Fool Portfolio Report
Friday, June 13, 1997
by Jeff Fischer (TMF Jeff)

ALEXANDRIA, VA, (June 13, 1997) -- The S&P soared this week, rising 4.11%, while the Nasdaq Composite gained 1.29%. The market continues to hit new highs, but nobody is screaming, "Sell everything now!"

The Dow has climbed to nearly 8,000 after passing 4,000 in the spring of 1995. Looking at the earnings estimates for the thirty companies involved, the sharp rise of the Dow isn't a big deal. As of last week the stocks traded at 17.2 times this year's estimates, and 15 times 1998 estimates, on average. That isn't outside the historical norm.

For now, who can argue with rising stock prices?

Consider the dominant position of America's leading companies, the lean business models, steady earnings growth, intelligent management of inventory and cash -- all this alongside an American economy with low inflation and sustainable growth.

The S&P 500 stocks are, in like fashion with the Dow, rising in tandem with growth in earnings. The S&P has risen 20% this year, and nearly 100% over the past three years.

Everyone is told that stocks are risky, but if you had bought the S&P three years ago, the index now needs to get dramatically halved (from 890 to 445) to merely bring you back to even. If the S&P got cut in half and you suddenly had the same amount of money that you had three years ago, you'd only need to imagine that the cash had been sitting in a checking account for the past 1,000 days.

Meanwhile, sure, stocks are risky in the short-term, but who invests for the short-term? You can't enjoy the benefits of long-term growth for only a short while.

Your money begins to truly compound after ten, twenty years -- if you've owned the right stocks. With that in mind, a mere week is boring, even when the S&P soars 4%. The media needs to crank out daily articles with exciting headlines, but it's to your benefit not to get excited by daily stock moves -- up or down -- but instead to always think with a long-term calm and self-assurance, and with confidence in a future far from now.

TWO. Foolish Four stocks gained strongly on the week, but we needn't cover them, as they're a mechanical and mindless part of this portfolio. 3M rose over $6, Chevron gained $4, and AT&T $2. Billions of dollars in market cap were tacked onto these three companies.

Our smaller stocks didn't fare as well. KLA-Tencor dropped $1 on the week after an analyst downgraded the stock due to price, while America Online rose a mere $1 despite announcing a new marketing agreement with CUC International. Iomega gained $1/2, while our short, Trump Hotels, rose nearly $2 after a CNBC broadcast talked the stock higher. Nope -- it didn't rise because the business looks any better.

Glancing at where some Fool stocks currently stand:

Earnings P/E on Est. 5 yr. Stock Est. (mo./yr.) Est. Ann. Growth Rate AOL $0.85 (6/98) 67 50% ATCT $0.26 (6/98) 21 30% COMS $2.47 (5/98) 19 30% KLAC $2.29 (6/98) 20 22% IOM $1.14 (12/98) 18 31% DJT -0.47 (12/98) N/A N/A
Of Interest: Coke $1.93 (12/98) 36 18% Microsoft $3.13 (6/98) 41 25% Intel $9.87 (12/98) 14 20%

At $57, AMERICA ONLINE (NYSE: AOL) is trading at the level that we've called "fair value" since January, measured by a subscriber-based valuation model. This doesn't mean that six months from now the "fair value" price won't rise. As long as the business continues to grow, the stock should too, which is why "fair value" is a weak and static measure in the fluid world of investing. People write, "It's at fair value, why not sell it?" It's only at fair value for now -- if it is.

Estimates on ATC COMMUNICATIONS (Nasdaq: ATCT) have come down considerably -- in fact, nearly cut in half -- from last October. Only a few analysts are covering it now, as the other few vanished into the shadows. The 30% growth rate is of questionable accuracy, but not out of the realm of possibility for such a small company. ATCT is "re-focusing" its business and that surprised everyone. The longer-term your outlook, the less it matters, as long as the company can pull it off.

3COM (Nasdaq: COMS) completed its merger with U.S. Robotics this week, so Robotics no longer trades as a separate company. 3Com and IOMEGA (NYSE: IOM) appear to be the best values in the Fool Port when you look at estimates compared to growth rates.

Meanwhile, people like to complain that COCA-COLA (NYSE: KO) and MICROSOFT (Nasdaq: MSFT) -- among other giants -- trade at very rich premiums compared to their growth rates. Coke trading at 36 times its far estimate while growing 18% annually doesn't sound too outrageous to me, though.

