Fool Portfolio Report
Thursday, November 21, 1996

by Tom Gardner (TomGardner)

ALEXANDRIA, VA, November 21, 1996 -- The year is coming to a close. It being the 21st of November, we're left with scant few weeks before the ball drops on 1997. The Prime Mover has seen to it, through his vessel -- the Egyptian astronomer, Sosigenes -- that the words "January First" mean a new year, an unmarked canvas for us to emblazon as we see fit.

For many investors, that new cloth and frame are dear. 1996 has not been a great year for the entire market. Close to home, America Online and Iomega, two enormously profitable investments in our motley collection, have stung those who initiated their positions in June. Most semiconductor companies have seen the value of their enterprise slacken. In 1996,

a. Generic-drug stocks have fallen 22%. Take a look at Ivax Corporation's stock graph.
b. Cable-TV stocks are off 18.5%, with TCI Cable touching a five-year low last week.
c. Consumer-electronic stocks are off 17.3%. Best Buy, trading at $12, saw $26 a share in June.

IPO investors without large enough accounts to get preferential treatment have been feasted upon. Through technology issues like Yahoo! or Excite or (gasp) General Magic, they have witnessed the retreat of their holdings by 50% or more. Still other investors, buying heavily on margin, were backhanded this summer. And I won't even mention all the money drawn out of the accounts of private investors, hoping to hit it big in the options market.

Not everyone is pleased with their painting on 1995's blank canvas.

Now it has been a great year for the stock market, as an entity. The S&P 500, the collection of five hundred strapping US corporations, has risen 20.6% -- that's nearly twice the historical average. Over the past twelve months, Intel has risen 89%, Microsoft is up 78%, Cisco up 69%, Gillette has added 40% in value, Coca-Cola has gained 34%, and Johnson & Johnson is up 22%. All have beaten the market; none was hidden from view of the private investor in Fooldom.

Did we all own just those few? Probably not!

And the unfortunate temptation, as we study our own performances, is to look past our shortcomings, to kick the proverbial golf ball out from behind that tree without counting a stroke, to misrepresent our performance to protect the fragile ego. To think all of your stocks are winnahs!

To act contrary to this, tonight I present you with the negative take on each one of our investments. As you know, we have no vested interest in your purchasing any of these stocks. We did not underwrite any of these companies. If you choose to short what we’ve purchased, and purchase that which we’ve shorted, you stand in as good stead with us as any – provided that you share your opinions in Fooldom with grace and curiosity.

We’ll proceed with the negativism alphabetically:

1. America Online: Wired Magazine raised numerous issues in this month’s copy. Barrons asked some intelligent questions in this week’s issue. Newsweek and The Washington Post strike the online-services leader at every turn. The questions remain: Can the company profitably build an interactive service that energizes the nation?

2. ATC Communications: While it announced fine earnings recently, they did not satisfy that pack of hungry-wolf momentum investors, who feast on short-term outperformance and flee everything else. The company’s stock has fallen more than 30% for us. Any assurance it won't fall further? Nope.

3. AT&T: You’re thinking of buying AT&T? Gimme a break! The stock has done nothing for three years; the executive team seems more interested in protecting their status than in generating rewards for their shareholders, and the enterprise has thus far missed out on great opportunity in the new world of networked communication.

4. Chevron: Hey, this oil company is up to its ears in debt and has cumulatively underperformed the market over the past three years. You're gonna buy it?

5. General Motors: Beset by strikes, GM is heading into the most aggressive launch of new vehicles in its history. Earnings for the next two quarters have been downgraded. Their stock has dramatically underperformed the market over the past five years.

6. Iomega Corporation: Hemmed in by hopeful and larger competitors, Iomega continues to run operations off negative cashflows. Analysts recently downgraded fiscal 1997 earnings to 80 cents, which still represent a multiple of 29x year-ahead figures.

7. KLA Instruments: Estimates have consistently and significantly been downgraded in recent months. The stock was hammered all year, until its recent climb over the past six weeks. All told, the stock has lost money for investors while the market has plowed ahead 20% for the year.

