Fool Portfolio Report
Tuesday, September 2, 1997
by Jeff Fischer (TMFJeff@aol.com)
ALEXANDRIA, VA (Sept. 2, 1997) -- Welcome to September, the worst month for stocks. Historically anyway.
Today the market woke up and slapped history in the face. Stocks vaulted higher as inflation fears were soothed yet again by tame economic figures. The S&P surged 3.13%, the Nasdaq gained 1.94%, and the Fool Portfolio fell in the middle, closer to the S&P than to the Nasdaq, gaining 2.61%.
Since inception the Fool Portfolio has an annualized return of 46% against the S&P's 26%. The S&P's three-year annualized return of 26% is slightly worse than what Warren Buffett has achieved annually for the past forty years -- since 1957. Buffett's 27% annualized return is mind-boggling. It's like experiencing the same amazing stock market that we've experienced in the past three years again and again, for the last four decades. Not without slow periods, yes, but overall, nobody can hold a candle to this man. If you study anything, study his method. This annualized return comes from Gillette, Disney, Coca-Cola, Geico -- there are no small caps in this portfolio, no quote watching, no newsletter subscriptions, and very little trading.
The big winner for the Fool Portfolio today was AMERICA ONLINE (NYSE: AOL), scoring a $4 3/8 gain to $68 7/8. With trailing sales of $1.7 billion and a market cap of $6.7 billion, the stock trades at 3.9 times sales. In my mind, this is inexpensive.
Sure, conventional wisdom argues that four times sales isn't exactly a bargain, especially for a company with sporadic profits and historically thin margins, but we're talking about a new company and a new industry, one as promising as any to roll out of the shipyard yet. We're also talking about the industry leader, one with nine million members (just announced today), and one that grew sales 55% last year.
You can't outright compare different industries, of course, but you can compare growth rates and perceived industry leadership. JOHNSON & JOHNSON (NYSE: JNJ) is growing 13% per year, with 13% profit margins, and trades at about the same price-to-sales ratio as America Online, a company which is expected to grow 55% annually for the next five years, remain profitable, and consistently improve margins. CISCO SYSTEMS (Nasdaq: CSCO), which sells the equipment that in part makes America Online and the Internet possible, trades at 9 times sales while expected to grow 34% annually. The company has strong margins. Then there is YAHOO! (Nasdaq: YHOO), perhaps a more meaningful comparison to AOL. Yahoo aims to make money through advertising and strategic partnerships, much like AOL. It doesn't have a subscriber-based revenue stream, though. Sporting a $1.6 billion market cap on $37 million in trailing revenue, the stock trades at 43 times sales.
Wall Street has certainly priced great potential into Yahoo's stock, while at the same time it has perhaps left America Online's stock some breathing room for disappointment. With nine million members valued at about $880 to $1000 each on a subscriber-based valuation, the stock would get a market cap of $7.9 billion (on the $880 per subscriber number), meaning a stock price of about $82. AOL's network value and partnership deals add another few dollars to an implied fair stock price, pushing the subscriber-based "fair value" closer to $90. This would give the company a $8.7 billion market cap, and put the stock at 5 times trailing sales. Not "cheap" by traditional standards, but hopefully accurate in predicting future sales and earnings growth success; and remember, AOL's subscriber growth is far from static. The company tacked on 400,000 new members since the quarter ended in June, and it could have another one million by the end of 1998, which would merit another $880 million in market cap, or $9 per share on this method.
America Online is expected to earn $0.88 for the current fiscal year ended next June, and $1.50 per share the year after.
Also rising today were CHEVRON (NYSE: CHV), up nearly $3, and GM (NYSE: GM) and LUCENT (NYSE: LU), each up more than $2. The only losers in the portfolio were, happily, our short TRUMP HOTELS (NYSE: DJT), which shed $1/4, and not so happily, IOMEGA (NYSE: IOM) which didn't move. Also, ATC COMMUNICATIONS (Nasdaq: ATCT) was a loser as well, being flat in the soaring market.
