Fool Portfolio Report
Tuesday, May 27, 1997
by Jeff Fischer (TMF Jeff)

ALEXANDRIA, VA., (May 27, 1997) --  Continuing Friday's move, stocks jumped to new record levels today.

Nasdaq led the parade, soaring another 1.40%. The Nasdaq Composite has gained 12% this month, led by big names like Intel and Microsoft. Meanwhile, talk is still circulating that small caps are finally ready to move. Small cap stocks have lagged the market for the past twelve months, even though earnings have usually beat expectations, and the group is growing more quickly than any other.

The Fool gained 1.23%, and has gained over 7% for the month. 3COM (Nasdaq: COMS) led the Foolish charge, gaining another $3 1/2 on top of last week's $7 gain. The stock of the number two networker has almost doubled from the low made less than four weeks ago.

The Fool slapped down $11,700 and bought the stock in August of last year at $46.86 (including commissions). All of us saw it soar above $81 in November, but then plummet even more quickly, losing $17 in one week alone in February, to $47; only to fall further, to $24, by late April. It has been a wild ride.

The latest leg up has been fueled by positive comments from analysts, some of which are seeing more of the potential in the U.S. ROBOTICS (Nasdaq: USRX), 3Com merger that should finalize in June. Some analysts are also feeling that the outlook for networking as a whole may be turning more positive. The merry-go-round in networking (great outlook, to terrible outlook, to good outlook again) is a shame. That 3Com -- a world-leading company -- went from a $14 billion market cap in November, to about $4 billion in April, is hard to believe. It's now back above $8 billion.

One analyst stated that while the stock has bounced, it's still relatively cheap.

Whatever that means, who knows.

Another person's off-the-cuff statement about any stock should be worth this to you: Nothing. At best, any thoughts you read or hear on investments are simply ideas to look into, if interested. The same holds true with anything on the Fool, of course.

3Com announces earnings for the fiscal year of 1997 during the third week of June. $0.48 is expected, bringing the fiscal year-end total to $2.05 per share. The stock trades at 22.7 times that estimate, and 18.8 times the estimate of $2.47 for the year ended May of 1998. The numbers don't take into account the merger with U.S. Robotics, of course. U.S. Robotics soared $6 to above $80 today. The stock was as low as $40 less than one month ago.

Past earnings do show that considerably more of 3Com's sales are importantly coming from routers and hubs. Meanwhile, one person with 3Com connections, which we could cryptically and Wisely quote as an "inside source," shared this sentiment with us as well, along with great thoughts on 3Com's adapter card strategies. In this case, the information is not private, but it was asked by the contributor that it not be discussed until all was certain that it was fine to discuss even such general, known, and open information. So we won't discuss it right now. If we do in the future, we'll use the person's full name.

Only the Wise often choose to be nameless.

CNBC's Dan Dorfman was the most annoying user of "inside sources," as each day he spewed off information that would often blur the line between "inside information" and mere hype -- or rumor. Much of the same behavior circulates the current world of the Wise, though lately on larger issues.

Several weeks ago, The Wall Street Journal reported that "inside sources" involved with AMERICA ONLINE (NYSE: AOL) shared that the company was in talks to buy COMPUSERVE (Nasdaq: CSRV). The paper implied that it was all but a done deal, giving a price of $11.50 to $14.00 for Compuserve shares.

Compuserve's stock rose about 25% on the news. It's now back down to $10 1/8, the price before the "news." AOL shares rose sharply too, and that stock has continued to rise, but on other announcements (earnings, network improvements, analyst upgrades). AOL's stock is now above $55, and less than $2 from a new 52-week high.

Anyway... who were these "inside sources" that the Journal referenced? Were the sources correct, but the talks died? Or did the sources only have an interest in seeing Compuserve's stock rise? Or will the deal still come about?

Also, why didn't these "inside sources" represent "inside information?" Because it was nothing but speculation? But then why did The Wall Street Journal print that speculation at the top center of its front page?

