Fool Portfolio Report
Wednesday, April 30, 1997
by David Gardner (DavidG@fool.com)
ALEXANDRIA, VA, April 30, 1997-- Market up strong again Wednesday, as the Fool tried to keep pace. I say tried because we're sitting 30% in cash, and so haven't participated to the full extent in the market's latest surge. That said, the Fool Port rose 1.06%, outpacing the S&P 500 (up 0.92%) but lagging the quickly warming Nasdaq (up 1.46%).
The big thing today was our official short of TRUMP HOTELS AND CASINO RESORTS (NYSE:DJT). Yep... it's official... the Fool is now short the Donald!
NOTE: We have theme music tonight. It's a 200K PC-only wave file download, so don't bother if you have a slow connection or a mac. But for those who can afford a couple minutes, download it and then listen as you're reading the rest of the report! Here's the link: Tonight's Fool theme music.
We did the trade in the mid-afternoon, shorting 1170 shares at $8 1/2, and the stock closed at its ask of $8 5/8. I had fun dropping into our Fool Chat (hosted on AOL) to announce the grand moment. Which reminds me. If you're on AOL, you'll be happy to know we now have fully Foolish daytime market chats back and better than ever, 10 AM to 5 PM ET, every weekday. Hosted by Karen Kosoy and Sharon Wagner, and joined by a cast of Foolish characters, our chats concentrate on educational group discussion and humorous quips about whatever's on CNBC at the moment. This environment represents a great improvement over the unhosted chat rooms of several months ago, and I encourage you to drop by from time to time. I do!
Back to Trump. There was one thing that we didn't really mention much in our initial short report, but that bears brief discussion here. Namely, do you recognize how outrageous it is for us to short stocks as we do in broad daylight? Most of the hedge funds and other "short bureaus" carefully guard (cloak-and-dagger) the lists of their short holdings. Why? They don't want mutual-fund and brokerage-firm supporters to go in and whack their short positions.
If you're unfamiliar about this, it's well worth learning. Mutual funds and brokerage firms that have a holding in a stock often target short sellers through concerted buy efforts. The idea is to concentrate a bunch of their buying at once, driving up the share price and scaring the shorts out. I've heard it straight from the horse's mouth before, successful mutual-fund managers telling me they "went in to whack the shorts" on this or that stock. It's perfectly legal, and does happen. And that's why you'll have a hard time finding any gooroos providing you their firm's (or fund's) short picks. They just don't want you to know.
That's why I wanted to acquaint you, our Foolish reader, with just how insanely Foolish our shorting is. Running America's most thoroughly scrutinizable (and scrutinized) portfolio, it's absolutely insane for us to announce we're shorting this or that tomorrow or the next day. You won't find anyone else doing that. (Of course, you also won't find anyone else making his real-money stock portfolio public, deducting all fees, comparing it to the market indices, and letting you know ahead of time everything he's doing!) But as you well know, dear reader, we're Fools. Even more Foolish, we're now short Trump.
OK, back to business. In addition to the obligatory up moves of our darling growth stocks -- I mean, ya gotta rise on a day like today, right? -- we had an extremely rare moment with ATC COMMUNICATIONS (Nasdaq:ATCT). Namely, the stock went up. Up an eighth. Normally, this would be interesting enough on its own. But in this case, our company also happened to report earnings at market open today.
And you know what? I was actually pleasantly surprised. In fact, I'm coining the term "unhorrible" to depict my view of today's earnings report. As I wrote Monday, I was expecting red ink and I think the market was too. Sure, consensus earnings estimates were 7 cents per share, but the market's relentless crush of this security made it obvious ahead of time that the company was going to underperform estimates for the third quarter in a row. And it did. But not as bad as I thought.
ATCT's third-quarter sales rose a measly 6% to $24.5 million, while net income decreased 64%. Earnings per share came in at 2 cents, vs. 5 cents in 3Q 1996. Small-cap growth companies that begin to lose top-line sales growth often show horrible declines in their profitability, because they have to continue to spend to build their businesses. That's what happened to the fellas in Dallas.
