Fool Portfolio Report
Tuesday, May 13, 1997
by Jeff Fischer (TMF Jeff)
VIRGINIA BEACH, VA., (May 13, 1997) -- All was right in the Fool's world today. Nearly all of our stocks were down, and our one short position was up. The market dropped as it should, and happily our portfolio fell more. Our goal of underperforming the market is beginning to come to fruition.
This has been the worst bull market in history, one that has lifted us higher though we've tried to fight it. While 90% of mutual funds have been adept enough to lose to the market over the last five years, we haven't been so lucky. We've instead topped the S&P by eighty percentage-points since August of 1994 -- returning 160% to the market's 80%. We've been hoping for a bear market to bring us down, and while some corrections of 10% or more have come and gone, we can't wait any longer for the real deal. We must be proactive.
In our quest to mirror the majority of mutual funds in total returns, we're going to begin trading our stocks actively, buying options, pork bellies, and bonds, and investing in the Mexican Peso -- as well as in a certain high-tech gum manufacturing company that we recently discovered. We're also going to short stocks like Iomega and America Online, which have higher annualized returns over the past five years than both Microsoft and Intel. Witness:
Past five-year annualized returns
America Online 86%
We realize that had we shorted America Online and Iomega from the beginning, rather than buying them long, we would be absolutely Wise right now: we would owe money to our broker. We may want to consider shorting Microsoft and Intel, too, as both stocks have consistently beat the market.
Today held few surprises. Quality investments like Trump Hotels rose to our delight, as we're short the stock, while losers such as networking giant, 3Com, fell -- to our pleasure.
TRUMP HOTELS (NYSE: DJT) was as much as five percent higher before closing only $1/8 above yesterday's price, but still -- higher. It isn't surprising to see this gem move higher even in a sharply down market. The company is in a fantastic position and has a fine reputation for taking on more debt at high rates, while losing money every year.
The stock has been rising because the three analysts following the company lowered earnings estimates during the last two weeks. Two analysts had expected profits in 1998, but no longer is that the case. The consensus estimate for 1998 now stands at a $0.48 per share loss. For 1997, estimates were lowered substantially to a loss of $0.82 from a loss of $0.43. For the current quarter, the consensus estimate was formerly $0.09, but it has been lowered to only $0.01 per share.
A strong gambling quarter that rings in a penny of profit would mean a hefty $2.4 million would flow to the Trump bottom line. With that type of money, eventually Trump Hotels could wipe out 1% of its $1.7 billion in debt -- preferably the debt financed at 15%, rather than the debt financed at the low, low rate of 11%.
The company's position has not improved, so the stock has been rising. Estimates have been lowered, so the stock is rising in anticipation.
The company is attractive because it has $1.7 billion in debt. For each $10 share that an investor buys, they acquire about $70 per share in debt. Add to that $200 million in interest payments per year, or $8.25 per share, and for each $10 stub you acquire over $78 in debt. The attraction to the stock is unquestionable.
Trump needs to earn $70 per share in order to pay off its debt. It may earn a penny per share next quarter.
A slim profitable quarter or two may occur before the fall season descends upon the East Coast. As orange pumpkins are carved and candles lit, while the wind turns cold and leaves fade brown, the losses are expected again at Trump. Winter should bring loss, and again loss should reign for the next two fiscal years.
It's a wonderful investment and deserves to rise.
$1.7 billion in debt. Only $253 million in current assets. And all the while, the business is adding nothing to the bottom line that remains: any income is eaten away as soon as it's made, if it is made.
Compare the picture-perfect investment scenario of Trump Hotels to that of a stock that rightfully fell today: MICROSOFT (Nasdaq: MSFT). Microsoft is a fat and wasteful giant.
Unlike the slim operating model that Trump employs, Microsoft has over $10 billion in current assets, as well as $9.1 billion in cash -- much of which pathetically serves little purpose but to earn millions per month in interest. Meanwhile, the company is increasingly bringing more sales (read: FAT) to the bottom line, as net margins rose above 30% last quarter. Its costs are declining and its market dominance is growing.
