Fool Portfolio Report
Friday, May 23, 1997
by Jeff Fischer (TMF Jeff)
ALEXANDRIA, VA, (May 23, 1997) -- All the markets hit new highs on Friday -- fundamentally meaning: anyone that ever sold the market, at this moment, was wrong.
ONE. Change of gears.
Let's quickly review the performance of Warren Buffett's stock, BERKSHIRE HATHAWAY (NYSE: BRK.A):
Buffett's stock: + 8.25%
The S&P 500: +20.26%
Berkshire Hathaway has underperformed the market. That's a true statement, supported by numbers.
Looking at the numbers, more than a few people have stated that the Fool is badly underperforming the market. True -- for a certain time period. The Fool is up 1.44% for the past five months, while the S&P is up more than 14%.
Next, slowly pull back the curtain and look at the Fool's performance just prior to our re-setting of the odometer at the New Year. Peek and see why we endlessly bragged during the twilight of 1996:
The ability to brag was taken away from us with the turn of a page. How can we brag now?
Over the Fool Portfolio's history, it has an annualized return of 43% -- while the S&P, since August of 1994, has returned an unusually strong 24% annualized. The Fool of course won't continue to grow at 42% per year -- that's near insane. Our goal is to return about 22% annualized -- or a "Babe Ruth double" of the typical market gain.
(Hear that? That's the sound of a bat hitting a baseball, and big old Babe Ruth has begun to amble, with skill, down the first-base line....)
We're off to a fine start.
"But look at the trailing 52-week returns!" the crowd hisses, throwing stale popcorn down the stands, and onto the green grass. "The portfolio is down 25% since last year at this time!"
That's not surprising. This is a portfolio of a dozen stocks, not a mutual fund of two hundred. It isn't going to advance "steadily" -- not when one stock can soar, or get crushed, to the point of altering the performance of the entire portfolio significantly for a time. Last year at this time, almost to the day, Iomega closed at $53 7/8 per share, and this portfolio was up 308%. Naturally the portfolio has fallen since then. The only way to avoid that would have been to sell Iomega at the high.
If that had been accomplished, a display of ego the likes of which has never been seen before would have led to the ruin of this column, and maybe to the Internet as a whole; and then -- of the world.
Volatility of a portfolio of twelve stocks -- especially growth stocks -- is a given. This portfolio rose 11% on May 22nd of last year. It's that volatile. For certain measures of time the trailing performance will look miserable. The portfolio should advance steadily when looked at from the arm-length of a decade, though -- and it should beat the market (if we meet our goal) by about double. That's the Foolish aim!
TWO. For the week the Fool gained 3.16%, while the S&P and Nasdaq hitched on 2.08% and 3.65% in value. Stocks ended Friday on a surprisingly strong note, with markets gaining over one percent in the afternoon. The tone of the week was set when the Fed decided to leave interest rates steady on Tuesday. The Nasdaq Composite has gained over 10% this month.
In the last five days 3COM (Nasdaq: COMS) recovered $7, as networking stocks bounced back from a first quarter slide. The industry is growing at over 25% per year, with strong margins and no apparent threats on the horizon: it isn't terribly surprising to see the stocks recovering.
We've written many positive articles on networking over the past five months while the stocks have gone down -- and down -- and down. 3Com rose this week, in part, on news of winning more product awards, while the merger with U.S. ROBOTICS (Nasdaq: USRX) will be completed by early summer. In Friday's Fool news, Randy Befumo wrote a full column on 3Com. The stock is down 8% on the Fool since August.
Also moving up, AMERICA ONLINE (NYSE: AOL) gained more than $3 this week, to top $53. In a recent Forbes article a gentleman gave his opinion that the fair value of AOL is $9.20, or $880 million. At that market cap, with $1.5 billion in trailing sales, it would trade at 0.58 times sales.
The company's ANS subsidiary and its AOLNET are worth $300 million alone, or over $3 per share. Meanwhile, each AOL member generates an annual $270 in advertising, merchandise and transactions fees. Currently, the company values each peson at $750, which is reasonable when you consider the life-span of a member.
