Fool Portfolio Report
Friday, November 1, 1996
by Tom Gardner (Tom
Gardner)
ALEXANDRIA, VA -- November 1, 1996 -- We're still working at mopping that egg off our lampost. Dave embarked on a climb outside of our Hall of Portfolios to unwind the Angel Soft toilet paper from the maple tree. I toweled the shaving cream of the doorknob this morning. I think all will be fine soon, but no doubt, we were subjected to tricks, not treats, this year. How so?
Our Halloween stock, ATC Communications, got pumpkin smashed.
In some corners of Fooldom, ATC Communications, the Company, is being labeled that "Halloween-ie" wonder. I'd like to review a few of the numbers here before tra-la-laing through a short review of our other ten stocks.
ATCT, the stock, fell another $2 3/8 today, as the mix of momentum players and early adopters -- those who bought at various points over the past twenty months as the stock rose from $1 to $26 -- sold their tickets, in great haste. In the two market days following their announcement, ATCT has fallen from $23 3/4 to $16 1/2. That's a $7.25 per share drop, amounting to a 30.5% drubbing. That's the yolk on the lampost, tissue in the tree, Foamy on the doorknob.
Now let's clean some of it up. We'll begin with this question:
Is ATC Communications -- the company -- in danger?
By every measure we know, certainly not. The Company announced 9 cents in earnings per share for the quarter, in line with Wall Street estimates. The third-quarter comparisons were gratifying: Sales growth of 47.2%, earnings growth of 159%, and earnings-per-share growth of 125%. Too often companies try to justify mediocre earnings performance by celebrating superior sales performance. Thankfully, ATC isn't playing the game that way. Gross margins rose from 31.8% to 34.2%; operating margins climbed from 7.8% to 12.5%; net profit margins expanded to 8.0% from 4.5%.
Leave aside, just for the moment, discussion of the stock price -- a thing of great ugliness, a bruised pumpkin, molded green on the interior, and rotting. Leave that vision alone just for an instant. If you bought this stock or owned it, and still do, and are like we are, you're probably having a difficult time keeping your eyes from your preferred stock-quote service. But just take one second with me to recognize that the business appears to be fundamentally strong, a rip-roaring success right now. Strong growth attended every value item on the income statement.
That instant passed, let's consider the stock price.
David did a nice job of considering the reasons for the stock's decline yesterday. And Randy Befumo (MF Templar) has written quite eloquently about that window between momentum and turnaround. Once a stock loses its short-term oomph, the mo' players bail. Sometimes it can take awhile, and a significant decline, before the turnaround investors take note. While it's good fun to posit where in that slope we are today at $16.50 per share, for the great majority of Americans who invest in businesses, the fundamental story is a helluva lot more important.
So in the wake of those earnings, does ATC Communications look like a good value here at $16 1/2, capitalized at $371 million and around 3x sales? Lez crunch some numbers.
The largest firm following ATC Communication, Oppenheimer Co., this morning raised its 1997 (year-ending in June) estimates to $0.44 from $0.40, and reiterated their buy recommendation. 1998 consensus projections are resting at $0.70. The five-year projected growth rate is 50%. And while this 1st Quarter report raises questions about the company's ability to outdo Street estimates, it certainly doesn't call into question those projections. We have a financially-strong company in a booming industry.
To my eye, this stock is now fairly priced at $26, come June of 1997. And it is fairly priced at $35, looking ahead to June, 1998. How so? Well, the projected earnings growth rate in 1997 is 59.1% and 50.0% in 1998. Let's work through the fourth-grade mathematical work.
1997: $0.44 x 59.1 = $26
1998: $0.70 x 50.0 = $35
Those ballpark price ranges present growth potential of 57.6% over the next seven months and 112% over the next nineteen months. There are quite a few assumptions built into these targets. Can the company continue to meet or beat earnings estimates going forward? Is that rapid growth supported by a solid business foundation and first-rate management? Can ATC Communications fund this growth internally, out of operations, rather than traipsing over to a bank or diluting their shareholders with a secondary offering?
I don't have answers for these questions. Thankfully, public companies in the United States are required to release performance figures every three months. Ninety days from now, we'll have a few more files of information. Numbers and facts. And I contrast this with some of the silliness going on presently in our ATC Communications folder. "The Fools lost here. The Fools should sell now. ATCT is definitely going to $10 a share before the 2nd quarter announcement. The momentume players are gone; this one is dead; time to move on!"
All of these may prove true. The problem, of course, is that the throng of bears that have collected in the wake of a strong, but not smashing, quarterly report, they are relying on emotion and short-term expectations. Emotional, gut-wrenched, short-term investors can make money, I grant that. And while we question the usefulness to society of individuals who sit in front of monitors, betting on ticks and ticker symbols, we certainly don't question their ability to make good, pre-tax, pre-commission profits on very large accounts.
But Fools all, please do not check your skepticism at the door when you enter our motley shack, rooved with straw and bright-hued yarns. Please, please embrace skepticism when confronted with investment advice from any house, however sky-high or prominent, however many suits push open and closed their heavy doors.
Momentum investors on every medium will preach loudly to you to transact their way. Professional investors may want you to buy, sell and do anything but hold because their firm compensates them based on the number of trades that they make, not how well your account does. And of course, mutual funds and money-management firms are pouring cash into the marketplace, essentially underwriting the idea that individuals should not manage their own money. When they tell you not to do dental work on yourself, not to operate on your own kidney, not to try to build your own airplane and, thus, not to manage your own money, be skeptical. Train the wondering in your eye, doubt it wholly and Foolishly.