8. Lucent Technology: Above $50 a share, this stock is trading at 25x current 1996 estimates, with a long-term growth rate projected at 17% annually. This is their first year – these are their first months -- as an independent operation. Untested alone, unproven.

9. Quarterdeck: Though the stock has been pummeled in 1996, Quarterdeck released new products at Comdex that it plans to heavily promote through Christmas. The company has a name and shelf-space. Rumors in its stock folder here suggest that Quarterdeck might be acquired at a premium.

10. 3Com: This one has had a nice run of late, but COMS is now trading well above its average P/E multiple, now at 31x current-year estimates. The company runs profit margins considerably below those of its chief competitor, Cisco. Furthermore, its underlying financial might does not compare to that of Cisco, either.

11. 3M: Though on fire of late, 3M is another blue chipper here that has not done well over the past three years. And who in this market would invest in scotch tapes when the Internet is growing? Finally, the dividend yield of this and other large Dow companies is so significantly below the historical average. It would appear a considerably greater risk to be buying this issue today.

If you are well-versed in Foolishness, you know that we have answers to most, if not all, of these arguments. Hey, we wouldn’t have socked our own savings money into them if we did. But please, challenge our logic. Challenge your own logic. Acknowledge up front that you will make numerous mistakes. Debate professionally, courteously, and with clever wit here in Fooldom. You can expect that no intelligent, thorough, and civil argument will be shunned within these digital walls.

Invest in only what you understand. Hold all of your investments numerically accountable. Require that the whole process actually be fun. Do these things, and your financial paintings in 1997 and beyond should be worthy of framing.

Tom Gardner, Fool


Stock Change Bid ------------------- AOL - 1/8 27.13 T --- 37.13 ATCT + 1/8 15.63 CHV - 1/4 67.00 GM --- 57.13 IOM - 1/2 21.50 KLAC +2 3/4 33.25 LU - 1/4 51.75 MMM + 1/2 83.38 QDEK - 3/16 4.88 COMS -1 72.63
Day Month Year History FOOL -0.52% 2.25% 48.37% 177.04% S&P 500 -0.16% 5.31% 20.59% 62.02% NASDAQ -0.54% 2.99% 19.57% 74.69% Rec'd # Security In At Now Change 5/17/95 2010 Iomega Cor 2.52 21.50 753.52% 8/5/94 680 AmOnline 7.27 27.13 272.96% 8/13/96 250 3Com Corp. 46.86 72.63 54.98% 8/11/95 125 Chevron 50.28 67.00 33.24% 9/27/96 -890 Quarterdec 7.08 4.88 31.18% 8/12/96 110 Minn M&M 65.68 83.38 26.95% 8/12/96 280 Gen'l Moto 51.97 57.13 9.91% 10/1/96 42 LucentTech 47.62 51.75 8.68% 8/12/96 130 AT&T 39.58 37.13 -6.20% 8/24/95 130 KLA Instrm 44.71 33.25 -25.63% 10/22/96 600 ATC Comm. 22.94 15.63 -31.88% Rec'd # Security In At Value Change 5/17/95 2010 Iomega Cor 5063.13 43215.00 $38151.87 8/5/94 680 AmOnline 4945.56 18445.00 $13499.44 8/13/96 250 3Com Corp. 11714.99 18156.25 $6441.26 8/11/95 125 Chevron 6285.61 8375.00 $2089.39 9/27/96 -890 Quarterdec -6304.75 -4338.75 $1966.00 8/12/96 110 Minn M&M 7224.44 9171.25 $1946.81 8/12/96 280 Gen'l Moto 14552.49 15995.00 $1442.51 10/1/96 42 LucentTech 1999.88 2173.50 $173.62 8/12/96 130 AT&T 5145.11 4826.25 -$318.86 8/24/95 130 KLA Instrm 5812.49 4322.50 -$1489.99 10/22/96 600 ATC Comm. 13761.50 9375.00 -$4386.50 CASH $8801.62 TOTAL $138517.62