Fool Portfolio Report
Tuesday, October 21, 1997
by Jeff Fischer ([email protected])

ALEXANDRIA, VA (October 21, 1997) -- The Fool Portfolio blazed past the S&P today and landed closer to the Nasdaq than it's been in months. Up 32.03% for the year against the Nasdaq's 32.65% and the S&P's 31.26%, the Fool is again looking Foolish after nine months of shaky performance. Every portfolio has periods of underperformance, but the Fool Port has beaten the S&P every year since its inception, and that's a record that we'd like to maintain -- of course! Historically, we've got significant breathing room: The Fool is up 252% since August of 1994, while the S&P has gained 112%.

It's been an amazing run for the market, with the S&P rising 34% in 1995, 20% last year, and 31% so far this year. On Friday we'll take an interesting look at the market's performance for the past four decades. (Just how often do stocks fall?) Today, though, we have news to cover.

Monday and today the stock market recovered all of Friday's loss and more. Today represents one of those occasions when a person wants to list all the portfolio's stocks: Amazon up $7, AOL up $3, AT&T up $2, KLA up $3 5/8, Iomega up $1 3/8. The only goat of the bunch was 3COM (Nasdaq: COMS), which fell $2. In this strong market, perhaps 3Com fell due to a newspaper article questioning the company's accounting practices, though 3Com already addressed its accounting method once in the recent past. Without further information, there's no reason to think that this is anything but a short-term downdraft due to a negative but inconsequential article written by a one-way print journalist.

There's actually substantive news to report today, so let's move on. Both KLA-Tencor and Lucent announced earnings, and news arguably helped propel Amazon's stock 16% higher on mucho volume.

AMAZON.COM (Nasdaq: AMZN) rose $7 1/4 though the only new information is that its lawsuit with BARNES & NOBLE (NYSE: BKS) was summarily dropped. Refreshingly, the two companies agreed to battle in the marketplace rather than in the courtroom. Early this year, Barnes & Noble filed a lawsuit against Amazon claiming that Amazon's "Earth's Biggest Bookstore" trademark was misleading. Amazon filed a counterclaim stating that Barnes & Noble should charge all its online customers state sales tax, because Barnes & Noble has operations in all fifty states. (If a business has a physical retail presence in a state, customers from that state must pay state taxes.) The companies agreed to drop both charges.

Amazon announces earnings this Thursday, or, more appropriately said: Amazon announces sales this Thursday. The revenue number is the one that most people will be interested in, and after that, the costs involved. It's unlikely that we'll see the company's business becoming more efficient just yet, but with size it should, down the road.

LUCENT TECHNOLOGIES (NYSE: LU) announced earnings (before a $1.8 billion charge for its acquisition of Octel Communications) of $0.57 per share, topping estimates of $0.51. Fourth quarter revenue rose to $6.9 billion, up 17% from last year. The company showed improvement across the board for its major product categories. At $86, the stock trades at 31 times earnings estimates of $2.76 per share for the fiscal year ended September of 1998. With 650 million shares outstanding, the company is capitalized at $55.9 billion, or 2.12 times sales. Perhaps the company's largest current weakness is trailing net profit margins of 5.5%. It's been a wonderful investment, though; Lucent has admirable momentum and will likely be improving itself on most measures going forward.

KLA-TENCOR (Nasdaq: KLAC) reported first quarter earnings of $0.56 per share, well above estimates of $0.52, and 40% above last year's results. First quarter revenue climbed from $261 million last year to $312 million.

Management is running the newly-merged business well. Operating expenses declined despite an increase in research and development costs, gross margins remained consistent with last quarter (55%), operating margins held steady (20.8%), and net profit margins increased to the highest level in the past year, to 15.9% (though this is partially due to a 3% lower tax rate).

KLA-Tencor was expected to earn $0.56 per share next quarter, which it already earned this quarter, so analysts may adjust estimates; the company did state, however, that new order volume is slightly below the current revenue level due to a seasonal slowdown. Estimates stand at $2.35 in earnings per share for the fiscal year ended next June, and $3.02 the year after. The stock trades at 20 times the current fiscal 1999 estimate.

KLA-Tencor ended the quarter with $685 million in cash and equivalents and zero long-term debt. With 88 million shares outstanding, at $62 per share the company has a market cap of $5.4 billion. Back out the cash, and the stock is valued at $4.7 billion, or about 3.7 times sales. Today a PaineWebber analyst, Gunnar Miller, reiterated a "buy" rating on the stock with a price target of $83. The reason for the price target wasn't given in the press release -- naturally. Clients only. How long will the full-service brokerage industry remain exclusive? With most everyone openly sharing information, full-service brokers will need to work increasingly hard for eyes -- and clients -- over the coming years.

