Fool Portfolio Report
Monday, April 28, 1997
by David Gardner (MotleyFool)
ALEXANDRIA, VA, April 28, 1997-- We welcomed two new employees to Fool HQ today, and as is Fool custom, my brother and I got to sit down and meet with them and talk some about what we do and where we're going. And then I like to take questions... anything on their minds on their first day in the office.
First question: "Yes, I don't know if this is the right time or place to ask this, but what's up with ATC Communications?"
Turns out our new employee had bought the stock in the mid-$20's, early on in his discovery of Fooldom. Our new employee. Our guy. Hey, it's hurt me enough having to own this dog all the way down into the mid-single-digits, without having to feel my new employee's pain.
SO WHAT IS UP WITH ATC COMMUNICATIONS (Nasdaq:ATCT)?!
Great question. You see, it's not JUST that it is at present the worst stock in Foolish Portfolio history. (And we've had our share of dogs, as we always will... that's investing... that's why you diversify.) But also, ATCT has lost 85% of its value with little more than a whisper. A press release here, but not there (in other words, very little communication from ATC Communications). A management change BEFORE this all happened. A company whose last two quarters, while below estimates, have still been profitable.
I mean look at it, on the face of it. $100 million sales, profit margins of 6.7% leading to current trailing earnings per share of 29 cents. A market cap, at market close today, of just $58.5 million. This is now a micro-cap... $100 million pretty profitable trailing sales valued at $59 million. Monday brought more high volume (756,000 shares) down to a new low; heck, this stock touched $3 in the afternoon, before closing at $3 1/4.
What are the lessons? They're all good, though none is particularly original. We've written of these before, but it helps to bring them together. Here are the three primary ones I'm taking away:
1. If you're going to pay up, pay up for a company that is dominating -- even literally creating -- its industry. ATCT's Fool Ratio was exceptionally high when we bought it. The stock had already risen several times in value, was a momentum-player's dream (and a Navellier pick) as well, and showed high future growth rates. But it was also just one of many middle-sized horses in its industry. We'll aim to avoid doing that in future, though every rule has its exceptions.
2. Bring more knowledge and expertise to companies you invest in that don't sell directly to the consumer. We didn't have enough specialized knowledge of this industry, and we plan to avoid such situations in future. Here's a contrasting example: We fairly confidently doubled our money in Ride Snowboard a few years ago during the snowboarding craze, even though we personally don't snowboard. We felt good about it, though, because this company was selling in huge volume directly to consumers, people who were reading and contributing to our message boards. We were able to follow Ride very closely, and learn a lot while making money. ATC, on the other hand, sells to corporations in a way that is very hard for average consumers like us to follow. Its Corporate Communications department's silence was not only deafening, it also served to keep us from getting educated further into the company's business and prospects.
3. Small-cap stocks will make up the riskiest portion of the Foolish Portfolio. You can double your money or better... you can also lose most of it in any given investment. Iomega was a small cap before we bought it; today it's capitalized at over $2 billion, and has in excess of $1.2 billion in sales. It has been our very best investment. ATC, on the other hand, has gone from small-cap to micro-cap, and may never recover. Who knows? The point is, and I'll put it in all caps: DIVERSIFY. If circumstances play out one way, you can make a ton of money in a good small-cap stock, and it doesn't take many to make your portfolio a big winner. But if circumstances play out another way, which they often do, you can lose lots. Starting with Foolish Four big-cap stocks and then mixing in more aggressive small-caps will guarantee that the mutts of your portfolio don't bark all over it. Sure, we've lost $12,000 of our own money on this stock, but the overall portfolio's weighting and allocation kept this from being a huge problem. You should Foolishly ensure that the same is the case for your own portfolio. If you need to learn more about this, the 13 Steps await you... in that order.
ATC announces earnings this Wednesday before market open. One can only expect utter disaster. I'm thinking sales of less than half last year's comparable quarter, with earnings painted bright red. Please don't go saying, "The Motley Fool says sales will be down 50%," or anything like that, because in fact we have no idea. That's part of the problem... we've invested ourselves in a company that doesn't communicate, with a product that doesn't reach consumers. So we're just guessing, making stuff up in some way to reflect what has happened to the stock. You can bet we'll be watching closely, though.
