Fool Portfolio Report
Thursday, December 5, 1996

by Jeff Fischer (Tom Gardner)

ALEXANDRIA, VA., December 5, 1996 -- The market slept in today. And by the time it pulled itself out from under blankets and pillows and nightcaps, it couldn't muster the strength to get up, get dressed, get outside, and profit. The S&P 500 fell 0.10% on the day. And it was a no-great-shakes day for The Fool Portfolio, which rose another 0.37%, to 64.08% growth for the year.

Strange, actually, how perceptions can cloud out reality. Labeling this a "no-great-shakes" day for The Fool is wildly inaccurate. Had we compounded 0.37% daily gains in 1996, our portfolio would now be closing in on smashing year-end returns of 143%. It is not. Simple addition, multiplication and division applied with a modicum of common sense create market-beating portfolios. And ignorance-beating minds.

So today was, in fact, a spectacular one for The Fool. And the gains in our portfolio were driven almost exclusively by 3Com Corporation (NASDAQ:COMS). This morning, Hambrecht & Quist laced up their golden slippers, strapped on their floppy caps, danced a rather Foolish-looking jig and burst into song. The merry tune spoke of the firm's initiated coverage of 3Com with a "Strong Buy" rating.

Were there some numbers and comments with that rating?

Hallelujah, yes there were. H&Q technology analyst, Farrokh Billimoria, cited an increase in operating margins, strength in their core networking-products business, an increase in international opportunities, and the firm opined that 3Com will grow more rapidly than its competitors. Most significantly, Billimoria released sales and earnings projections for fiscal 1997 and 1998, ending in May. H&Q is now on record with the following estimates:

Earnings Sales Per Share 1997 $3.27 $2.30 billion 1998 $4.46 $3.08 billion

These projections call for a growth in sales of 36.4% and in earnings per share (EPS) of 33.9%. With the stock touching an all-time high of $80, and with nearly 175 million shares outstanding, the entire corporation is today valued just shy of $14 billion. Thus, the total capitalization represents a multiple of 4.3x sales for this year and 3.1x sales for 1998. Again, 3Com's fiscal years end in May -- so we're looking ahead six months and eighteen months, respectively.

It seemed preposterous when, last August, we posited expectations that the company could expand its capitalization from $7.8 billion to over $16 billion in less than ten months. To date, however, COMS is on pace to grow up and out and into an even larger frame than that in fiscal 1997. Since being purchased by The Fool Portfolio on August 13, the stock has risen 70.2%. That's 14% growth per month over the sixteen-week period, or growth at an annual rate of 382%.

Given the near 12-month stall in 3Com's stock price -- through most of 1996 -- I wonder if this isn't a good time to finally and peaceably lay to rest the notion of an efficient market, with its theory of information racing across the globe immediately, digested and expertly analyzed by everyone simultaneously. 3Com's valuation would seem to point to rather marked inefficiencies in pricing -- with the stock compounding growth of more than 100% per year in the five years that led up to 1996. . .at which point the stock froze in a zero-growth trading range.

Why might this have happened?

When you consider that most of our market watchers and wizards in Manhattan have no familiarity with this company's products, you have to wonder how many people do! And how many people across the planet are reading 3Com's press releases. And how many of them, not employed as full-time business analysts, can expertly assess the company's prospects and how those prospects ought be reflected in the valuation of its enterprise at every point time.

Ladies and gentlemen, Fools all, we do not live in an automated world. The mass implanting of business-value brain chips has as of yet not been implemented. And I think until those specialized chips are implanted, we will continue to operate in a gloriously-inefficient marketplace, where the motivations, expectations and expertise of the buyers and sellers cover one extreme, the other, and all points in between. Remember that a whole army of suited participants make more money by transacting than they do by indefinitely holding ownership positions in great companies, in search of maximal appreciation.

What an inefficiency. . . and what opportunity it brings to those with calculators, mindfulness, patience, and good humor -- a rather Foolish blend.

