Fool Portfolio Report
Tuesday, October 22, 1996

by Jeff Fischer (MF BudFox)

ALEXANDRIA, VA -- October 22, 1996 -- The markets headed deep south today, sickened as if having drunk a bad batch of moonshine. Have stocks got you nervous? Feeling a little lighter by the numbers? You're not alone. But consider this: right now somewhere far below the Mason Dixon line, in a hot swampy corner of Louisiana, on the rickety porch of an old run-down Confederate home, stands a bare-foot guy in over-alls and a floppy hat. He slowly looks through the thick willow trees, sucks a straw of grass, then mutters, "Ain't nuthin' hapenin' today, Max." His dog, Max, doesn't move. "Nope. Nuthin' goin' on at all."

Silence. Only insects. The hot croak of frogs. The heavy humidity. The man sits down. Pulls the hat over his eyes. Sleeps a tick.

Must be a long-termer.

Stocks got backhanded for a hefty loss for whatever reason the media cares to name. A few reasons they give include: 1. Digital Equipment Corp (DEC) reported bad earnings projections. (Sure, it's such a pivotal force in the scheme of the nation's health.) Or, 2. Microsoft's (MSFT) earnings were only 5.5% above expecations. Not good enough! Never mind the company showed strength across the board and is also deferring revenues, so actually Microsoft made even more money than the numbers show. (More on that later.) For whatever reason, stocks fell sharply, especially the tech-heavy Nasdaq Composite, which dropped 1.33%. The Fool lost to the market, giving back 1.86%, largely in the wake of Iomega's drop.

Iomega (IOMG) fell on nervousness after five high-tech companies, including Hewlett Packard and Sony, announced the backing of a new storage technology called CD-ReWritable (CD-RW). The companies plan to bring re-recordable CD devices to the market in 1997 for perhaps $750. The device will read regular CD-ROMs, but will also record gobs data on special CD-RW disks, expected to cost $25 each.

At $750, if that price is met, the product is not in competition with the Zip, which sells for $199, or $149 after a rebate; and, further, Iomega has stated the goal of $99 for a Zip. Jaz prices are also slated to come down.

CD-RW's will probably have a small market with businesses needing to store huge amounts of data. But the projected cost of CD-RW's makes the cry of "new competition for the Zip!" ring very hollow. Though long-term, as technologies change and prices on new technologies decline, competition is always important to consider. The future of quick-changing technologies is one uncertainty investors in this sector face almost constantly. But it's important to try to realize what represents competition. A $750 item is not going to steal away Zip buyers, or win over any current Zip fans. We're not about to see a bunch of blue Zip drives flying out of windows and smashing apart in the streets of America. Nonetheless, the stock fell about 5% today, to a bid of $22.

America Online (AOL) also dropped, after rising earlier in the day. The stock may have fallen in sympathy with Compuserve (CSRV), a stock which needs all the sympathy it can get. After coming public around $31 and trading as high as $35 1/2, Compuserve made a new low today below $10, falling all the way to $9 1/4. The company said thier losses may total 22 to 27 cents per share, much higher than the 15 to 18 cents they were expected to lose. Why would America Online's stock be punished for beating out the competition? Sympathy. That strange "sympathy" Wall Street has for brethren stocks. Or maybe AOL just fell with the market. We'll never know.

A winner for the Fool was, again, General Motors (GM). The stock finished $3/4 higher to $54 5/8 on news the company has reached a tentative agreement with the Canadian Auto Workers Union. The agreement hopes to end a nineteen day strike which has idled 26,000 workers in GM's Canadian plants.

So, why did the markets fall today, and why the big swoon in technology leaders especially? Does anybody know? Can anybody know?

Yesterday Microsoft (MSFT) announced earnings which were once again above expectations. One of the most successful companies of the century, Microsoft will inevitably go down in history books as a leading force behind the Personal Computer Revolution, as well as the Internet Revolution (if they have their way). And Microsoft continues to perform. Earnings rose 23% to a record $614 million, or 95 cents per share (estimates called for only 90 cents). Microsoft captured $614 million in net income for a three month period. Or nearly $7 million in earnings per day. (Maybe now you can see why they don't take days off at Microsoft.)

Not impressed yet? Some on Wall Street weren't either. But these numbers don't even represent the full earnings Microsoft accomplished. The company is deferring revenues, and this quarter deferred an additonal $91 million, rising its level of deferred revenues to $651 million. If the company had reported that additional revenue it would have added between five and nine cents per share to the quarter's earnings, according to Montgomery Securities. But instead they're keeping the money ("surplus" revenues from the Windows95 launch) to remedy possible financial fluctuations in the quarters ahead. (They wouldn't want to miss an earnings estimate in the future, now, would they?)