For one, you pay a premium to buy a company that presents much less risk than average. People have been complaining that large-caps are overpriced, but nobody mentions risk anymore -- the fact that there's much less risk involved in owning a large-cap over the long-term. Perhaps small-caps should trade below their growth rates, because growth is much less certain and more risky. Large-caps, arguably, deserve richer multiples.

Anyway, for the week the Fool gained only 0.55%, following a decent move last week.

THREE. Yeah, it hurts to be lagging a strong market this year, as much as the Fool portfolio is beating the market historically. Selling partial positions in Iomega and America Online didn't help, with Iomega now up $2 from our sell price, and America Online up about $11. There are no regrets, though, and the selling of the two partial positions was merited -- the two stocks accounted for 50% or more of the portfolio at times, and still account for 28%.

Meanwhile, as described in The Motley Fool Investment Guide, the Gardners believe in being as fully-invested in the market as possible -- and always for the long-term. In keeping with that spirit, their commonly followed sell approach is to sell only when it is believed that they have a better stock to replace the one being sold. This was the thought at the time that AOL and IOM were being sold -- we were close to new purchases, a few times. But things changed and we haven't made a purchase yet.

In the future, the aim is to sell a stock only when something better is already lined up and ready to be bought -- ideally on the same day as the sell. Being long-term investors, there's no need for "knee-jerk sells" -- (flailing arms and legs, followed by spittle-flinging shouts over the phone to a broker, demanding that KLA be sold because an analyst downgraded it). Not us. Not Foolish.

The idea of only selling when a better opportunity presents itself fits well with the big picture -- with the calm, "play-to-win-over-the-long-run" approach to investing. That's Foolish.

In that same vein, we don't sweat the mistakes made along the way. Mistakes are a part of investing. You can't invest and not make numerous errors. The most you can gain from each mistake is to learn a lesson, and to keep from making any same mistake twice. At least make a different mistake the next time around, and learn a new lesson.

Mistakes here have been numerous, from buying both KLA and Applied Materials (two very similar businesses), to buying ATC Communications and then not selling when the premise on which the stock was bought didn't pan out. (Actually, whether or not that's a mistake in the long run will be seen, but initially it is.)

No sweat. The more you learn from any mistake, the less it hurts you.

Invest for the long-term, and build family wealth over the years.

--Jeff Fischer, June 13, 1997

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Stock Change Bid -------------------- AOL - 5/8 58.50 T + 9/16 37.75 ATCT - 1/16 5.50 CHV +1 1/8 76.00 DJT + 1/4 11.63 GM + 3/8 57.25 IOM - 3/8 20.63 KLAC +2 9/16 46.13 LU +1 3/8 69.00 MMM + 3/8 98.75 COMS + 5/8 47.56
Day Month Year History FOOL -0.01% 3.72% 6.40% 183.95% S&P: +1.11% 5.30% 20.59% 94.87% NASDAQ: +0.83% 1.62% 10.22% 97.59% Rec'd # Security In At Now Change 5/17/95 980 Iomega Cor 2.52 20.63 718.45% 8/5/94 355 AmOnline 7.27 58.50 704.68% 8/11/95 125 Chevron 50.28 76.00 51.14% 8/12/96 110 Minn M&M 65.68 98.75 50.36% 10/1/96 42 LucentTech 47.62 69.00 44.91% 8/12/96 280 Gen'l Moto 51.97 57.25 10.15% 8/24/95 130 KLA Tencor 44.71 46.13 3.16% 8/13/96 250 3Com Corp. 46.86 47.56 1.50% 8/12/96 130 AT&T 39.58 37.75 -4.62% 4/30/97 -1170 *Trump* 8.47 11.63 -37.27% 10/22/96 600 ATC Comm. 22.94 5.50 -76.02% Rec'd # Security In At Value Change 8/5/94 355 AmOnline 2581.87 20767.50 $18185.63 5/17/95 980 Iomega Cor 2594.53 20212.50 $17617.97 8/12/96 110 Minn M&M 7224.44 10862.50 $3638.06 8/11/95 125 Chevron 6285.61 9500.00 $3214.39 8/12/96 280 Gen'l Moto 14552.49 16030.00 $1477.51 10/1/96 42 LucentTech 1999.88 2898.00 $898.12 8/24/95 130 KLA Tencor 5812.49 5996.25 $183.76 8/13/96 250 3Com Corp. 11714.99 11890.63 $175.64 8/12/96 130 AT&T 5145.11 4907.50 -$237.61 4/30/97 -1170*Trump* -9908.50 -13601.25 -$3692.75 10/22/96 600 ATC Comm. 13761.50 3300.00-$10461.50 CASH $49211.92 TOTAL $141975.55