Fool Portfolio Report
Thursday, December 19, 1996
by Tom Gardner (TomGardner)
ALEXANDRIA, VA., December 19, 1996 -- "And this. . . is Nightline."
We interrupt this news and portfolio report to announce that after market close, 3Com Corporation beat consensus estimates by 4 cents, announcing $0.60 EPS, excluding non-recurring charges. Gross margins climbed above 54%. Profit margins rose above 13.5%. We will discuss this report in the 3Com folder. Meet you there.
Back to the report!
Two nights back, one of our nation's favorite -- and rightly so -- probing news shows asked, "Wherefore the market in 1997... and why?" They explored one idea and t'other, rotated variables, turned logic inside out and over again, and growled like bears before the curtain fell.
Gone, really, was the notion that stocks have proven the best investment vehicle over the 20th century, by a long shot. Instead, Nightline went in search of exquisite juiciness, controversy, the potential for chaos. Which is their right and which has been the unchallenged habit of the media in the era before the Communications Revolution and the Internet.
The first one to Nightline's screen was that perpetual bear in academic garb, James Grant. Stocks have appreciated at a rate of around 17% annually over the past decade, but Grant has flipped and flopped like a fish out of water, droning on about fair-pricedness then froth, decked out in colorful academic robes.
The capitalization of America's greatest companies has plowed ahead during his hesitation, without a moment's concern for Grant. And as gold has amassed losses of 50% for its investors over the past fifteen years, stocks are showing far in excess of 500% gains for the period. There is nothing inherently wrong with being wrong. But Mr. Grant doesn't seem to recognize it. Nor did Nightline, unfortunately.
Next up on the telestage was Jimmy Rogers, presented as a professor at Columbia Business School. Feisty as ever, Rogers lectured Koppel on heating-oil prices, opined that stocks will fall so precipitously that there will be no Christmas in 1997, and cautioned youthful equity investors to expect they'll be sending their kids not to Dartmouth but to the University of Alabama.
One thing we can say for Rogers -- he's alive. He wants people to learn. He's punchy, sassy, irreverent. But, alas, too often logic gets tread under his excitable feet. For example, is there anything wrong with a small Christmas, Santa not dressed in a money suit, and handmade gifts? Additionally, should we really scoff at the University of Alabama? I'd say our state universities are badly underrated relative to good ole Dartmouth. And to Brown, where I spent four rather expensive years.
But let's leave those alone and, instead, consider Mr. Rogers' record. There's no doubt he was part of a fantastic team that helped build George Soros' Quantum Fund. But he has not been so successful since leaving -- particularly on the micro level. Rogers has proposed the shorting of Nike, Coca-Cola and Intel over the past few years and for prolonged periods.
Why?
Frankly, I don't know. In those businesses you have: Three global brands. Three superior management teams. Three highly-profitable and unleveraged businesses. Three powerhouse franchises. Three business models that require less and less investment in operations, which generate greater and greater returns on investment. And you have three stocks that have appreciated consistently and substantially in excess of the market -- and again, for very good reason. Here are the five year returns:
5-year Per Year Total Growth Intel +68% +1238% Nike +34% +332% Coke +27% +230% S&P +18% +129%Had you shorted any of these stocks over the past few years, and the Rogerses and Grants and, yes, the Garzarellis have often implied that you should... smush! Pow! Splat! Squish!
I cannot comprehend Mr. Rogers' inclination to have both shorted all three of these companies and to have presented in a consumer environment (cable television, popular financial newspaper, Nightline) that investors should go against this momentum -- a momentum tied tightly round exceptional business. Identify bad business for everyone and, sure, bet against it. But attacking the short-term valuation of three great companies in front of millions seems irresponsible, even to a Fool.
Now, there's no doubt that the gaggle of bears are enjoying beneficial association with Chairman Greenspan here. The whole world knows that Greenspan recently intimated that their might be froth in this market. Much of the world knows that Greenspan has done a standout job at managing interest rates and softly-landing the economy. What better time, then, than now to hitch your wagon to that star... particularly if you have a newsletter and have been bearish on the market or superior businesses in the 1990s? I can think of very few better times, in fact. So I anticipate another Garzarelli, "SELL YELL," oncoming. It makes good short-term business sense. Ugh.
But, I don't propose ignoring the importunings even of the Wise. Why not? Because, frankly, Grant and Rogers and Garzarelli are going to be right at some point or another. The stopped watch is right twice a day; the stopped valuation mind perhaps twice a decade. And though we champion investing long-term savings 100% into US stocks, there is complexity in that label, "US stocks."
Plenty of bad businesses are public today. There are plenty of short-term promotional companies, intent upon walloping quarterly estimates, racing above executive-option strike prices, and filing to sell, sell, sell. Or, alternately, they simply load up executive pay at the peak. These "businesses" willingly trade away enduring viability for immediate profits. Timed neatly in the middle of a raging bull market, a lot of people can make quick money off the jerrybuilt, promotional corporation.
Shall we take a look at one example? Sure.
Advertising on the Internet. One of the business models out there sounds something like this:
a. You pay me $10 million, and I'll give you
a promotional button on my screen.
b. I'll pay you $10 million, and gain myself
a button on your screen.
We swapped advertisements, did not exchange a dollar, and kawabunga! We both announced $10 million in margin-less sales.
Down at the local money-house, they're valuing Internet companies in rapid-growth phase via a multiple off sales, say, 10x projected 1997 sales. The flawed logic holds that while they're not making money now, their sales growth is extraordinary! To that I say, Never mind debating whether these sales (and proposed profits) are defensible... let's start by asking just what sales are!
The Fool believes that it is never a good idea for individual investors to invest in profitless, promotional businesses. Or marginally profitable businesses with foundations laid atop a mix of hot air and go-go promotions. Is there any time when this rings truest? I think so. During a period of extraordinary stock-market appreciation.
The last ten years, and particularly the last two years, have provided blistering growth for US stocks. Without question, fundamentals have girded much of that growth. Our businesses are fashioning the new technology; we are the global marketing powerhouse; our embrace of the Internet is leading and will lead us back into a prominent spot on the list of most educated nations; we are prospering and learning more as we do. And there really is no better foundation for business than these.
But the possibility always exists that the superior operations have lent credibility to mediocre companies, and worse. In this sort of environment, I think it's entirely appropriate to warn investors to divest themselves of any investments in companies whose business:
a. they don't understand;
b. is highly-promotional and highly-unprofitable;
c. has excellent two-month but invisible ten-year potential;
Are Intel, Coca-Cola and Nike in that group? One ought consider just their latest earnings and operations announcements. Nike crushed estimates yesterday. Coca-Cola announced today a 10% rise in unit case volumes for the 4th quarter. And Intel recently intimated that it is operating at maximal capacity with increasing efficiency.
Does this mean we won't see a 25% decline in stocks in 1997? Does this mean that the S&P 500 won't be flat over the next decade?
Who knows? It has happened before. And it just seems to happen in those "New Era" periods, doesn't it? So we may be ripe for a decline in the year ahead. But the majority of investors would be best served to align their portfolios with great businesses, to support all investments with a heavy load of Foolish Four stocks (GM, Chevron, AT&T, 3M -- we're not talking hot air and hyped business here), and to stick close to their valuations. The stocks of superior businesses survive periods of recessive and excessive economic growth. The selective and patient investor wins out decade after decade... but she doesn't get on Nightline; she doesn't have a hot newsletter (sizzle, sizzle); and she doesn't teach business at an exclusive, expensive university.
Stay Foolish out there,
TODAY'S NUMBERS
