Fool Portfolio Report
Tuesday, April 22, 1997
by Jeff Fischer (TMF Jeff)

Tomorrow at 6:30 AM, Tom Gardner will appear on CNN Business Day -- if he doesn't sleep through the sunrise alarm. Expect Tom to deconstruct and celebrate Microsoft's 3rd quarter earnings, all in a couple soundbytes! If you're looking for a little Foolish zing to your wakeup, flip it over to Turner's network.

ALEXANDRIA, VA., (April 22, 1997) -- "Stocks were strong after recent weakness," the common saying goes. Stocks rebounded. Stocks were looking for levels "closer to fair value" after falling in the past weeks.

The S&P gained 1.87%, the Nasdaq lifted 0.73%, and the Fool added 0.63%. Our two largest holdings didn't budge. Perhaps the stocks are at fair value.

In the recent past, when the Internet stocks of SPYGLASS (Nasdaq: SPYG) and NETCOM (Nasdaq: NETC) traded at prices ten times higher than today's, the market was being as efficient as greed desired. In 1987, when the stock of DISNEY (NYSE: DIS) was cut from $20 to $10 5/16 in less than three weeks, the market was being efficient only in spreading fear.

Is MICROSOFT (NYSE: MSFT) worth a market cap of $132 billion dollars? Is 3COM (Nasdaq: COMS) worth only $4.7 billion? There's currently no fear involved with the name of Microsoft. If you factor anxiety into the company's future -- as had happened when NETSCAPE (Nasdaq: NSCP) entered the picture -- the stock would probably drop several billion dollars in market value.

Sometimes the market is only as efficient as fear and greed deem appropriate. Valuation-wise, the market is anything but consistently efficient. COCA COLA (NYSE: KO) touched $52 3/4 ten days ago while the selling of stocks was indiscriminate. Now the stock is 17% higher -- an additional $19 billion in market cap achieved in ten days. Inefficiency is occurring on which side of this short-term move?

As the "fear and greed" factor changes each day in the market (two intangibles that can never be predicted) and are arguably a significant part in valuing stocks in the near-term, the idea of a market with predictable price moves is ridiculous. Therefore, in the same vein, basing an investment strategy on charts, support levels, gaps, and momentum is equally futile. Eventually you'll be clocked by an unforeseen emotion.

Long-term investors buying the right companies can arguably be as greedy as they wish. Investors who ponied up 300 million dollars today in order to buy five million shares of Coca Cola near its all-time high will -- odds are -- not end up in the poor house, eating bugs off the wall. Instead, they'll probably be able to cash those shares in for twice the amount -- $600 million -- in well under ten years.

In the April 3rd Fool recap we looked at the prices of some of the Nifty Fifty stocks -- stocks which some felt "could do no wrong" in the early 1970s. Skeptics now believe that the stocks of Microsoft, Intel, Gillette, and Coke represent the new "Nifty Fifty" -- regarded as mindless purchases for the "buy and hold novices." The significant differences of valuations granted in the 70s compared to now were noted in that Fool recap. At the peak, some multiples granted were:

1972 P/E (Price-to-Earnings multiple) Sony 92 McDonald's 83 Intl. Flavors 81 Walt Disney 76 Avon 64 Clorox 49

A comparison needs to go into more details than mere price-to-earnings multiples, as it's impossible to compare year-to-year without comparing growth rates, intrinsic value, the economy, and more. But the lesson here is about greed. The lesson namely concerns buying Mcdonald's at 83 times earnings, and Disney at 76 times earnings at the peak in 1972.

Good Fool, you were one greedy investor! You thought those stocks would just keep rising, didn't you! Certainly you were disappointed when they came back to more normal valuations. But your greed paid off. The returns (with much thanks to Mike Barrett ( for sending them our way):

From 12/31/72 (approximate peak) Company - Annualized /Cumulative (Total % Returns) MCD - 11.4 / 1258.1 DIS - 10.6 / 1041.8 IFF - 5.6 / 277.5 AVP - 0.4 / 10.6 CLX - 7.5 / 475 SNE - 6.9 / 404.5 (price appreciation only,
dividends not included) SP 500 - 9.0 / 706

If you had bought MCDONALD's (NYSE: MCD) at 83 times earnings in 1972, over the past 25 years you would have returned 11.4% annualized, beating the S&P. Likewise with Disney at 76 times estimates. You would have returned 10.6% annualized. (Interesting to note: McDonald's is now near its 52 week high. It's been rising since the low $40's, when the large stake taken by Buffett was made public. Instead of trading at 83 times earnings, it now trades at 22 times earnings.)

Granted, with some of the other stocks you wouldn't have done so well, especially buying AVON PRODUCTS (NYSE: AVP) in 1972. The stock fell 80% from the high reached in 1972, before beginning to recover. Over the next twenty-five years you would have only earned an annualized 0.4%. Ouch. CLOROX (NYSE: CLX), INTERNATIONAL FLAVORS (NYSE: IFF), and SONY (NYSE: SNE) underperformed, too.

