Fool Portfolio Report
Tuesday, September 16, 1997
by Jeff Fischer (

ALEXANDRIA, VA (Sept. 16, 1997) -- The market soared, but only the Nasdaq is in record territory. The S&P climbed 2.8%, Nasdaq 2%, and the Fool was third today, at 1.96%. Why the resurgence? Wise-onomic data showed that consumer prices remained nearly unchanged while production in the country increased strongly. Foolishly stated: that's business growth coupled with low inflation -- ideal for stocks.

Should we be surprised that stocks are soaring? At the end of August, the S&P 500 traded at 20 times trailing earnings of about $44, while earnings are expected to grow about 17% next year. The S&P is at a small premium to its earnings growth rate.

For the Fool, Chevron, General Motors, and AT&T all soared to new 52-week highs. Yes, folks, AT&T is trading at a new high. Wall Street in general has been so bearish on the company that it's interesting to see this contrarian Fool Four stock snub the masses. The stock has gained 35% since the end of April when, trading at $33, Ma Bell deserved to be written about even though it's a mindless Fool Four holding. When you throw in Lucent and NCR, AT&T hasn't mistreated us at all. It is a mindless holding, though, so let's move on.

IOMEGA (NYSE: IOM) announced that it has sold over eight million Zip drives since early 1995. When you consider that it has taken America Online this entire decade to grow to 9 million members, you can better realize how well, in general, Iomega has reached consumers and inspired them to plunk down $199 to $149 for a little blue box. The rapid acceptance of the Zip drive has made it one of the fastest growing consumer electronics products in history.

"Find a need and fill it."

If only more companies focused so intently on that dictum.

The stock of AMERICA ONLINE (NYSE: AOL) was down today despite the company announcing a content deal with MICROSOFT (Nasdaq: MSFT), the behemoth that was going to crush America Online only a few years ago. AOL is offering a Preview Channel on Microsoft's Explorer 4.0 that, with one click, will take readers to AOL content. The AOL Preview Channel will provide daily content from various AOL sources, including news and sports coverage. Where do you want to go today? Wherever. How about to AOL.

AMAZON.COM (Nasdaq: AMZN) rose $3 on three times normal volume to bid $40.25. This week's issue of Fortune has an article that presents, again, the possibility of the behemoth booksellers crushing Amazon. The Fortune article didn't offer much substance, but -- in their defense -- that's partially due to the landscape of the current situation. There isn't incredibly much to offer but for guesses on where the respective book businesses might go. We happen to be optimistic about Amazon's business, and many others happen to think -- yup, you guessed it -- that the big guys will crush this new company.

That's easy to think, though, and it's an easy argument to put forth. Skepticism seems to surround new companies and -- oddly -- often skepticism circles most boisterously around promising new companies. America Online and Iomega have likely had more negative press than any other companies over the past three years, and yet these companies possess two of the best performing stocks on the market. We're optimistic when we find reason to be, and we also try to check any unfounded skepticism at the door as soon as we place on our Foolish caps and walk through the "entrance" of every new day given to us. We've put some faith in this "first-to-market" company, the young management, and the ability for Amazon to carry forward with lower overhead -- and probably more speed -- than the bigger guys.

If those were the only arguments that we had for the stock, though, heaven help us. Another argument, and one that David likes to reiterate, is that the world is big enough for more than one party. Amazon and, yes, Barnes & Noble and Borders can probably all survive and even prosper. The book industry is estimated to be $85 billion. These three companies together have trailing sales of only $4.7 billion.

Greg Markus (TMF Boring) wrote about Amazon on Friday in the Boring Portfolio because he couldn't see the reasoning behind the Fool purchase. Much of the recap focuses on the ability of  BORDERS BOOKS (NYSE: BGP) to prosper -- as a defense of the company that Boring owns. We agree, Borders certainly should prosper.

Greg grants Amazon 5% net margins down the road, as a guess, though even Borders and BARNES & NOBLE (NYSE: BKS) have net margins of 7% to 9% during the Holiday quarter, which is the one quarter that the companies are consistently profitable. Volume leads to margins in the book world, especially for the big booksellers that have so many fixed costs to cover. While these giant booksellers have usually been profitable only one quarter per year, Amazon could build enough volume while having low enough fixed costs that it could be profitable all year.

