Fool Portfolio Report
Monday, August 25, 1997
by David Gardner (DavidG@fool.com)
ALEXANDRIA, VA (August 25, 1997) -- Not a bad market-beater of a day, as the Fool Portfolio (up 0.22%) edged out the Nasdaq (up 0.18%) for a blue ribbon, finishing more than a length ahead of the sagging S&P 500 (down 0.37%).
Given that the Fool Port was up more than one percentage point most of the day, however, it was a bit of a letdown. The market hit its high in the late morning then progressed steadily lower the rest of the day.
Highlighting our victory today were continued strong moves in two new emerging Foolfolio leaders: Innovex (up $1 1/8 to bid $35 1/4), and General Motors (up $1 7/16 to close at $66 3/16). These two ponies are running neck-and-neck for 7th place in our portfolio's individual stock sweepstakes. GM is currently winning, up 27.35% since purchase. Innovex has risen 27.21%, but of course we've owned that one for less than two months. To stack them up against the market over their respective periods, things look like this:
It's important always to consider the market's performance vs. each of your stocks. While a quick look at GM and Innovex suggest nearly identical results, as soon as you place those results in the context of length of ownership and overall market results, the differences become plain. Even despite its recent surge, General Motors has been a slug; Innovex, on the other hand, has been whomping on the averages.
As regards INNOVEX (Nasdaq:INVX), you may wonder why. After all, there hasn't been much news out from Hopkins, Minnesota lately. Scan the news wires and you find the 3Q earnings report from mid-July, a dividend announcement a week later (yeah, these guys kick us 3 cents per share -- or $9.75 -- every quarter), and the appointment of a new vice president of corporate development.
Indeed, you have to go back more than two months to find the most meaningful statement from the company. That was its revision of market expectations for performance in its fourth quarter, ending 9/30/97. Innovex has distinguished itself for several years now in openly providing guidance to the market as to its near-term future, that report from June 20th being the latest example. As you'll recall, the company stated that unless orders suddenly picked up, it would report little to no "sequential" improvement for its year-ending quarter. By "sequential," we mean any given quarter compared to its PREVIOUS quarter (not the previous year's comparable quarter). It's an important and useful term to understand.
Thus, as INVX reported 3Q sales of $42.0 million and profits of $10.9 million (earnings per share of 72 cents), you'd have to expect the same basic deal for the 4Q. That would put fiscal 1997 overall results at sales of $150 million, net income of 38 million, and earnings per share of $2.50.
At the present closing bid of $35 1/4, that makes for a P/E ratio of 14.
In the same June 20 release, Innovex asserted that, "Based upon industry projections for fiscal 1998 and long-term forecasts that Innovex is now receiving from its larger customers, the Company expects to see significant sequential growth in its next fiscal year."
So geez, what's "significant"? Ah, the million-dollar (at least) question. Don't you hate it when words get in the way of numbers? Anyway, we'd estimate that the company would consider 20% "significant," which is in fact the current consensus growth rate estimated by analysts (scroll down to the bottom of our Fool Snapshot and you'll find estimates for Innovex of $2.48 for 1997, and $2.97 for 1998 -- or, growth of 20%).
We probably never run enough Fool Ratios for you, so let me take the time to do that tonight for INVX. If you're new at this, report directly to the Fool's School (Step 10), for a fully Foolish explanation.
Trailing earnings are currently $2.07 per share, expected to go to $2.97 by September 1998. To annualize that growth rate, you take the straight-line growth from $2.07 to $2.97, which is 43.5% (2.97/2.07 = 1.4348, or 43.5%). To obtain the annualized growth rate, you take that 1.4348 figure and take the root of it which corresponds to the number of years in between the two earnings figures. Well, there are five quarters of reporting between the present $2.07 per share and the 4Q 1998 expected $2.97. That's 1.25 years... so you take the 1.25 root. Let's do it:
Plug 1.4348 into your calculator, then take the 1.25 root and you'll get 1.335, or 34% annualized growth.
We have the annualized growth rate: 34%. Now, we need to find the trailing P/E.
Current stock price? $35 1/4. Current trailing earnings per share? Easy... we already used it: $2.07. So divide $35.25 by $2.07 to obtain the P/E ratio of 17.0.
The Fool Ratio, as long-time readers know, simply takes the P/E and divides it by the growth rate. So 17 divided by 34 -- well, I don't even need a calculator for that. The Fool Ratio (or PEG) is 0.50. The present price target is thus $70, suggesting the possibility of a double over the next 12 months. Would that be a huge surprise? Not really: Innovex has quadrupled over the past 12 months as the market has begun to recognize it (with higher trading volumes and institutional holdings) for the great company that it is. Obviously, Innovex engenders very high risk and volatility compared to most stocks, so owning this company is appropriate only for investors who understand that risk and can accept that volatility.