Why? Because the data shows irrefutable that these are nothing more than scare tactics. Professional investors as a group have consistently proven an inability to beat the market each year. Whenever you research mutual funds, benchmark them back against the index fund -- the S&P 500 -- and you'll quickly learn how to smile in disbelief. In the money world, the word professional is euphemistic for overpriced. More often than not, that advertising line "I am a professional money manager," should be de-euphemistized to read, "I am an overpriced money manager." The regulation of mutual-fund and brokerage-firm advertisements on television, in magazines, in the newspaper would be incredibly helpful to the average U.S. investor. More significantly, it could be an awful lot of fun!
Where does this leave us with ATC Communications? Right back where we started, with the numbers. Our initial presentation of a "free rise" valuation is certainly no longer true. But I think that the market, in trying to price out that unreality, has overreacted. I don't think the majority owners of this business would sell it out at 3.6x sales, or $371 million dollars. Not with all this room for growth ahead. Not with this healthy financial foundation under foot. Not with a fine quarterly report under their belt that, though it did not meet overexpectations, did match Wall Street's projections. We're studying, reflecting, and holding.
What happened elsewhere in The Fool Portfolio today?
America Online fell $1 3/8 back to $25 3/4. No news at all. Investors are waiting to see if the recent price changes can translate into profitability, if the new accounting standards can clear up media misconceptions, if the new guy from MTV and Century One, Bob Pittman, can build a spirited consumer brand. This stock is up 254% for us in less than three years, but down markedly from its pre-summer high. Winter's the season for this business -- holiday buying, millions snowed in, electronic mail beating out air mail, et cetera. Come the spring, we'll know a lot more about subscriber growth and the bottom-line than we do now.
Otherwise kind of a flat day here in the Hall of Portfolios. The Fool Port dropped 2.75%, while the other indices were essentially flat. Year to date, our portfolio has risen 41.1% versus S&P 500 gains 14.2%. A $100,000 bill -- if such beast existed -- invested in The Fool Portfolio on January 1, 1996 is now worth $141,100. That same giant bill invested in the S&P 500 is now worth $114,200. That same bill invested in your average mutual fund is worth around $112,000.
How would that bill have done in your portfolio in 1996? Most investors don't know. One prominent NY investment firm is now offering a new service; they promise to let you know how your account is doing once a year, and they promise to actually show you how much you paid in commissions. Wow. Great. So if your account was traded 240 times for the year and you lost to the S&P by 15 percentage points, you can find out at year-end---after paying out all that money in commissions.
We prefer a more Foolish standard. Accounting every day. Education above short-term profit. Investment in great businesses for the long haul. A concentration on wealth accumulation for the customer, first, and the firm, second. And a belief that if Americans spent the two hours it takes to read through our 13 Steps to Investing, Foolishly, we'd start pulling ourselves out from under loads of consumer debt, inappropriately high commission payments to investment firms, and the bad returns doled out by well-marketed, poorly-run mutual funds.
We used to think, "Ahh, someday." With online technology reaching into tens of thousands of new homes every month, we now think, "Ahh, someday soon."
Have an exceedingly Foolish weekend.
Tom Gardner
Today's Numbers
Stock Change Bid ------------------- AOL -1 3/8 25.75 T - 1/4 34.63 ATCT -2 3/8 16.50 CHV - 5/8 65.13 GM + 1/8 54.00 IOMG - 3/4 20.75 KLAC + 1/8 24.38 LU --- 47.00 MMM - 3/4 75.88 QDEK - 5/16 4.88 COMS --- 67.63
Day Month Year History FOOL -2.75% -2.75% 41.10% 163.47% S&P 500 -0.21% -0.21% 14.26% 53.53% NASDAQ +0.02% 0.02% 16.12% 69.65% Rec'd # Security In At Now Change 5/17/95 2010 Iomega Cor 2.52 20.75 723.75% 8/5/94 680 AmOnline 7.27 25.75 254.05% 8/13/96 250 3Com Corp. 46.86 67.63 44.31% 9/27/96 -890 Quarterdec 7.08 4.88 31.18% 8/11/95 125 Chevron 50.28 65.13 29.51% 8/12/96 110 Minn M&M 65.68 75.88 15.53% 8/12/96 280 Gen'l Moto 51.97 54.00 3.90% 10/1/96 42 LucentTech 47.62 47.00 -1.29% 8/12/96 130 AT&T 39.58 34.63 -12.51% 10/22/96 600 ATC Comm. 22.94 16.50 -28.06% 8/24/95 130 KLA Instrm 44.71 24.38 -45.48% Rec'd # Security In At Value Change 5/17/95 2010 Iomega Cor 5063.13 41707.50 $36644.37 8/5/94 680 AmOnline 4945.56 17510.00 $12564.44 8/13/96 250 3Com Corp. 11714.99 16906.25 $5191.26 9/27/96 -890 Quarterdec -6304.75 -4338.75 $1966.00 8/11/95 125 Chevron 6285.61 8140.63 $1855.02 8/12/96 110 Minn M&M 7224.44 8346.25 $1121.81 8/12/96 280 Gen'l Moto 14552.49 15120.00 $567.51 10/1/96 42 LucentTech 1999.88 1974.00 -$25.88 8/12/96 130 AT&T 5145.11 4501.25 -$643.86 8/24/95 130 KLA Instrm 5812.49 3168.75 -$2643.74 10/22/96 600 ATC Comm. 13761.50 9900.00 -$3861.50 CASH $8801.62 TOTAL $131737.50