Today that same newspaper reported -- front page, top story -- that AT&T (NYSE: T) is in talks to merge with Baby Bell company, SBC Communications, in a $50 billion deal. The CEO of LCI INTERNATIONAL (NYSE: LCI) was quick to talk down the deal, stating that such a large merger wouldn't be fair so soon in the young industries' life -- a life that was meant to be anti-monopoly.

SBC controls a majority of the residential markets in the countries' ten largest cities, and would boost AT&T's market-share above 60% again. Already the Federal Communications Commission has stated that the rumored merger would raise many questions, and probably face several challenges.

SBC Communications only recently closed its acquisition of another Baby Bell company, Pacific Telesis Group, in a $17 billion merger. Now, this $50 billion deal with AT&T would be the largest merger in corporate history. Such a merger doesn't make much sense in an industry that was recently regulated to make it more competitive. But we'll see. Maybe the Journal is dead on the money.

AT&T and SBC Communications officials both refused to talk about the rumor -- at all.

Of course they refuse. If they did talk, that would constitute inside information.

The inside sources -- or "people close to the talks" -- if they exist, can't come out in public with the story. So why can they presumably share it with the Journal, and the Journal then prints it as news?

"Inside sources," "people familiar with the story" -- those types of lines are used far too frequently, and if anything they should be a sign of a story holding poor journalistic quality. If the statements made don't constitute inside information, they must be sloppy journalism, being only rumor from an unnamed source. Hardly front page, center material.

If the deal does come about, I'll apologize in one regard to The Wall Street Journal. But otherwise, I call it -- and the America Online/Compuserve story -- little more than sloppy.

Also, it's interesting that AT&T's stock rose 10% last week before the rumor was printed.

Finally, the merry-go-round on Wall Street that was and is the networking story is a good example of the need to be Foolish.

--- Jeff Fischer, May 27, 1997

Stock Change Bid -------------------- AOL +1 7/8 55.50 T +1 37.25 ATCT --- 3.88 CHV - 3/4 70.25 DJT + 3/8 10.13 GM + 1/2 58.00 IOM + 1/4 17.25 KLAC +2 51.50 LU + 1/4 64.25 MMM -1 1/8 91.00 COMS +3 1/2 46.63
Day Month Year History FOOL +1.23% 7.14% 2.69% 174.06% S&P: +0.32% 6.04% 14.71% 85.36% NASDAQ: +1.40% 11.77% 9.15% 95.67% Rec'd # Security In At Now Change 8/5/94 355 AmOnline 7.27 55.50 663.41% 5/17/95 980 Iomega Cor 2.52 17.25 584.52% 8/11/95 125 Chevron 50.28 70.25 39.70% 8/12/96 110 Minn M&M 65.68 91.00 38.56% 10/1/96 42 LucentTech 47.62 64.25 34.93% 8/24/95 130 KLA Tencor 44.71 51.50 15.18% 8/12/96 280 Gen'l Moto 51.97 58.00 11.60% 8/13/96 250 3Com Corp. 46.86 46.63 -0.50% 8/12/96 130 AT&T 39.58 37.25 -5.88% 4/30/97 -1170 *Trump* 8.47 10.13 -19.56% 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 19702.50 $17120.63 5/17/95 980 Iomega Cor 2594.53 16905.00 $14310.47 8/12/96 110 Minn M&M 7224.44 10010.00 $2785.56 8/11/95 125 Chevron 6285.61 8781.25 $2495.64 8/12/96 280 Gen'l Moto 14552.49 16240.00 $1687.51 8/24/95 130 KLA Tencor 5812.49 6695.00 $882.51 10/1/96 42 LucentTech 1999.88 2698.50 $698.62 8/13/96 250 3Com Corp. 11714.99 11656.25 -$58.74 8/12/96 130 AT&T 5145.11 4842.50 -$302.61 4/30/97 -1170*Trump* -9908.50 -11846.25 -$1937.75 10/22/96 600 ATC Comm. 13761.50 2325.00-$11436.50 CASH $49020.02 TOTAL $137029.77