Borders had net profit margins of 0.1%, 0.1%, a loss, and 9.1% in the past four quarters. As can been seen from the strong fourth quarter, once expenses are covered a bookseller can net decent profit margins in this business. There is room for it. In the long run, all the booksellers are going to want to make money, not lose it through cut-throat pricing. A happy medium should be met -- the type that allows nearly all industries to have a handful of healthy leaders within -- and Amazon, we believe, could have the lowest expenses of the group. And we think that all can prosper.

It's appropriate that today America Online signed a deal with Microsoft, while Fortune wrote about the big guys crushing Amazon. Just two years ago America Online was the targeted company that was "about to be crushed."

This discussion will certainly continue, as Greg brought up other good points to address. For now, though, to conclude the recap:

Tom and David have gracefully allowed me to write in this space for nearly one full year, and I've yet to really take advantage of it -- until now. I want to say Happy Birthday to my little brother, Rob. So I just did. He's a Fool who understands that you buy what you know -- at least to a point. In his case, that would be Atari and Nintendo, and Volkswagen cars.

Fool on...

Drip Portfolio -- Pfizer, Inc.
Fool Message Boards -- Speak your mind!
Boring Portfolio -- Boring holds Cisco, Oracle.
Fool Four Portfolio -- 23% annually, historically.
Market News -- All the news, early.
Port Tracker -- Update your portfolio daily.
Daily Double -- Learn what makes good business. Maybe.
Daily Trouble -- Cut in half! A good deal?
Fribble -- A fun lesson from readers.

Stock Change Bid ---------------- AMZN +3 1/4 40.25 AOL - 15/16 74.38 T + 11/16 44.88 ATCT - 3/32 4.81 CHV +4 1/2 87.06 DJT - 5/16 11.38 GM + 15/16 68.94 INVX +1 3/16 31.94 IOM +1 1/16 26.88 KLAC + 5/8 72.44 LU +3 77.63 MMM - 7/8 88.38 COMS - 7/8 48.06
Day Month Year History FOOL +1.96% 5.53% 23.16% 228.69% S&P: +2.81% 5.13% 27.66% 106.29% NASDAQ: +2.06% 5.12% 29.25% 131.69% Rec'd # Security In At Now Change 5/17/95 980 Iomega Cor 2.52 26.88 966.47% 8/5/94 355 AmOnline 7.27 74.38 922.64% 8/11/95 125 Chevron 50.28 87.06 73.14% 10/1/96 42 LucentTech 47.62 77.63 63.02% 8/24/95 130 KLA-Tencor 44.71 72.44 62.01% 8/12/96 110 Minn M&M 65.68 88.38 34.56% 8/12/96 280 Gen'l Moto 51.97 68.94 32.64% 6/26/97 325 Innovex 27.71 31.94 15.26% 8/12/96 130 AT&T 39.58 44.88 13.38% 9/9/97 290 38.22 40.25 5.31% 8/13/96 250 3Com Corp. 46.86 48.06 2.57% 4/30/97 -1170 *Trump* 8.47 11.38 -34.32% 10/22/96 600 ATC Comm. 22.94 4.81 -79.02% Rec'd # Security In At Value Change 8/5/94 355 AmOnline 2581.87 26403.13 $23821.26 5/17/95 980 Iomega Cor 2594.53 26337.50 $23742.97 8/12/96 280 Gen'l Moto 14552.49 19302.50 $4750.01 8/11/95 125 Chevron 6285.61 10882.81 $4597.20 8/24/95 130 KLA-Tencor 5812.49 9416.88 $3604.39 8/12/96 110 Minn M&M 7224.44 9721.25 $2496.81 6/26/97 325 Innovex 9005.62 10379.69 $1374.07 10/1/96 42 LucentTech 1999.88 3260.25 $1260.37 8/12/96 130 AT&T 5145.11 5833.75 $688.64 9/9/97 290 11084.24 11672.50 $588.26 8/13/96 250 3Com Corp. 11714.99 12015.63 $300.64 4/30/97 -1170*Trump* -9908.50 -13308.75 -$3400.25 10/22/96 600 ATC Comm. 13761.50 2887.50-$10874.00 CASH $29541.35 TOTAL $164345.98