The company is expected to earn $2.63 per share this year and $3.12 per share next year -- or about $7 billion dollars over the next eighteen months. What can one company do with all that money?
What a waste.
Slim down, Microsoft! Or you'll never attract investors.
Meanwhile, the Securities Exchange Commission declared that 3COM's (Nasdaq: COMS) merger proposal with U.S. ROBOTICS (Nasdaq: USRX) is "effective," meaning it's on track as planned. Shareholders from both sides will meet on June 11th, and the deal should be finalized this summer.
3Com's stock rightfully fell on the news. The second-largest networking firm is joining with the largest modem manufacturer to form an entity that will control a majority stake in several networking fields -- a sector that promises to grow consistently over the next five years. Both companies are profitable and have plenty of cash.
GENERAL MOTORS (NYSE: GM) fell as PaineWebber downgraded the stock from attractive to neutral. The analysts gave no details, which delighted investors and fed their happy and frantic selling.
Those of us already in the stock and catching the downdraft are happy with the downgrade and we thank PaineWebber. We like that the company gave no reason for the downgrade. We enjoy the uncertainty which made our stock drop over $1 billion in market cap in a day.
That's what took place today as the Fool gracefully underperformed the market. Once we fall below the S&P's historic returns we plan to offer a Fool mutual fund, run glossy ads in magazines, and begin charging fees for Fools to send us their money.
We're also going to predict where the market is going in the near-term -- and then trade your money on those predictions. We think, like many on Wall Street, that the future is predictable. Easily. All of it.
---Jeff Fischer, May 13, 1997
Stock Change Bid -------------------- AOL - 1/4 49.63 T --- 32.88 ATCT + 1/16 4.00 CHV - 1/4 72.50 DJT + 1/8 10.13 GM -2 56.75 IOM - 1/2 17.88 KLAC - 1/2 47.75 LU -1 1/4 61.63 MMM - 7/8 91.50 COMS -1 1/8 36.88Day Month Year History FOOL -1.33% 3.22% -1.07% 164.03% S&P: -0.54% 3.97% 12.47% 81.75% NASDAQ: -0.79% 5.78% 3.30% 85.17% Rec'd # Security In At Now Change 5/17/95 980 Iomega Cor 2.52 17.88 609.33% 8/5/94 355 AmOnline 7.27 49.63 582.60% 8/11/95 125 Chevron 50.28 72.50 44.18% 8/12/96 110 Minn M&M 65.68 91.50 39.32% 10/1/96 42 LucentTech 47.62 61.63 29.42% 8/12/96 280 Gen'l Moto 51.97 56.75 9.19% 8/24/95 130 KLA Tencor 44.71 47.75 6.80% 8/12/96 130 AT&T 39.58 32.88 -16.94% 4/30/97 -1170 *Trump* 8.47 10.13 -19.56% 8/13/96 250 3Com Corp. 46.86 36.88 -21.31% 10/22/96 600 ATC Comm. 22.94 4.00 -82.56% Rec'd # Security In At Value Change 8/5/94 355 AmOnline 2581.87 17616.88 $15035.01 5/17/95 980 Iomega Cor 2594.53 17517.50 $14922.97 8/12/96 110 Minn M&M 7224.44 10065.00 $2840.56 8/11/95 125 Chevron 6285.61 9062.50 $2776.89 8/12/96 280 Gen'l Moto 14552.49 15890.00 $1337.51 10/1/96 42 LucentTech 1999.88 2588.25 $588.37 8/24/95 130 KLA Tencor 5812.49 6207.50 $395.01 8/12/96 130 AT&T 5145.11 4273.75 -$871.36 4/30/97 -1170*Trump* -9908.50 -11846.25 -$1937.75 8/13/96 250 3Com Corp. 11714.99 9218.75 -$2496.24 10/22/96 600 ATC Comm. 13761.50 2400.00-$11361.50 CASH $49020.02 TOTAL $132013.90