A subscriber based-valuation puts AOL Network's value at $6 billion, or $53 a share -- the current price -- as we've been figuring since January. Add the other $300 million in value and a fair price of around $56 is realistic. It's likely the company can have over 12 million members in a two years, and then a price above $80 is conceivable -- all else being equal -- and especially if earnings begin to surmount as expected.
FOUR. PHILIP MORRIS (NYSE: MO) was the topic most discussed this week, the question being: is it an ethical investment? One issue not mentioned by others: MO's primary business has not changed, despite the fact that the preferences of the country have shifted dramatically -- against that business. If a company must fight the public in order to serve its customers, I'd avoid it as an investment.
Granted, Europe, Asia, and most of the world hasn't had the backlash against cigarettes that this country has, but their time will come. A product that's detrimental to consumers and not accepted by the majority (unlike alcohol) eventually faces an uphill battle.
Lawyers are discussing the possibility of controlling the amount of nicotine in cigarettes, in hopes of lowering their addictive nature; meanwhile, tobacco companies are still avoiding full FDA regulation of the drug. Tobacco companies, worth noting, are the largest tax payers in the country.
Knowing your investments well, in the spirit of Peter Lynch, implies a certain pride in your investments. A company that doesn't want to allow "full-disclosure" (meaning, full FDA regulation of its drug) is enough to solidify any decision for me.
END. Here's hoping you have an enjoyable Memorial Day weekend! Whether you're off to the races (see you there!), heading to a company picnic (poor you), or slinging a rifle over your shoulder and hunting dinosaurs in The Lost World, be Foolish! And try to catch the National Memorial Day Concert on Sunday night.
Being highly appreciative of America and all those that have kept it a free country... Fool on!
--- Jeff Fischer, May 23, 1997
1. The Daily Dow
Report: Fool Four Move Up.
2. Friday's Evening News: 3Com vs. Intel.
3. Weekend Stock Research.
4. The Daily Trouble: Scholastic Corp. -- bad books?
5. The Daily Double: Reliability Inc. -- reliable?
Stock Change Bid -------------------- AOL +1 3/4 53.63 T + 7/8 36.25 ATCT --- 3.88 CHV +1 1/2 71.00 DJT + 1/8 9.75 GM + 7/8 57.50 IOM - 1/4 17.00 KLAC + 3/4 49.50 LU +1 3/4 64.00 MMM +1 7/8 92.13 COMS +1 1/2 43.13Day Month Year History FOOL +1.14% 5.84% 1.44% 170.72% S&P: +1.36% 5.70% 14.35% 84.78% NASDAQ: +1.25% 10.23% 7.64% 92.97% Rec'd # Security In At Now Change 8/5/94 355 AmOnline 7.27 53.63 637.62% 5/17/95 980 Iomega Cor 2.52 17.00 574.60% 8/11/95 125 Chevron 50.28 71.00 41.20% 8/12/96 110 Minn M&M 65.68 92.13 40.27% 10/1/96 42 LucentTech 47.62 64.00 34.41% 8/24/95 130 KLA Tencor 44.71 49.50 10.71% 8/12/96 280 Gen'l Moto 51.97 57.50 10.63% 8/13/96 250 3Com Corp. 46.86 43.13 -7.97% 8/12/96 130 AT&T 39.58 36.25 -8.41% 4/30/97 -1170 *Trump* 8.47 9.75 -15.13% 10/22/96 600 ATC Comm. 22.94 3.88 -83.11% Rec'd # Security In At Value Change 8/5/94 355 AmOnline 2581.87 19036.88 $16455.01 5/17/95 980 Iomega Cor 2594.53 16660.00 $14065.47 8/12/96 110 Minn M&M 7224.44 10133.75 $2909.31 8/11/95 125 Chevron 6285.61 8875.00 $2589.39 8/12/96 280 Gen'l Moto 14552.49 16100.00 $1547.51 10/1/96 42 LucentTech 1999.88 2688.00 $688.12 8/24/95 130 KLA Tencor 5812.49 6435.00 $622.51 8/12/96 130 AT&T 5145.11 4712.50 -$432.61 8/13/96 250 3Com Corp. 11714.99 10781.25 -$933.74 4/30/97 -1170*Trump* -9908.50 -11407.50 -$1499.00 10/22/96 600 ATC Comm. 13761.50 2325.00-$11436.50 CASH $49020.02 TOTAL $135359.90