Fool Portfolio Report
Friday, November 29, 1996
by Tom Gardner (TomGardner)
ALEXANDRIA, Va., November 29, 1996 -- The Fool Portfolio squirreled past the market today, rising 0.34% versus 0.27% gains for the S&P 500. As expected, the marketplace was empty today, as investors concentrated their efforts on digestion and focused their eyes on what might best be labeled, "The First Day of Christmas."
Trading volume was halved across the board, a state of quietude The Fool would love to see endure for years to come. In a world where, unfortunately enough, institutional traders profit off commission far more than performance -- where trading often is superior to trading well -- should the clients of this ludicrous business model not hope for less trading and better investing in the years ahead?
Thus, today was one of The Motley Fool's favorite market days of the year. We righted half of the nonsense today. The gleeful shouts of traders, exorbitantly rewarded for merely shouting on behalf of their Firm, were shushed the day after Americans gathered around feasting tables to give thanks for family, for good health, and decency.
Principal on our list of Foolish aspirations for 1997 is to drastically reduce trading volumes on our stock market. Active professional trading represents the old-guard's Firm-First business model. The Internet puts individuals in position to demand what is rightfully theirs -- a Customer-First business model. There are some exciting challenges ahead; we hope you plan to participate.
This slow but winning day brought Fool Portfolio totals for the month to 7.80% versus 7.34% for the market. Our two largest holdings, America Online and Iomega, rose $1/2 and $1/4 respectively. Neither had any news to show for it. In fact, only one of our eleven companies spoke publicly today, but that one did enough chattering for the entire group. Which one?
General Motors, up $1/2 for the day, announced new developments in its ongoing wrangle with German automaker, Volkswagen. VW announced the resignation of its production chief, Jose Ignacio Lopez. Lopez, the former purchasing head of General Motors, has been at the center of an alleged international corporate espionage scandal for three years running. General Motors has charged Lopez with stealing corporate secrets and delivering them unto Volkswagen.
Though pleased with today's decision, GM proclaimed from its Zurich headquarters that Volkswagen must pay damages, publicly take responsibility for the transgression, and issue a public apology. To which Volkswagen has replied (paraphrased to avoid TOS violation): "Pa-tooey!" As the battle continues, we're happily sitting on $1,582 in profits, or 10.87% growth, from our double-down Foolish Four holding in less than four months.
Do you believe in miracles, Fools? A few days back, neglected by the authors of this column, our laggard Foolish-Four investment, AT&T, burst out of the red. Henceforth, dusted by Chevron (+33.24%), 3M (+27.52%), and General Motors (+10.87%), the communications giant that had been floating like a bee and stinging like a butterfly finally emerged from its slumber. The combination of AT&T and its spinoff Lucent has now made us a cool $110.01, just enough capital to put that rearview-mirror defroster from Abercrombie & Fitch in reach. Maybe we should cash out!
Before addressing the dreariness in Fooldom that is Quarterdeck today, let's pause on 3Com for the moment. COMS slipped back $1/8 to $75 1/8 today. In case you missed it, 3Com is continuing to mine down into the consumer segment of networked communications. Naturally, this is going to provide lower initial margins than MF Boring's beloved Cisco Systems -- which need spend far less in marketing dollar today but may risk unbranded business-to-business activity in the years ahead.
Mind you, I love Cisco, have for some time. I think the stock belongs above $90 a share in the year ahead, and I think it would make a wonderful addition to any well-balanced, long-term-oriented portfolio. We are certainly still in the backbone- and hardware-driven phase of this new medium. Substantial growth in profits for software and content companies on the Internet will just have to wait until the underlying standard has been established.
As Cisco has built out the more corporate networks, 3Com is burrowing down early into the consumer market. With this in mind, 3Com sponsored the CyberBlitz Challenge this past weekend, pitting two high schools in San Francisco versus two in Washington DC in a Web-driven trivia battle, to coincide with the Redskins-49ers football game. Students at St. Albans and Banneker High Schools in Washington battled against those at Mission and Balboa High Schools in San Francisco. The booty? Autographed footballs, team-logo hats and t-shirts, and $1,500 in networking products from 3Com for their schools.
This is what 1980s Apple marketing expert, Guy Kawasaki, and his colleague Steve Scheier would have labeled the perfect mix between commercialism and philanthropy. 3Com prepares teenagers for what will certainly be the most important medium for the next thirty years and trains them as evangelists for COMS' offerings in the years ahead. Reaching down into the consumer market, with cross-country challenges like this and in its sponsoring of the ballpark in San Francisco, has definitely strengthened 3Com's position for the long haul. We may not see the mighty financials of Cisco girding 3Com's efforts, but then they're pursuing different approaches to what will be a fantastic business over the next ten years. Our six-month target price for COMS sits at $96 per share. As management recently projected stronger gross margins than expected, we may even be forced to inch that target higher.
