Fool Portfolio Report
Friday, December 13, 1996


by Jeff Fischer (MF BudFox)

ALEXANDRIA, VA., December 13, 1996 -- Like Berlioz's "Symphonie Fantatisque," this week the market was a wild ride of crescendo and decrescendo. In the finale, the "de" won. Stocks dropped. The Nasdaq fell more then one percent today, while the Fool was no sell-out performance either. In fact, it bombed. The Fool Port lost nearly three percent today, ending a very ugly five day performance down more than nine percent. America Online, Iomega, and ATC Communications took the brunt of the jeering, again.

Today ATC COMMUNICATIONS (Nasdaq: ATCT) dropped to a bid of $13 on strong volume but apparently no substance. No news came over the wire, the company said there was no reason for the drop, and there was certainly no change in the firm's outlook. The stock has fallen consistently since earnings only met estimates in late October.

ATCT now sports a market cap of about $230 million, and trades at a price-to-sales ratio (PSR) not much over 2. Companies in the industry have traded at PSR ratios of two to ten, so ATC has successfully gotten itself down to the very low end of the range. This should signal good things about the remaining downside potential in the stock (hopefully there isn't much downside remaining). Also, the stock is now undervalued to its growth rate.

The Fool has been hammered on this stock. Strung and hammered like a cheap piano. But ATC hasn't gone from success to bankruptcy in two months, as some spectators might think. The business remains as solid as when we first bought the thing. So, for a closer and updated look at the investment, we'll be offering a special on ATC Communications next weekend. MF Nexus6 (Alex), who writes the "Sector Snapshots" for the Fool, will write next week on the teleservices industry -- taking into account the industry trends and inner-workings and comparing the competition within the industry. Along with that, I'll be writing a more specific update and look at Fool stock ATCT. We'll offer the two pieces together next Friday.

The only company with interesting "news" today was Iomega. IOMEGA (NYSE: IOM) continued to fall, dropping $1 1/4 to $18 3/4. There may be a few reasons for the continued selling after yesterday's far from earth-shattering revision in estimates by J.P. Morgan. (Morgan's revision brought its estimate more in line with the consensus). So, what's on the plate today?

A long-time Iomega "bear" columnist wrote of Iomega today. He's been quiet about Iomega for a while, after predicting the stock was heading to the "single digits" this spring, soon before it rose more than a few hundred percent. The columnist wrote that Iomega's deal with Seagate Technologies (NYSE: SEG) is over. In July, Iomega had reached a manufacturing agreement with Seagate, but this man's column today wrote that Seagate's CEO, Al Shugart, said the deal with Iomega is "all over."

Iomega reports they don't need Seagate any longer because they're moving manufacturing to a new plant in Malaysia, which it announced the purchase of months ago. Bears are saying, though, that the true reason Iomega doesn't need Seagate is that demand for the Jaz drive isn't as strong as expected. That argument all but crumbles.

Fool Louis Corrigan (RgeSeymor@aol.com) spoke with Mr. Howard Kalt, of investor relations at Iomega, this late afternoon. Mr. Kalt confirmed that Seagate's manufacturing of Jaz disks is ending in January. He said that Iomega's deal with Seagate was only a short-term solution to manufacturing needs (as was implied months ago), and suggested that Iomega's production in Penang (Malaysia) is ramping up better than expected. (The Penang plant was "opened for business" in the last quarter.)

Iomega has suggested in past conference calls, and very notably in the Q3 conference call that many manufacturing deals were short-term solutions, meant to stand only until Iomega had its own means of manufacture. In fact, the most recent conference call reads:

"The addition of this (Penang) facility has caused Iomega to review their contract manufacturing relationships. (Iomega) recently took over production of Zip drives from Seiko/Epson in the Philippines and are negotiating the transfer of Jaz production from Sequel in California to their Penang facility."

So, it very much appears this was in Iomega's plans. The call also states:

"...It is (Iomega's) intention to move most or all of the production of these subcontractors into the Penang facility... (and), the Penang facility has come up better and faster than anticipated. It is allowing (Iomega) to re-evaluate their total manufacturing strategy sooner than they originally planned. And, over the next several months, (Iomega) will be reviewing all sites and contract manufacturing relationships as well as their licensing strategy."

So, let's consider where today's "news" is coming from, essentially: Seagate. And what is Seagate? Seagate is one of the largest disk-drive manufacturers in the world -- but note -- Seagate manufactures traditional disk drives. Iomega manufactures new and technologically superior disk drives, and possesses an ever-increasing base of users.

Iomega has many times stated that it wants to become as vertically integrated as possible: meaning Iomega will manufacture everything that it can independently. It appears Iomega has taken another step in that "better for Iomega" direction. So, if any stock should have gone down on today's news, it should have been Seagate.

But the cry of Jaz demand being less than expected shouldn't be shrugged off, of course, and predicatably causes worry among investors. But judging from the source of this news, and seeing as we already have standing evidence that Iomega planned to end business with subcontractors anyway, worries today seem "improper," to say the least.

Surely Iomega fell for other reasons, too. Tech stocks fell in general, and other press talked it down, I've heard. Iomega at $18 3/4 is undervalued again, based on its growth rate.

If anything today, the Foolish Four shined and showed why they make excellent underpinnings for any portfolio. Chevron, 3M, and AT&T rose today.

Have a Foolish weekend.

TODAY'S NUMBERS


Stock Change Bid ------------------- AOL -1 3/8 34.25 T + 3/8 39.00 ATCT - 7/8 13.00 CHV + 5/8 62.00 GM - 3/8 56.50 IOM -1 1/4 18.75 KLAC - 1/8 36.00 LU -1 47.13 MMM +1 1/4 81.50 COMS - 3/4 75.25
Day Month Year History FOOL -2.89% -6.77% 45.83% 172.29% S&P 500 -0.10% -3.75% 18.29% 58.94% NASDAQ -1.03% -0.59% 22.12% 78.42% Rec'd # Security In At Now Change 5/17/95 2010 Iomega Cor 2.52 18.75 644.35% 8/5/94 680 AmOnline 7.27 34.25 370.93% 8/13/96 250 3Com Corp. 46.86 75.25 60.58% 8/12/96 110 Minn M&M 65.68 81.50 24.09% 8/11/95 125 Chevron 50.28 62.00 23.30% 8/12/96 280 Gen'l Moto 51.97 56.50 8.71% 10/1/96 42 LucentTech 47.62 47.13 -1.03% 8/12/96 130 AT&T 39.58 39.00 -1.46% 8/24/95 130 KLA Instrm 44.71 36.00 -19.48% 10/22/96 600 ATC Comm. 22.94 13.00 -43.32% Rec'd # Security In At Value Change 5/17/95 2010 Iomega Cor 5063.13 37687.50 $32624.37 8/5/94 680 AmOnline 4945.56 23290.00 $18344.44 8/13/96 250 3Com Corp. 11714.99 18812.50 $7097.51 8/12/96 110 Minn M&M 7224.44 8965.00 $1740.56 8/11/95 125 Chevron 6285.61 7750.00 $1464.39 8/12/96 280 Gen'l Moto 14552.49 15820.00 $1267.51 10/1/96 42 LucentTech 1999.88 1979.25 -$20.63 8/12/96 130 AT&T 5145.11 5070.00 -$75.11 8/24/95 130 KLA Instrm 5812.49 4680.00 -$1132.49 10/22/96 600 ATC Comm. 13761.50 7800.00 -$5961.50 CASH $4291.89 TOTAL $136146.14 Transmitted: 12/13/96