Making that kind of money is serious business, and doesn't allow for much free time. Have you ever attempted to get Microsoft's Chief Financial Officer, Michael Brown, on the phone to throw a few questions his way? Or how about attempting to give a call to Gregory Maffei, Vice-President of Corporate Development, to ask him where Microsoft is going from here?

We'll close with something I found interesting this morning when I read the front pages of two competing financial papers.

You can't take news at face-value, correct? (Right, you're thinking, tell me something I don't already know.) Well, this morning both Investor's Business Daily and The Wall Street Journal ran cover stories about IBM's earnings. Investor's Business Daily headlined:

IBM's 3rd-Qtr Net Up 7%;

Offers a Rosy Outlook

And went on to read, "...IBM's chief financial officer gave a rosy assessment of the company, particularly for its main computer hardware business..."

Meanwhile, The Wall Street Journal wrote: "...A company official's cautious statements about the company prompted some analysts to cut profit forecasts. IBM's finance chief (the same man that IBD refers to) said the computer giant is taking a revenue hit as more customers lease mainframes rather than buy them. He said that problem could hurt the current quarter..."

IBD claims a rosy outlook. WSJ says the current quarter may be hurting. Both these views come from the same source, supposedly, the same man. Reading the entire Investor's Business Daily and Wall Street Journal articles, both papers continue their different slants throughout -- slants which read nearly as opposites.

If you know these papers, you may realize that IBD tends to be an optimistic publication. It focuses on rising, successful companies, and on successful entrepreneurs -- and its optimistic nature arguably influences other areas of the paper as well. On the other hand, the WSJ often leans towards the pessimistic side of the table. Of course, seeing how the stock market has risen about 11% per year for the past sixty years, being optimistic over the long-term makes good sense.

Either way, it's of course important for Foolish investors to know the "true" facts -- the Foolish facts -- and to able to discuss the differing opinions on those "facts;" and that is where this engaging new online medium comes into play, again, so importantly.

Here's a fact you can bet on -- the Fool added 600 shares of ATC Communications to the Foolfolio today, at a cost of $22 7/8 per share. The stock closed bidding $22 5/8. ATC is due to report earnings next week.

Stay Foolish!

Transmitted: 10/22/96

Today's Numbers

Stock Change Bid ------------------- AOL - 3/4 26.00 T - 1/8 39.88 ATCT - 1/4 22.63 CHV + 3/4 67.88 GM + 3/4 54.63 IOMG -1 1/8 22.00 KLAC - 3/8 23.38 LU - 1/2 47.75 MMM + 1/8 71.75 QDEK - 1/8 6.00 COMS + 1/8 62.38
Day Month Year History FOOL -1.86% -4.27% 46.13% 172.86% S&P 500 -0.46% 2.80% 14.72% 54.14% NASDAQ -1.33% -0.56% 15.95% 69.40% Rec'd # Security In At Now Change 5/17/95 2010 Iomega Cor 2.52 22.00 773.37% 8/5/94 680 AmOnline 7.27 26.00 257.49% 8/11/95 125 Chevron 50.28 67.88 34.98% 8/13/96 250 3Com Corp. 46.86 62.38 33.11% 9/27/96 -890 Quarterdec 7.08 6.00 15.30% 8/12/96 110 Minn M&M 65.68 71.75 9.25% 8/12/96 280 Gen'l Moto 51.97 54.63 5.10% 8/12/96 130 AT&T 39.58 39.88 0.75% 10/1/96 42 LucentTech 47.62 47.75 0.28% 10/22/96 600 ATC Comm. 22.94 22.63 -1.36% 8/24/95 130 KLA Instrm 44.71 23.38 -47.72% Rec'd # Security In At Value Change 5/17/95 2010 Iomega Cor 5063.13 44220.00 $39156.87 8/5/94 680 AmOnline 4945.56 17680.00 $12734.44 8/13/96 250 3Com Corp. 11714.99 15593.75 $3878.76 8/11/95 125 Chevron 6285.61 8484.38 $2198.77 9/27/96 -890 Quarterdec -6304.75 -5340.00 $964.75 8/12/96 280 Gen'l Moto 14552.49 15295.00 $742.51 8/12/96 110 Minn M&M 7224.44 7892.50 $668.06 8/12/96 130 AT&T 5145.11 5183.75 $38.64 10/1/96 42 LucentTech 1999.88 2005.50 $5.62 10/22/96 600 ATC Comm. 13761.50 13575.00 -$186.50 8/24/95 130 KLA Instrm 5812.49 3038.75 -$2773.74 CASH $8801.62 TOTAL $136430.25 Transmitted: 10/22/96