Fool Portfolio Report
Monday, May 5, 1997
by David Gardner (MotleyFool)
ALEXANDRIA, VA, May 5, 1997-- Man... the one week you happen to be sitting 30% in cash, the market explodes. Ain't that just the cat's pajamas? Yes, ladies and gents, that's market timing done Foolishly... done not at all, in our case!
Following our partial sales of AOL and Iomega two weeks ago, we've since deployed our money in one new short sale, with several additional prospects (short and long) on the docket. Alas, we've hit the best week of the year so far with 30% in cash and a new short sale rising 14% against us! I'm just happy to still be playing ball in the same park as the indices. That was the case again today, as The Fool's 2.56% return kept pace with the Nasdaq's 2.60% tally, and actually managed to outdo the strong S&P 500 (up 2.12% on another huge day).
Headlining our portfolio Monday was our holding of AMERICA ONLINE (NYSE:AOL), as AOL skyrocketed $5 5/8 to close at $52 7/8. This strong performance is initially attributable to a "Buy" rating from Hambrecht & Quist, the San Francisco brokerage firm that initiated its coverage on AOL today. Don't ask me why H&Q waited this long to initiate coverage of the billion-dollar, world's-best-known online services company, but hey, we'll take the rating and the big move. It must be noted that H&Q earns plaudits for being one of the few brokerage firms that covers another billion-dollar high-tech best-of-breed operation: Iomega. (It continues to amaze me how few Wall Street firms cover IOM... so bully for Hambrecht!)
H&Q stated its belief that AOL would report strong third-quarter numbers today, 78 cents in earnings per share for fiscal 1998 (ended 6/98), and had overcome most of its connectivity problems. This report was certainly the initial impetus for today's move. But it's likely that anticipation of the company's after-market earnings announcement also had something to do with it.
You see, AOL rocked analysts' estimates.
Expected to lose 8 cents per share today, AOL cut its marketing costs spectactularly and achieved a 2-cent profit (on $456 million in sales). Chairman Steve Case has said all along that the company expected to be profitable by the June quarter, a claim that many bears thought not possible. This is partly because AOL has changed its accounting so that "customer acquisition" expenses now come straight out of the income statement, deducted from revenues. In the past, those amounts were not deducted from revenues, but rather "capitalized" as a balance-sheet item. With AOL's much publicized change in accounting, many had thought the company might never show a profit, or positive cash flow in any form.
They thought wrong!
With the change to flat-rate pricing in December, the company had a huge surge in demand, further enhanced by an expensive national TV advertising campaign. Demand outstripped capacity supply, and AOL got bad press for creating a service not everyone could log on to. Then followed lawsuits from enterprising lawyers (OOPS! I meant to say "damaged customers"), followed by more bad press, customer cancellations, etc.
The upshot, however, was that AOL cut back its marketing expenses because there was no point in bringing new customers to a service that was hard to reach. AOL then announced a $350 million effort to blow out its network, which it began building in the third quarter. By the end (March 31st), the company had a good service that most could log onto at cheap prices for long hours. The stock has shot back to more than double its November lows. Patience, my dear Fools, has been rewarded once again.
We have the full story in our AOL earnings package special, and encourage you to contribute your thoughts to our AOL message folder. It'll be interesting to see whether the stock shot its wad today, or whether it'll open strong tomorrow.
And you kind of have to still think about those short sellers, with their 20+ million shares hanging out to dry....
Well, everything was up today, with the exception of a cooled-off KLA Instruments, which dropped a buck to $49 1/4. Even The Donald rose $3/8, now having risen a point above our short position initiated last week. More heavy volume for TRUMP HOTELS & CASINO REPORTS (NYSE:DJT) as the stock traded 380,000 shares today. The only news since our short was that a New Jersey judge tossed out a Trump lawsuit intended to block construction of a tunnel to Atlantic City's marina district, where several Trump rivals are setting up shop. Ah, well, the market's vicissitudes....
Hey, if I do one more of those ho-hum paragraph-enders with an ellipsis (....), I'm going to turn into Larry King. I have to stop that. Or rather, I have to stop that....
Now, to some of our buzzards. ATC COMMUNICATIONS (NASDAQ:ATCT) climbed back over $5, on a rampage since touching the mid $2's last week. Sure did look cheap there... especially after a not-bad earnings report. 3COM (NASDAQ:COMS) is also recovering from 52-week lows, up from $24 back to close at $35 5/8 bid, today.
All in all, it seems clear once again that God's in his heaven and all's right with the world. Unless you're short AOL!
--- David Gardner, May 5, 1997
Stock Change Bid -------------------- AOL +5 5/8 52.88 T + 1/8 33.88 ATCT + 7/16 5.19 CHV +1 1/8 70.25 DJT + 3/8 9.63 GM +1 58.00 IOM + 1/2 17.50 KLAC -1 49.25 LU +1 7/8 62.13 MMM +2 3/4 90.38 COMS +1 3/8 35.63Day Month Year History FOOL +2.56% 4.83% 0.48% 168.15% S&P: +2.12% 3.60% 12.08% 81.11% NASDAQ: +2.60% 6.23% 3.74% 85.97% Rec'd # Security In At Now Change 8/5/94 355 AmOnline 7.27 52.88 627.30% 5/17/95 980 Iomega Cor 2.52 17.50 594.44% 8/11/95 125 Chevron 50.28 70.25 39.70% 8/12/96 110 Minn M&M 65.68 90.38 37.61% 10/1/96 42 LucentTech 47.62 62.13 30.47% 8/12/96 280 Gen'l Moto 51.97 58.00 11.60% 8/24/95 130 KLA Instrm 44.71 49.25 10.15% 4/30/97 #### *Trump Hot 8.47 9.63 -13.65% 8/12/96 130 AT&T 39.58 33.88 -14.41% 8/13/96 250 3Com Corp. 46.86 35.63 -23.98% 10/22/96 600 ATC Comm. 22.94 5.19 -77.38% Rec'd # Security In At Value Change 8/5/94 355 AmOnline 2581.87 18770.63 $16188.76 5/17/95 980 Iomega Cor 2594.53 17150.00 $14555.47 8/12/96 110 Minn M&M 7224.44 9941.25 $2716.81 8/11/95 125 Chevron 6285.61 8781.25 $2495.64 8/12/96 280 Gen'l Moto 14552.49 16240.00 $1687.51 10/1/96 42 LucentTech 1999.88 2609.25 $609.37 8/24/95 130 KLA Instrm 5812.49 6402.50 $590.01 8/12/96 130 AT&T 5145.11 4403.75 -$741.36 4/30/97 ####**Trump** -9908.50 -11261.25 -$1352.75 8/13/96 250 3Com Corp. 11714.99 8906.25 -$2808.74 10/22/96 600 ATC Comm. 13761.50 3112.50-$10649.00 CASH $49020.02 TOTAL $134076.15