant management, with their feet on the ground and their heads beneath the clouds, turning the company into a "world-beater" -- a world-beater in an industry which offers explosive growth as Web use explodes, to name just one example of the so many needs for expandable and portable storage.
So what's not to like in the Iomega success story? Why would the stock be "most overvalued" at the July $17 price level, about 17 times current estimates, when growing at a rate twice that? I don't know. Let's see the reasons given by the fund managers. Well... let's see here... hmmm... well, actually... Okay. They didn't give any reasons, or if they did, Barron's didn't print them. The "most overvalued" stocks are simply written, one after the next, without reason or explanation or logic. Hmmm... how reassuring, how Wise.
Either way, It's baffling to me so many money managers would fail to grasp the story behind Iomega, or to recognize the value of the shares as we move towards 1997 -- not to mention what 1998 and beyond can bring from such a leading company. Maybe the "Big Money" can't get past the media version of Iomega as being an "online" phenomena, which isn't fair to the online world (The Fool) or the stock, by any means. Iomega's accomplishments stand on their own. And what if Foolish online folk have gained handsomely by being intelligent investors in the stock? Good for them. Great for them!
But over-all, I think those fund managers who named Iomega among the most overvalued stocks revealed more of themselves than they realize. It reminds me of the story "The Emperor's Clothes," where the Emperor parades naked down the street thinking he's dressed elegantly and intelligently. Does the "Big Money" know how much they reveal of themselves as they walk down the Street making their proclamations? Perhaps the "Emperors" are oblivious to how they appear, but Fools certainly know. Maybe the "Emperors" will know too, before long. After all, Fall is here and it's getting colder outside.
It's extremely easy to search the SEC EDGAR Archives for your favorite public company's 10K and 10Q reports.
Day Month Year History FOOL +3.09% -2.57% 48.71% 177.68% S&P 500 -0.38% 1.94% 13.75% 52.84% NASDAQ -0.85% 1.08% 17.87% 72.20% Rec'd # Security In At Now Change 5/17/95 2010 Iomega Cor 2.52 23.63 837.88% 8/5/94 680 AmOnline 7.27 26.75 267.80% 8/13/96 250 3Com Corp. 46.86 66.38 41.65% 8/11/95 125 Chevron 50.28 65.88 31.00% 9/27/96-890 Quarterdec 7.08 6.50 8.24% 8/12/96 110 Minn M&M 65.68 70.13 6.77% 8/12/96 130 AT&T 39.58 39.38 -0.51% 8/12/96 280 Gen'l Moto 51.97 50.00 -3.80% 10/1/96 42 LucentTech 47.62 45.63 -4.18% 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 47486.25 $42423.12 8/5/94 680 AmOnline 4945.56 18190.00 $13244.44 8/11/95 125 Chevron 6285.61 8234.38 $1948.77 9/27/96-890 Quarterdec -6304.75 -5785.00 $519.75 8/12/96 110 Minn M&M 7224.44 7713.75 $489.31 8/12/96 130 AT&T 5145.11 5118.75 -$26.36 10/1/96 42 LucentTech 1999.88 1916.25 -$83.63 8/11/95 280 Gen'l Moto 14552.49 14000.00 -$552.49 8/24/95 130 KLA Instrm 5812.49 2811.25 -$3001.24 8/13/96 250 3Com Corp. 11714.99 16593.75 $4878.76 CASH $22563.12 TOTAL $138842.50 Transmitted: 10/8/96