Fool Portfolio Report
Wednesday, November 20, 1996

by David Gardner (MotleyFool)

ALEXANDRIA, VA, November 20, 1996 -- To most out there in Wall Streetville, perhaps this was just another day at the races. Stock market rose a quarter of a percent. No big deal. The four horse, the seven horse, whatever. Could've been any November Wednesday at the tracks. Didn't even have to pay attention, really.

But for Fools, today was historic. The moves themselves look fairly uninteresting: semiconductor equipment manufacturer KLA Instruments up $3/4, telecommunications outsourcer ATC Communications off $1.

But no... this was no mean event. This was amazing. For the first time in nine months and one week, since February 13th of this year, KLA Instruments bypassed another horse in Fool Stables.

ATC just became our new worst stock.

It wasn't easy for KLAC. Darn thing has mostly withered on the vine since our table-pounding purchase in August of 1995. Ever since, around Fooldom that ticker symbol has become synonymous with mediocrity... whatever the context. The New York Jets? What a KLAC. Bob's Big Boy? KLAC City! Bob Dole, whatever you might think of him (I'm neutral), KLACkin' his way down Election Lane.

No more. Now our investment in KLA Instruments is just merely bad, not horrible. And insofar as the stock has in the past two months risen from a low of $17 1/2 to its closing bid of $30 1/2 today, you're actually talking about a Nasdaq monster once again. There are people who now love this stock, guys who were in there on September 13th with the shares below $18 and others who've ridden it almost straight up ever since.

In celebration of this, this afternoon I took the time to click back through our KLA Instruments message folder during those dark bottom-fishing days to see what I could find. Take a gander:

From: Reuben2539 (9/13)

I hold a few shares of KLAC and I'm sitting at a loss on them - however, I would not sell this loser at these prices... From the Gardners' write-ups over the last few weeks I think they probably feel the same way. KLAC is too cheap.

From: JChalker (9/14)

I also believe it is time to buy KLAC, which appears very undervalued given the future outlook.

From: FMSTOCKS (9/15)

How can the Fool continue to hold this dog? There should be a law that truly Foolish investors cannot own stocks where estimates are generally falling. NO ONE really knows how long this trend will continue. SELL IT and find some other stock.

From: Byenhold (9/16)

We're all just biding our time waiting for KLAC to return. It's one thing to say you're investing for the long haul. It's often painfully more difficult to actually do it. Part of it means not pretending to be able to call short term stock movements. I'm long quite a bit of KLAC and have added several times in the 20-24 range. I don't know if it will be 8 or 48 months from now, but at some point I expect to be pleased I held on... If the fundamental story is good, short or even moderate term downtrends should not dissuade you. Just don't have so much in one company that you start losing sleep over it. A round of drinks on me when KLAC pushes past 50...

Well, the stock isn't past $50 yet, but if you go back and read the folder, you have to love the general sense of Folly that pervades it. What comes across is a picture of a bunch of individual investors dispassionately admitting short-term failure and disappointment, but keeping their heads when some about them were losing theirs and blaming it on someone else.

This is quite different from the standard picture the media often portrays of individual investors. To wit: "The standard individual investor is an ignorant greenhorn, a walking contrary indicator. If he's finally decided to enter the stock market, the market's definitely topping... the smart money is out. The guy has no business investing. And if he's somebody who uses THE INTERNET?!!! Lemming over a cliff."

That's why we continue to invite those who've never actually tried the online medium, or entered Fooldom, to read our message boards and understand what's happening. A very fine example of that lies in the posts above; investors educating investors, group study, common sense. Emerson wrote, "Nothing astonishes men so much as common sense and plain dealing." For "men" in that sentence, fill in your favorite: either "the media" or "institutional investors."

To close on KLA Instruments, the company has posted mostly outstanding performance all the way through this period, and remains a financially robust entity. It was the market that got carried away at the upside (yup, we bought at the top), and then to the downside.

