Fool Portfolio Report
Tuesday, August 26, 1997
by Jim Surowiecki (Surowiecki@aol.com)
ALEXANDRIA, VA (August 26, 1997) -- Taking a little time away from writing The Fool's weekly column in Slate -- it runs there every Thursday -- I figured today would be a quiet day, perhaps a day to run the numbers on yet another Fool stock. But maybe the next time the stock market looks to be heading into a slow week of desultory trading, we can call on PC Week to come along and save us again by sparking a slew of unsubstantiated rumors. Rumor-mill trading may not be good for the market or the economy, but apparently it's irresistible to many investors. Or rather, it's irresistible to many speculators.
Of the two rumors that caught the press' attention today, PC Week can claim responsibility for just one of them, namely the story that IBM (NYSE: IBM) is seriously contemplating a takeover of NOVELL (Nasdaq: NOVL), the corporate networking giant which finds itself in the midst of an attempted turnaround under new CEO Eric Schmidt. In an article that appeared in print yesterday, PC Week suggested that the two companies would fit together nicely, and cited inside sources -- unnamed, of course -- who claimed Big Blue was in the hunt. Both companies insisted that no talks were underway, but it didn't matter. The speculators were off to the races, and Novell ended up almost 11% on the day. A stunning 31 million shares of the stock traded hands, eight times more than usual volume.
The other rumor also involved IBM, at least marginally, as the market suddenly found itself seized by the conviction that SYBASE (Nasdaq: SYBS), which makes software for database management, was on the sales block and that IBM might be buying. As it happens, this is actually an old rumor, and there was no new source for it, but that didn't seem to bother anyone. In fact, the story apparently mutated as the day went on, and by market close Sybase's real suitor was deemed to be ORACLE (Nasdaq: ORCL). It didn't matter, of course. People were trading not on fundamentals, and not even on the real possibility of a takeover, but rather on the possible implications of the possibility of a takeover. SYBS finished the day up 9% on volume four times heavier than normal.
And that wasn't all. PC Week wasn't done yet. In last week's issue, the magazine ran a piece suggesting that FoolPort stock LUCENT (NYSE: LU) is in the market for an established networking company. The story mentioned ASCEND (Nasdaq: ASND), CABLETRON SYSTEMS (NYSE: CS), FORE (Nasdaq: FORE), MADGE NETWORKS (Nasdaq: MADGF), and SHIVA (Nasdaq: SHVA) as possible targets. One might have thought that the sheer size of that list -- which includes nearly every relatively small corporation in the networking business -- would have deterred speculators from jumping in feet first, but such seems not to have been the case. Madge, which lost money in the previous year, was up 16% today and Shiva, a company that was once the market's darling but has struggled badly of late, was up a remarkable 22%.
Reuters quoted one unnamed "trader" today saying, "These rumors are flying like crazy but they are just that -- rumors. Once in a while one of them hits but these are all just going around the mill." All of which is true, of course, but what's remarkable is how little impact this kind of common sense has when the market is awash with money looking for quick returns. The hunger for short-term news, especially during a slow trading week, is almost palpable among fund managers and, unfortunately, among too many individual investors. If you're not buying-and-holding, and you're not interested in running a PEG ratio, a juicy rumor must seem heaven-sent. And in a corporate world that has fallen back in love with mergers -- here, to plug myself, is an article from our collaboration with Slate on this very subject -- takeover rumors are the juiciest of all.
Of course, we do things a little bit differently here at The Fool. We prefer not to buy stocks in anticipation of the possibility that they may be acquired. We think it makes more sense to buy stocks in anticipation of them coming to dominate their markets and delivering solid earnings year after year. And we also prefer not to buy stocks at 10:30 a.m. in order to sell them at 2:30 p.m. Call us crazy, but over the long run that's nothing more than a recipe for a disaster. Besides, there are better things to do with your time than watch the tape.
But more is wrong with the rumor mill than the possibility that unwitting investors will get burned when the pyramid collapses. The kind of trading that we saw in Novell and Shiva today is speculation in its purest form, utterly divorced from any kind of fundamental analysis. It's trading that draws money away from more deserving companies, encourages a short-term mentality, and severs the stock market from its real function, which is directing capital to those corporations that will use it most efficiently. And it makes investors as a whole look like gamblers.