ATCT should announce earnings this week or next (we'll get the date as soon as the company does). The company is expected to earn $0.02 per share, an 83% decline from last year's $0.12. Trailing earnings will fall from $0.26 to $0.16 per share if estimates are only met, raising the trailing P/E multiple to 28. We're not in a big hurry to see the results, understandably, but we are hoping that the company is getting its new business model in place and moving forward steadily.
Finally, if you haven't checked out the Motley Fool's new Drip Portfolio yet, now is a good time. Today's recap gives a quick summary of the action so far. The portfolio made its first purchase two weeks ago (Intel Corp) and is working towards a second purchase this week. Today's recap begins to consider Johnson & Johnson, Pfizer, and other healthcare leaders. The portfolio is aiming to grow an initial $500 plus $100 added monthly into $150,000 in twenty years, for a strong market-beating return.
We're buying stock directly from companies in small increments, each month, avoiding commissions and using dollar cost averaging to our advantage. The portfolio is run by Randy Befumo of the Evening News, and me, and offers a daily recap where decisions are made over many days, or even weeks, in full view. We make our stock decisions over weeks as we write them, the reasoning given as we write.
Have a Foolish evening...
Drip Portfolio --
Fool Message Boards -- Speak your mind!
Boring Portfolio -- Boring beating Fool Port.
Fool Four Portfolio -- 23% annually, historically.
Market News -- All the news, early.
Port Tracker -- Update your portfolio daily.
Daily Double -- On the move!
Daily Trouble -- Cut in half! A good deal?
Fribble -- A fun lesson from readers.
Stock Change Bid ---------------- AOL +4 3/8 68.88 T +1 7/16 40.44 ATCT --- 4.38 CHV +2 15/16 80.38 DJT - 1/4 11.38 GM +2 1/2 65.25 INVX +1 5/8 35.25 IOM --- 25.63 KLAC + 5/8 71.31 LU +2 1/4 80.13 MMM +1 11/16 91.56 COMS + 5/16 50.25Day Month Year History FOOL +2.61% 2.61% 19.76% 219.61% S&P: +3.13% 3.13% 25.22% 102.35% NASDAQ: +1.94% 1.94% 25.33% 124.68% Rec'd # Security In At Now Change 5/17/95 980 Iomega Cor 2.52 25.63 916.87% 8/5/94 355 AmOnline 7.27 68.88 847.39% 10/1/96 42 LucentTech 47.62 80.13 68.27% 8/11/95 125 Chevron 50.28 80.38 59.84% 8/24/95 130 KLA-Tencor 44.71 71.31 59.49% 8/12/96 110 Minn M&M 65.68 91.56 39.41% 6/26/97 325 Innovex 27.71 35.25 27.21% 8/12/96 280 Gen'l Moto 51.97 65.25 25.55% 8/13/96 250 3Com Corp. 46.86 50.25 7.23% 8/12/96 130 AT&T 39.58 40.44 2.17% 4/30/97 -1170 *Trump* 8.47 11.38 -34.32% 10/22/96 600 ATC Comm. 22.94 4.38 -80.93% Rec'd # Security In At Value Change 5/17/95 980 Iomega Cor 2594.53 25112.50 $22517.97 8/5/94 355 AmOnline 2581.87 24450.63 $21868.76 8/11/95 125 Chevron 6285.61 10046.88 $3761.27 8/12/96 280 Gen'l Moto 14552.49 18270.00 $3717.51 8/24/95 130 KLA-Tencor 5812.49 9270.63 $3458.14 8/12/96 110 Minn M&M 7224.44 10071.88 $2847.44 6/26/97 325 Innovex 9005.62 11456.25 $2450.63 10/1/96 42 LucentTech 1999.88 3365.25 $1365.37 8/13/96 250 3Com Corp. 11714.99 12562.50 $847.51 8/12/96 130 AT&T 5145.11 5256.88 $111.77 4/30/97 -1170*Trump* -9908.50 -13308.75 -$3400.25 10/22/96 600 ATC Comm. 13761.50 2625.00-$11136.50 CASH $40625.59 TOTAL $159805.22