Now, to ATC Communications. In one short month -- actually, in less than a month -- this stock has become our worst. Dropping $1 to $15 1/2 at the closing bid today, ATCT is off 32% (it's actually been down even more, touching the low $14's two weeks ago). In several reports over the past month we've written at length about our feelings on this one. So I'm not going to repeat what's been said, other than to say that the company was a momentum investor favorite that only matched -- did not beat -- its earnings estimates. And for that reason primarily, the stock got nailed.

But the 10-Q showed up on the SEC's fantastic EDGAR site late last week, and I've had some time to look it over. It looks quite good! A few of the basics to which I always refer are impressive, reminding me of why we bought and own this stock.

First quarter revenues were $26.5 million, 45% ahead of last year, with net income fully taxed of $2.1 million. The company's net profit margin was therefore 8%, well above the 4.5% in the year-ago first quarter and well above most of the rest of American business.

Cash flow, an ongoing concern of mine, looked very good. The company actually managed to reduce its accounts receivable (the sales it has booked but not yet collected) despite growth in its sales. Those improved collections combined with quarterly profits produced first-quarter cash flow from operations of $3.6 million.

That said, earnings estimates have been revised slightly downwards over the past week, a penny or two here and there. That's not a great sign. The December quarter now shows estimates of 9 cents per share, which used to be 10 cents per share. And consensus annual estimates show 43 cents per share, where they once used to be 45 cents. You need not look much further for the reason that this stock is weak of late.

As for whether ATC Communications will, KLA-like, rise from its autumn ashes, we shall see. I haven't seen the industry and company success story change any. You know where our money is.

We'll close by mentioning that 3Com hit an all-time high today, rising $1 3/4 to close bidding $73 5/8. We're darn glad to be shareholders, now up 57% in three months. And oh yeah, by the way. General Motors. Up $2 1/4. New Fool high. The stock hit $58 briefly in April, but hadn't even crossed $57 since.

Go GM. We got a lot ridin' on you, Trigger.

--- David Gardner, November 20, 1996


Stock Change Bid ------------------- AOL + 1/8 27.25 T --- 37.13 ATCT -1 15.50 CHV - 1/4 67.25 GM +2 1/4 57.13 IOM - 1/2 22.00 KLAC + 3/4 30.50 LU + 3/4 52.00 MMM + 1/2 82.88 QDEK - 1/2 5.06 COMS +1 3/4 73.63
Day Month Year History FOOL +0.10% 2.79% 49.14% 178.49% S&P 500 +0.24% 5.48% 20.78% 62.29% NASDAQ +0.19% 3.56% 20.23% 75.64% 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 27.25 274.68% 8/13/96 250 3Com Corp. 46.86 73.63 57.12% 8/11/95 125 Chevron 50.28 67.25 33.74% 9/27/96 -890 Quarterdec 7.08 5.06 28.54% 8/12/96 110 Minn M&M 65.68 82.88 26.19% 8/12/96 280 Gen'l Moto 51.97 57.13 9.91% 10/1/96 42 LucentTech 47.62 52.00 9.21% 8/12/96 130 AT&T 39.58 37.13 -6.20% 8/24/95 130 KLA Instrm 44.71 30.50 -31.78% 10/22/96 600 ATC Comm. 22.94 15.50 -32.42% 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 18530.00 $13584.44 8/13/96 250 3Com Corp. 11714.99 18406.25 $6691.26 8/11/95 125 Chevron 6285.61 8406.25 $2120.64 8/12/96 110 Minn M&M 7224.44 9116.25 $1891.81 9/27/96 -890 Quarterdec -6304.75 -4505.63 $1799.13 8/12/96 280 Gen'l Moto 14552.49 15995.00 $1442.51 10/1/96 42 LucentTech 1999.88 2184.00 $184.12 8/12/96 130 AT&T 5145.11 4826.25 -$318.86 8/24/95 130 KLA Instrm 5812.49 3965.00 -$1847.49 10/22/96 600 ATC Comm. 13761.50 9300.00 -$4461.50 CASH $8801.62 TOTAL $139245.00