Ok, now finally to Quarterdeck. Our short has gone on a wrongway tear since announcing bleeding-red numbers on November 25th to close out their fiscal year. For the quarter, Quarterdeck posted operating losses of $26 million, with a one-time charge of $28.6 million loaded on top. For the year, Quarterdeck lost $37 million before one-time charges, as they clung to high-priced shelfspace and churned through management and employees. The facts are that Quarterdeck is a small-company with a highly-unprofitable revenue base and no CEO.
Now, how those facts translate into reality, and how long it takes for them to find their way into the valuation, is often an entirely separate issue. Obviously, the market has located something in this story since November 25th that it liked enough to balloon QDEK's valuation by 29%. The Company is now worth $54 million more than it was four days ago, when it announced worse-than-expected earnings off a somewhat stabilized revenue base.
To cover or not to cover, that appears to be the question. In our case, we are obliged to cover before the end of trading on Thursday next. We love our position. Why? Because it has integrity that the remainder of the industry hasn't yet adopted. It gives our customers the advantage, as ever ought be the case in American business. And we still have a few days left for reality (that's what we've labeled it) to settle in here.
Additionally, we've re-learned an important lesson here. When great companies merely meet quarterly expectations in a strong market, their valuations often stumble briefly. Contrarily, when last-breath companies announce still-breathing earnings in the same market, their valuations stand to improve briefly.
When Microsoft recently announced good earnings, their stock fell before gaining another $20/share -- or $12 billion in capitalization. The reverse has been true for QDEK, thus far. I wouldn't be surprised to see the inverted trend playing out for Quarterdeck. It may not happen before Thursday, though. And that's all right. Portfolios that balance large-cap value investing with mid-cap growth investing with small-cap business-momentum investing with shorting can afford a few missed opportunities over the next seventy years and still expect some rather astonishing profits.
In seventy years, Dave and I will be one-hundred and ninety-eight, respectively. People won't be able to call us too young to invest then. Hopefully, they'll recognize that the sooner you learn this stuff and put it to use, the better. Perhaps they'll also realize that the older your body gets, the younger grows your heart. On that note, when we're centenarians, we'll be more forgiving of the press for these days when they chose to deride the Foolish application of online technologies to converse with Americans about their money, while they entirely overlooked what the big firms in New York were doing to the nation.
Ah well, to junior hearts and senior minds for all of us, we give thanks. Have a wonderful and an exceedingly UnWise weekend.
Stock Change Bid ------------------- AOL + 1/2 35.38 T + 1/8 39.25 ATCT --- 15.38 CHV + 3/8 67.00 GM + 1/2 57.63 IOM + 1/4 22.63 KLAC - 1/2 35.50 LU + 1/8 51.25 MMM + 3/8 83.75 QDEK + 9/16 6.63 COMS - 1/8 75.13
Day Month Year History FOOL +0.34% 7.80% 56.42% 192.07% S&P 500 +0.27% 7.34% 22.91% 65.14% NASDAQ +0.41% 5.82% 22.86% 79.48% Rec'd # Security In At Now Change 5/17/95 2010 Iomega Cor 2.52 22.63 798.18% 8/5/94 680 AmOnline 7.27 35.38 386.40% 8/13/96 250 3Com Corp. 46.86 75.13 60.32% 8/11/95 125 Chevron 50.28 67.00 33.24% 8/12/96 110 Minn M&M 65.68 83.75 27.52% 8/12/96 280 Gen'l Moto 51.97 57.63 10.87% 10/1/96 42 LucentTech 47.62 51.25 7.63% 9/27/96 -890 Quarterdec 7.08 6.63 6.48% 8/12/96 130 AT&T 39.58 39.25 -0.83% 8/24/95 130 KLA Instrm 44.71 35.50 -20.60% 10/22/96 600 ATC Comm. 22.94 15.38 -32.97% Rec'd # Security In At Value Change 5/17/95 2010 Iomega Cor 5063.13 45476.25 $40413.12 8/5/94 680 AmOnline 4945.56 24055.00 $19109.44 8/13/96 250 3Com Corp. 11714.99 18781.25 $7066.26 8/11/95 125 Chevron 6285.61 8375.00 $2089.39 8/12/96 110 Minn M&M 7224.44 9212.50 $1988.06 8/12/96 280 Gen'l Moto 14552.49 16135.00 $1582.51 9/27/96 -890 Quarterdec -6304.75 -5896.25 $408.50 10/1/96 42 LucentTech 1999.88 2152.50 $152.62 8/12/96 130 AT&T 5145.11 5102.50 -$42.61 8/24/95 130 KLA Instrm 5812.49 4615.00 -$1197.49 10/22/96 600 ATC Comm. 13761.50 9225.00 -$4536.50 CASH $8801.62 TOTAL $146035.37 Transmitted: 11/29/96