How greedy are the buyers of today's world-leading companies? On the simplest, price-to-earnings level, not nearly as greedy as they were in the 1970s. We have:

1997 P/E Coca-Cola 40 Mcdonald's 22 Gillette 45 Walt Disney 36 Hewlett-Packard 19 J&Johnson 26 Intel 20 Microsoft 48

Granted, many of these companies have two years of strong growth factored into the stock price. I'd call that "greed." If you're buying these companies you need to realize that you're being greedy, and call yourself greedy for the next few years, before growth (ideally) catches up with the valuations, and the stock can realistically appreciate again.

As greed is often taken too far in the near-term while riding the coat-tails of possibility, fear is often pounded into the ground with a stake three feet too long. That may likely be the case with leading networking companies, as it was the case with leading semiconductor stocks nearly two years ago. But not all the semiconductor issues have risen from the ashes.

Fear has been factored into 3COM's (Nasdaq: COMS) stock price for several reasons:

1) Price cuts
2) Lower margins
3) Possible slowing growth
4) Commoditizing of low-end products
5) The coming merger with U.S. Robotics
6) Competition from Ascend and Cascade
7) Cisco Systems
8) Intel -- an increasing new fear, new fears being most powerful.

Today a SoundView analyst cut his rating on the shares. The stock fell before rebounding to close higher. COMS trades at 16 times earnings and 12 times estimates, while expected to grow around 30% per year. The analyst has fears that the company will have difficulty moving into the wide-area network business.

The most widely held stock in the country, owned by everyone from the Hemingway family to Charles Slanec of Berwyn, IL, AT&T (NYSE: T) fell after announcing earnings last night. Ma Bell earned 69 cents per share, compared to 92 cents last year, same quarter. Revenues topped $13 billion, up slightly from $12.85 billion. The stock -- after accounting for the spin-offs of Lucent Tech and NCR -- hasn't seen this price level since 1993. Competition is heating up and entering new markets is expensive.

Finally tonight, AOL users:

The Nasdaq Speaker Series welcomes
Scott Cook, Chairman of the Board and
co-founder of INTUIT (Nasdaq: INTU). He'll
be joining us on The Motley Fool this
evening at 9pm ET to discuss Intuit's plans
for competing in the online and software
finance industries.

With over 80% of the market, Intuit is the
dominant player in the personal finance arena.
Quicken is now the #1 selling personal finance
software available. Currently there are over
9 million active Quicken consumers, up from
8 million last year.

For the 1996 fiscal year ending in July, Intuit
reported sales of $538.6 million, or 28% higher
than 1995's $419.2 million. Income from
continuing operations, excluding acquisition
related charges, jumped 17% to $32.2 million.

Mr. Cook will answer investor questions about
how he plans to position Intuit in the ever
changing finance industry. Please join us in the
Nasdaq Auditorium.

I'll be there. Hope to see you!

Fool on!

Stock Change Bid -------------------- AOL - 3/8 43.00 T - 7/8 32.13 ATCT - 3/16 5.00 CHV +1 7/8 66.63 GM - 1/4 56.25 IOM --- 16.75 KLAC +1 3/8 41.00 LU +2 7/8 56.75 MMM +4 1/4 87.50 COMS + 7/8 27.13
Day Month Year History FOOL +0.63% 1.86% -5.47% 152.29% S&P: +1.87% 2.31% 4.57% 68.98% NASDAQ: +0.73% -0.74% -6.06% 68.39% Rec'd # Security In At Now Change 5/17/95 980 Iomega Cor 2.52 16.75 564.95% 8/5/94 355 AmOnline 7.27 43.00 491.24% 8/12/96 110 Minn M&M 65.68 87.50 33.23% 8/11/95 125 Chevron 50.28 66.63 32.50% 10/1/96 42 LucentTech 47.62 56.75 19.18% 8/12/96 280 Gen'l Moto 51.97 56.25 8.23% 8/24/95 130 KLA Instrm 44.71 41.00 -8.30% 8/12/96 130 AT&T 39.58 32.13 -18.83% 8/13/96 250 3Com Corp. 46.86 27.13 -42.11% 10/22/96 600 ATC Comm. 22.94 5.00 -78.20% Rec'd # Security In At Value Change 8/5/94 355 AmOnline 4945.56 15265.00 $10319.44 5/17/95 980 Iomega Cor 5063.13 16415.00 $11351.87 8/12/96 110 Minn M&M 7224.44 9625.00 $2400.56 8/11/95 125 Chevron 6285.61 8328.13 $2042.52 8/12/96 280 Gen'l Moto 14552.49 15750.00 $1197.51 10/1/96 42 LucentTech 1999.88 2383.50 $383.62 8/24/95 130 KLA Instrm 5812.49 5330.00 -$482.49 8/12/96 130 AT&T 5145.11 4176.25 -$968.86 8/13/96 250 3Com Corp. 11714.99 6781.25 -$4933.74 10/22/96 600 ATC Comm. 13761.50 3000.00-$10761.50 CASH $39092.98 TOTAL $126147.10