Looking at the Fool Port's allocation, you'll see that we have the fifth highest amount of money committed to our INVX shares (ahead of it are, from first to fourth, AOL, Iomega, General Motors, and 3Com). That seems about right. The company has a strong management, a record of beating the analysts' expectations, and a dynamite and highly profitable business (net profit margin for last quarter was one of the highest in the United States of America, at 26.0%).
To close, Fools prefer to find companies like this and buy and hold. Already sitting on a stock that is crushing the market, we have no interest in trying to "time" exit and entry prices over the short term. One reader, contributing this to our INVX folder on AOL a few days ago, wrote: "I made a large blooper last week. With the market dropping and INVX following, I anticipated we would be plunging through the 50-day moving average, into the $26-$29 range again. So I confidently sold half my position, to later buy it back cheaper and even increase my position." And of course, it didn't return and may never. We shall see. Regardless, we sympathize with Mike's blooper, and encourage each of you to find good companies and not waste your time playing guessing games.
Finally tonight, Fool HQ sends out a selfish congratulations to Shirley and Jerome Yochim, who celebrate their 40th wedding anniversary today. We call it a "selfish" congratulations because they are directly responsible for Dayana Yochim, who does a fine job running our Fool's School. Dayana pointed out to me that 40 years of marriage is 30 more than Warren Buffett has been married to Coca-Cola stock!
A long marriage is a fine metaphor for investing... you "buy," you hold, and you reap riches far beyond anything you'd ever have imagined or deserved. "One Fool at least in every married couple," wrote the English novelist Henry Fielding, in Amelia. To which I must respond: Even better if there are two!
Congratulations again, Shirley and Jerome. Fool on!
-- David Gardner, August 25, 1997
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Stock Change Bid ---------------- AOL - 7/16 67.00 T --- 40.25 ATCT - 1/8 4.38 CHV - 7/8 78.56 DJT + 1/16 11.56 GM +1 7/16 66.19 INVX +1 1/8 35.25 IOM + 1/16 23.75 KLAC - 5/8 73.75 LU + 13/16 84.06 MMM + 3/16 92.69 COMS - 3/16 52.50Day Month Year History FOOL +0.22% 2.62% 18.60% 216.53% S&P: -0.37% -3.58% 24.22% 100.73% NASDAQ: +0.18% 0.49% 24.05% 122.38% Rec'd # Security In At Now Change 5/17/95 980 Iomega Cor 2.52 23.75 842.46% 8/5/94 355 AmOnline 7.27 67.00 821.60% 10/1/96 42 LucentTech 47.62 84.06 76.54% 8/24/95 130 KLA-Tencor 44.71 73.75 64.95% 8/11/95 125 Chevron 50.28 78.56 56.23% 8/12/96 110 Minn M&M 65.68 92.69 41.13% 8/12/96 280 Gen'l Moto 51.97 66.19 27.35% 6/26/97 325 Innovex 27.71 35.25 27.21% 8/13/96 250 3Com Corp. 46.86 52.50 12.04% 8/12/96 130 AT&T 39.58 40.25 1.70% 4/30/97 -1170 *Trump* 8.47 11.56 -36.53% 10/22/96 600 ATC Comm. 22.94 4.38 -80.93% Rec'd # Security In At Value Change 8/5/94 355 AmOnline 2581.87 23785.00 $21203.13 5/17/95 980 Iomega Cor 2594.53 23275.00 $20680.47 8/12/96 280 Gen'l Moto 14552.49 18532.50 $3980.01 8/24/95 130 KLA-Tencor 5812.49 9587.50 $3775.01 8/11/95 125 Chevron 6285.61 9820.31 $3534.70 8/12/96 110 Minn M&M 7224.44 10195.63 $2971.19 6/26/97 325 Innovex 9005.62 11456.25 $2450.63 10/1/96 42 LucentTech 1999.88 3530.63 $1530.75 8/13/96 250 3Com Corp. 11714.99 13125.00 $1410.01 8/12/96 130 AT&T 5145.11 5232.50 $87.39 4/30/97 -1170*Trump* -9908.50 -13528.13 -$3619.63 10/22/96 600 ATC Comm. 13761.50 2625.00-$11136.50 CASH $40625.59 TOTAL $158262.78