But could it have been worse? Darn right. It could've been much worse. I'm actually somewhat impressed that CEO Chavoya managed to keep the company profitable through the slowdown. Meanwhile, ATC announced "an expense reduction program to match expenses with expected revenue levels," believing that "negative client impact on revenues will not continue past the fourth quarter."
ATC further announced it was considering repurchasing up to 5 million of its shares, believing them "undervalued due to the recent decline." "Decline" is an understatement, dear reader. This one's been taken out and shot so full of holes, there's more Swiss than cheese there, by now.
Five million ATC shares represent in excess of 20% of shares outstanding... a pretty huge percentage. Please note that in many cases "board authorization to repurchase" is not mandatory. It could be that the company doesn't actually spend one tin-lizzy nickel buying back its stock. That would surprise me, however.
I really don't know whether this stock could be any cheaper. With 27 cents in trailing earnings, the market has in my opinion extremely overreacted on the downside (just as, in retrospect, it overreacted -- along with us, unfortunately -- to the upside). I can see a $10 stock here within 18 months, should the company right itself and build earnings again. Even if it just got back to 40 cents in earnings 18 months from now, put a 25 PE on it and you have (25 x .40)... $10. Am I saying it's going to happen. Can't, for sure. I am saying the risk/reward ratio is pretty low. Fine, ATCT isn't the Next Big Thing. But it's also not going out of business, operating in a growing industry that is currently terribly out of the market's favor. My thoughts, anyway.
We're continuing to look around for an additional short or two, to round out the portfolio. We also intend to plow our money back into a mix of growth companies over the next two months. Stay Foolish.
--- David Gardner, April 30, 1997
Stock Change Bid -------------------- AOL +1 1/8 45.13 T + 1/4 33.50 ATCT + 1/8 3.06 CHV + 5/8 68.50 DJT + 1/4 8.63 GM + 1/2 57.88 IOM + 3/4 17.25 KLAC - 3/4 44.50 LU + 7/8 59.00 MMM + 1/8 87.00 COMS + 3/8 29.00Day Month Year History FOOL +1.06% 3.28% -4.16% 155.79% S&P: +0.92% 5.84% 8.18% 74.81% NASDAQ: +1.46% 3.20% -2.34% 75.06% Rec'd # Security In At Now Change 5/17/95 980 Iomega Cor 2.52 17.25 584.52% 8/5/94 355 AmOnline 7.27 45.13 520.70% 8/11/95 125 Chevron 50.28 68.50 36.22% 8/12/96 110 Minn M&M 65.68 87.00 32.47% 10/1/96 42 LucentTech 47.62 59.00 23.91% 8/12/96 280 Gen'l Moto 51.97 57.88 11.36% 8/24/95 130 KLA Instrm 44.71 44.50 -0.47% 4/30/97 #### *Trump Hot 8.47 8.63 -1.84% 8/12/96 130 AT&T 39.58 33.50 -15.36% 8/13/96 250 3Com Corp. 46.86 29.00 -38.11% 10/22/96 600 ATC Comm. 22.94 3.06 -86.65% Rec'd # Security In At Value Change 8/5/94 355 AmOnline 2581.87 16019.38 $13437.51 5/17/95 980 Iomega Cor 2594.53 16905.00 $14310.47 8/12/96 110 Minn M&M 7224.44 9570.00 $2345.56 8/11/95 125 Chevron 6285.61 8562.50 $2276.89 8/12/96 280 Gen'l Moto 14552.49 16205.00 $1652.51 10/1/96 42 LucentTech 1999.88 2478.00 $478.12 8/24/95 130 KLA Instrm 5812.49 5785.00 -$27.49 4/30/97 #### *Trump Hot -9908.50 -10091.25 -$182.75 8/12/96 130 AT&T 5145.11 4355.00 -$790.11 8/13/96 250 3Com Corp. 11714.99 7250.00 -$4464.99 10/22/96 600 ATC Comm. 13761.50 1837.50-$11924.00 CASH $49020.02 TOTAL $127896.15