Some trivia: KLA-Tencor was added to the S&P 500 index on September 12th. Some other trivia: I find it interesting that the guv'ment would announce its investigation of MICROSOFT (Nasdaq: MSFT) on the same day that the software leader announced earnings. Everyone's attention was already on Microsoft yesterday, and the added volatility probably wasn't in the best interest of investors at large. Earnings dates are already an unreasonably volatile time for stocks. (Hopefully, years hence that won't be the case, but it probably takes longer than that for human nature to change.) Anyway, the government threatened to fine Microsoft $1 million per day until it satisfied the complaints filed by the Department of Justice. With $9.6 billion in cash, Microsoft could pay $1 million per day for 9,600 days, or 26 years, before it would run out of cash. And that's assuming that Microsoft's stash of moola wasn't earning any interest. For fun, slap a measly 5% annualized return on that $9.6 billion and you have $20 billion in cash in just 15 years.

Finally, AT&T (NYSE: T) continued to rise following yesterday's announcement that Michael Armstrong from Hughes Electronics would take over as CEO. The company also announced estimate-beating earnings yesterday. The stock hit a new 52-week today, crossing $50 per share. Fools that we are, we didn't think that the world was ending for Ma Bell when the stock rattled down to $33 per share in April. We were actually writing the opposite. Call us smart? Heavens no. We're Fools. But common sense says that the largest long distance company in the world -- with a 4.2% yield at the time -- would rebound sooner or later. Enter stage right: the Foolish Four philosophy.

Fool on!

--Jeff Fischer

Drip Portfolio -- KSU decision made. Wrap up. Intel $.
Fool Message Boards -- Speak your mind!
Boring Portfolio -- Cisco hits new high.
Fool Four Portfolio -- 23% annually, historically.
Market News -- All the News, early.
Port Tracker -- Update your portfolio daily.
Daily Double -- Earthgrains.
Daily Trouble -- Gargoyles glasses.
Fribble -- A fun lesson from readers.

TODAY'S NUMBERS
Stock  Change    Bid
----------------
AMZN  +7 1/8   53.00
AOL   +3 1/16  88.00
T     +2 3/16  49.63
CHV   +  15/16 87.81
DJT   -  1/8   10.00
GM    +1 7/16  71.31
INVX  +  15/16 29.44
IOM   +1 3/8   28.31
KLAC  +3 5/8   61.75
LU    +  1/4   86.06
MMM   +  13/16 94.63
COMS  -1 15/16 48.31



      
    
    
                  Day   Month    Year  History
        FOOL     +3.43%   4.89%  32.03% 252.37%
        S&P:     +1.74%   2.64%  31.26% 112.10%
        NASDAQ:  +1.61%   1.59%  32.65% 137.79%


    Rec'd    #  Security     In At       Now    Change
   8/5/94   355 AmOnline       7.27     88.00  1109.98%
  5/17/95   980 Iomega Cor     2.52     28.31  1023.51%
  10/1/96    42 LucentTech    47.62     86.06    80.74%
  8/11/95   125 Chevron       50.28     87.81    74.63%
  8/12/96   110 Minn M&M      65.68     94.63    44.08%
   9/9/97   290 Amazon.com    38.22     53.00    38.67%
  8/24/95   130 KLA-Tencor    44.71     61.75    38.11%
  8/12/96   280 Gen'l Moto    51.97     71.31    37.21%
            130 AT&T          39.58     49.63    25.39%
  6/26/97   325 Innovex       27.71     29.44     6.24%
  8/13/96   250 3Com Corp.    46.86     48.31     3.10%
  4/30/97 -1170 *Trump*        8.47     10.00   -18.08%


    Rec'd    #  Security     In At     Value    Change
   8/5/94   355 AmOnline    2581.87  31240.00 $28658.13
  5/17/95   980 Iomega Cor  2509.60  27746.25 $25236.65
  8/12/96   280 Gen'l Moto 14552.49  19967.50  $5415.01
  8/11/95   125 Chevron     6285.61  10976.56  $4690.95
   9/9/97   290 Amazon.com 11084.24  15370.00  $4285.76
  8/12/96   110 Minn M&M    7224.44  10408.75  $3184.31
  8/24/95   130 KLA-Tencor  5812.49   8027.50  $2215.01
  10/1/96    42 LucentTech  1999.88   3614.63  $1614.75
  8/12/96   130 AT&T        5145.11   6451.25  $1306.14
  6/26/97   325 Innovex     9005.62   9567.19   $561.57
  4/30/97 -1170*Trump*     -9908.50 -11700.00 -$1791.50
  8/13/96   250 3Com Corp. 11714.99  12078.13   $363.14


                              CASH  $32438.81
                             TOTAL $176186.56