The opportunity has not been slight in 3Com. And H&Q's $3.08 estimate for 1998 marks a 3% upgrade on the consensus of analyst projections. Back in August, the band of networking analysts following COMS were projecting $2.96 for the year. Thus, H&Q's new figure represents a 4% climb in expectations for 1998. Naturally, this alters our valuation.

With a 32% projected annual growth rate, and with $3.08 slated for fiscal 1998, our YPEG fair price for 3Com in May of 1997 is now $98 1/2 per share. With the stock trading today at $80, the loose price target would present 23% more room to the upside 'twixt today and the end of May. I emphasize the word "loose" because everything is a subject-to-change and to-be-announced phenomenon in a dynamic market. Let's keep our eyes open as we await the coming of the next quarter's earnings report from 3Com.

Oh, and as we merrily go about competing with the market, let's remember to casually smile at the media organizations that continue to paint the Digital World as a haunt for scamsters, touters, and other ne'er-do-wells. The old-guard at otherwise fine media outlets may choose to spend their time digging in shadowy places for penny-stock hype, and they will undoubtedly find some, which they will undoubtedly mumble on about, tirelessly. They may spend their hours in Wise circles, talking about everything that's wrong with interactive, global communications -- one of the greatest achievements of modern men and women.

In the meantime, The Motley Fool will just keep plugging away at business research, at competing with the S&P 500, at teaching with you and learning from you in ways never before possible. Take a moment and give thanks to the technologists who have built these platforms. They've given us the roadways out of the forest, out of our Financial Dark Ages, and into a world where what you say, what the customer says, is not ignored by business, is not patronizingly smiled at, is not merely peripheral to business. . .

It is the business.

Tom Gardner, Fool


Stock Change Bid ------------------- AOL + 1/8 40.00 T - 1/8 38.50 ATCT - 1/4 14.88 CHV +1 66.00 GM + 1/2 58.88 IOM - 1/8 23.75 KLAC - 1/2 35.75 LU - 3/4 49.00 MMM - 1/4 82.50 COMS +3 79.75
Day Month Year History FOOL +0.37% 4.90% 64.08% 206.38% S&P 500 -0.10% -1.67% 20.85% 62.39% NASDAQ +0.24% 0.58% 23.57% 80.53% Rec'd # Security In At Now Change 5/17/95 2010 Iomega Cor 2.52 23.75 842.85% 8/5/94 680 AmOnline 7.27 40.00 449.99% 8/13/96 250 3Com Corp. 46.86 79.75 70.19% 8/11/95 125 Chevron 50.28 66.00 31.25% 8/12/96 110 Minn M&M 65.68 82.50 25.62% 8/12/96 280 Gen'l Moto 51.97 58.88 13.28% 10/1/96 42 LucentTech 47.62 49.00 2.91% 8/12/96 130 AT&T 39.58 38.50 -2.72% 8/24/95 130 KLA Instrm 44.71 35.75 -20.04% 10/22/96 600 ATC Comm. 22.94 14.88 -35.15% Rec'd # Security In At Value Change 5/17/95 2010 Iomega Cor 5063.13 47737.50 $42674.37 8/5/94 680 AmOnline 4945.56 27200.00 $22254.44 8/13/96 250 3Com Corp. 11714.99 19937.50 $8222.51 8/11/95 125 Chevron 6285.61 8250.00 $1964.39 8/12/96 280 Gen'l Moto 14552.49 16485.00 $1932.51 8/12/96 110 Minn M&M 7224.44 9075.00 $1850.56 10/1/96 42 LucentTech 1999.88 2058.00 $58.12 8/12/96 130 AT&T 5145.11 5005.00 -$140.11 8/24/95 130 KLA Instrm 5812.49 4647.50 -$1164.99 10/22/96 600 ATC Comm. 13761.50 8925.00 -$4836.50 CASH $3870.12 TOTAL $153190.62 Transmitted: 12/5/96