Despite another 16% decline in ATCT today (down $5/8 to bid $3 1/4), the Fool Portfolio scored a moderate gain of 0.76%. That outdid the Nasdaq again (up 0.64%), but once again lost to the seemingly unsinkable S&P 500 (up 0.99%). Interestingly, since the online debut of the Fool on August 4, 1994, here's the total gain comparison of those two indices:
S&P 500: 68.62%
With all the world as their stage, they've had their exits and their entrances, but over time they've played pretty much the same part.
Changing gears, we held off shorting The Donald again today. As the market roared higher, we were seduced by the possibility of a better price for our announced short sale. We'll see if that works.
Pretty much everything else in the Fool Portfolio rose, with particularly good performances by 3Com, 3M, the ever volatile KLA Instruments, and (surprise!) AT&T.
Y'know, I saw a Bell Atlantic TV ad over the weekend (anyone else seen this one?) that effectively says this, summarized: "A few large telecommunications companies have wasted millions of dollars attacking each other over long-distance service for several years now. Bell Atlantic wants you to know that it will not contribute to this negativity, but rather will aim to serve its customers." All of that, spoken by James Earl Jones. I don't know what you think of that -- I like the basic attitude, I guess -- but overall I view this as bullish for AT&T.
Because with telecommunications deregulation, second-tier players like Bell Atlantic are suddenly going to have to spend millions of dollars trying to protect their existing business. If AT&T plays its cards right, it should snap up lots of customers who want just one bill for local and long distance.
What the world doesn't need, I'll continue to contend, is another Baby Bell. As an investor, I'm just not terribly impressed with these companies. Hey, maybe AT&T was up a buck and a half on these Bell Atlantic ads!
Finally, tonight, if you're a new investor -- or new to The Fool -- I want to put in a particular plug for our Ask a Foolish Question folder. One of Fooldom's most active, that folder contains an ongoing service-oriented Q&A whose sole mission is to get you THE answer to your investment question. Working tirelessly are Laurie Rappoport (TMF DrRap) on AOL, and Barbara Eisner Bayer (TMF Venus) on the Web, with great additional contributions by Fool staffers like Ann Coleman as well. So I close with a thank you to them, along with encouragement for you our reader to bookmark that folder and take advantage of it and us! Fool on.
--- David Gardner, April 28, 1997
Stock Change Bid -------------------- AOL --- 42.75 T +1 1/2 32.75 ATCT - 9/16 3.25 CHV + 1/4 66.00 GM + 3/8 55.25 IOM + 3/8 15.75 KLAC +1 42.38 LU - 1/8 55.25 MMM +1 86.38 COMS +1 3/8 28.13Day Month Year History FOOL +0.76% 0.13% -7.08% 147.99% S&P: +0.99% 2.09% 4.35% 68.62% NASDAQ: +0.64% -0.38% -5.73% 68.99% Rec'd # Security In At Now Change 5/17/95 980 Iomega Cor 2.52 15.75 525.00% 8/5/94 355 AmOnline 7.27 42.75 488.03% 8/12/96 110 Minn M&M 65.68 86.38 31.52% 8/11/95 125 Chevron 50.28 66.00 31.25% 10/1/96 42 LucentTech 47.62 55.25 16.03% 8/12/96 280 Gen'l Moto 51.97 55.25 6.30% 8/24/95 130 KLA Instrm 44.71 42.38 -5.23% 8/12/96 130 AT&T 39.58 32.75 -17.25% 8/13/96 250 3Com Corp. 46.86 28.13 -39.98% 10/22/96 600 ATC Comm. 22.94 3.25 -85.83% Rec'd # Security In At Value Change 8/5/94 355 AmOnline 2581.87 15176.25 $12594.38 5/17/95 980 Iomega Cor 2594.53 15435.00 $12840.47 8/12/96 110 Minn M&M 7224.44 9501.25 $2276.81 8/11/95 125 Chevron 6285.61 8250.00 $1964.39 8/12/96 280 Gen'l Moto 14552.49 15470.00 $917.51 10/1/96 42 LucentTech 1999.88 2320.50 $320.62 8/24/95 130 KLA Instrm 5812.49 5508.75 -$303.74 8/12/96 130 AT&T 5145.11 4257.50 -$887.61 8/13/96 250 3Com Corp. 11714.99 7031.25 -$4683.74 10/22/96 600 ATC Comm. 13761.50 1950.00-$11811.50 CASH $39092.98 TOTAL $123993.48