It's possible, of course, that Lucent will, in the end, acquire one of the companies on PC Week's list, and given Lucent's record since it was spun off from AT&T (NYSE: T), it will almost certainly be a good acquisition. Similarly, Novell is an interesting takeover target, because its market cap is relatively small and CEO Eric Schmidt -- late of SUN MICROSYSTEMS (Nasdaq: SUNW) -- is attempting a serious turnaround. But it does seem unlikely that Schmidt would have brought in an entirely new management team only to sell the company. Regardless, the point in both cases is that we don't know, and investing on the basis of what you don't know is generally a dangerous idea.
Of course, even when you invest on the basis of what you think you do know, you'll have bad days now and then, and today was one of those days for the Fool Portfolio, which finished today down 1.16%, losing to both the S&P 500 and the Nasdaq. Oddly, both the S&P and the Nasdaq are now up 23.26% for the year-to-date, while the Fool Port lurks in striking distance at 17.22%.
In the long-term, today is but a hiccup, but it was a frustrating hiccup nevertheless because of an almost complete absence of news. The two big losers on the day were KLA-TENCOR (Nasdaq: KLAC), a monster for us of late, which finished down $2 3/4 in its usual volatile fashion, and 3COM (Nasdaq: COMS), which gave up $3 1/16 despite not a trace of bad news. Apparently the market just decided that COMS was worth $1 billion less as a company at the end of the day than it was when dawn broke. Lucent, incidentally, was down $1 13/16, because rumors almost always drive the supposed acquirer down and the supposed acquiree up.
A sleepy day, then, in the middle of what feels like a sleepy pre-Labor-Day week. PC Week won't have another issue out for seven days. Perhaps in the meantime we can all get back to looking at 10-Ks and earnings projections.
Drip Portfolio --
Defending Intel, the first DRP Buy.
Fool Message Boards -- Speak your mind!
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Fool Four Portfolio -- 23% annually, historically.
Evening News -- All the news, early.
Port Tracker -- Update your portfolio daily.
Daily Double -- Woah... it's flyin'!
Daily Trouble -- Cut in half! A deal?
Fribble -- A fun lesson from readers.
Stock Change Bid ---------------- AOL -1 66.00 T - 3/8 39.88 ATCT --- 4.38 CHV - 1/4 78.31 DJT - 1/4 11.31 GM -1 3/16 65.00 INVX - 9/16 34.69 IOM + 1/8 23.88 KLAC -2 3/4 71.00 LU -1 13/16 82.25 MMM - 15/16 91.75 COMS -3 1/16 49.44Day Month Year History FOOL -1.16% 1.43% 17.22% 212.85% S&P: -0.78% -4.33% 23.26% 99.18% NASDAQ: -0.64% -0.16% 23.26% 120.96% Rec'd # Security In At Now Change 5/17/95 980 Iomega Cor 2.52 23.88 847.42% 8/5/94 355 AmOnline 7.27 66.00 807.84% 10/1/96 42 LucentTech 47.62 82.25 72.74% 8/24/95 130 KLA-Tencor 44.71 71.00 58.80% 8/11/95 125 Chevron 50.28 78.31 55.74% 8/12/96 110 Minn M&M 65.68 91.75 39.70% 6/26/97 325 Innovex 27.71 34.69 25.18% 8/12/96 280 Gen'l Moto 51.97 65.00 25.06% 8/13/96 250 3Com Corp. 46.86 49.44 5.50% 8/12/96 130 AT&T 39.58 39.88 0.75% 4/30/97 -1170 *Trump* 8.47 11.31 -33.58% 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 23430.00 $20848.13 5/17/95 980 Iomega Cor 2594.53 23397.50 $20802.97 8/12/96 280 Gen'l Moto 14552.49 18200.00 $3647.51 8/11/95 125 Chevron 6285.61 9789.06 $3503.45 8/24/95 130 KLA-Tencor 5812.49 9230.00 $3417.51 8/12/96 110 Minn M&M 7224.44 10092.50 $2868.06 6/26/97 325 Innovex 9005.62 11273.44 $2267.82 10/1/96 42 LucentTech 1999.88 3454.50 $1454.62 8/13/96 250 3Com Corp. 11714.99 12359.38 $644.39 8/12/96 130 AT&T 5145.11 5183.75 $38.64 4/30/97 -1170*Trump* -9908.50 -13235.63 -$3327.13 10/22/96 600 ATC Comm. 13761.50 2625.00-$11136.50 CASH $40625.59 TOTAL $156425.09