Fool Portfolio Report
Thursday, July 3, 1997
Jeff Fischer (TMF Jeff)

ALEXANDRIA, VA, (July 3, 1997) -- Stocks ended the week strong, working higher on the shortened Thursday before taking a holiday for the next three days. The Fool gained 1.33% on Thursday and 4.27% for the week, while the S&P gained 3.34% over the past four days, and the Nasdaq Composite gained 2.05%.

Appropriate for celebrating the United States, all the market averages -- the Dow, S&P, and Nasdaq -- closed at new all-time highs. Happy Fourth of July! The Dow gained an even 100 points Thursday. (It could have tried for 221, the age of its young country.)

In the world of the Fool, by the end of the week America Online, KLA-Tencor, and Lucent were making new 52-week highs. America Online signed a sports deal with CBS SportsLine, and 3Com and KLA-Tencor were upgraded by analysts. There was no news that would make a person "reconsider a particular Fool stock."

LOOKING FOR GROWTH STOCKS.  Last Friday we reviewed the guiding principles of the Fool Portfolio, and Wednesday we reviewed the Foolish Eight Point Checklist for evaluating growth stocks. Today we'll touch on how we find those growth stocks for consideration. Mainly, there are two ways.

The first avenue shouldn't be a surprise. The Fool finds stocks online and through day-by-day living. Iomega and America Online are the best examples of small-caps that were brought to the Fool's attention through both online contact with others in the message boards and through personal use of the product. This is in part why we like investing in consumer-oriented companies: you know the product and can conduct hands-on research. Great investments that we see daily at Fool HQ abound: Microsoft, Intel, Dell, Coca Cola, and Domino's Pizza -- if it was public.

A second avenue used by Da Fool for finding growth stocks is straight out numerical-based research. Here we're usually dealing with names that we don't initially know or don't know as well. For a starting point we use the Investor's Business Daily stock pages to find companies that we enter into two different and evolving spreadsheets.

The first spreadsheet is for strong relative strength, high-growth stocks. Every three weeks we scan the list of Nasdaq Market stocks and circle companies that have relative strength of 95 or higher, year-over-year sales growth of at least 50%, floats of 5.0 million or more, daily dollar volumes of $3 million or more, and finally the stocks must be within 15% of their highs.

This monthly spreadsheet is relatively new for us (since last fall), although its criteria follow several of the requirements of the Foolish Eight Point Checklist, written of Wednesday. This "search" process is a formalized way to weed out potential stocks for further consideration. In the recent past the list has included many stocks that have outperformed the market in the subsequent months, including Tellabs, McAfee, Innovex, Medicis (an old Fool stock), Scopus Technology, Remedy and Cymer. The list usually results in twenty-five to forty stocks that we then begin to research more deeply -- beginning with the Eight Point Checklist.

The second screen that we complete every three weeks takes a very different approach. This time we look for companies on both the NYSE and Nasdaq with a relative strength of 5 or below, a share price above $8, a minimum float of 5.0 million, and a daily dollar volume exceeding $2 million. Further, the company must be covered in the S&P Stock Guide that we receive each month, and all companies must be United States companies -- no ADRs.

This spreadsheet is affectionately (though maybe tentatively) named by David Gardner as the "Gods and Dogs" spreadsheet. Its purpose is to look for absolute dogs with no relative strength and very poor financials, and to also find "gods," or former leading stocks that may have unfairly gotten crushed on temporary circumstances. The so-called "dogs" are the companies with negative earnings and also assets to liabilities that are awful (worse than a one-to-one ratio). The "gods" are the companies with positive earnings and assets to liabilities that are good (better than two-to-one). (Assets to liabilities is found by dividing current assets by current liabilities and long-term debt.)

You might be surprised by some of the big names that show up on the spreadsheet with relative strength of below 5, and with strong earnings growth and balance sheets. Usually the stocks had been of high relative strength just recently. But there are just as many potential "dogs," with no earnings and miserable balance sheets.

TRUMP HOTELS (NYSE: DJT) first showed up on lists comprised in this fashion, as did QUARTERDECK (Nasdaq: QDEK) and other shorts that have been considered. The list usually results in about twenty to thirty-five potential stocks, which are cut down to a list of a dozen or so after the assets to liabilities are figured.

Both spreadsheets are being tweaked as we go, and are only starting points for considering stocks.

When we're comfortable with them we plan to offer the spreadsheet contents every three weeks as a service, because they are time-intensive and they are evolving. The lists of potential stocks already culled from the papers makes for interesting further research on companies that have already been drawn on stringent and -- we feel -- always improving factors.

In the end, though, arguably nothing beats good old "hands on" research and knowledge of company products. We look for consumer brand companies at good prices first and foremost, day-by-day. Still, while you're unlikely to call Cymer and order a laser before investing, the stock is up over 100% since October. Obviously looking beyond consumer names can result in great returns as well, from the likes of Medicis, Boston Technology, 3Com (at one point, and probably again), and we hope Innovex, and so on. As long as you understand what you've found before you invest in it, of course.

We were going to look at some stocks that we've considered in the recent past, but we'll have to wait until next week. We're out of time and space! We'll also discuss how Innovex and other stocks were first found.

Have a great Fourth of July! Fool on!

--- Jeff Fischer, July 3, 1997

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Stock Change Bid ---------------- AOL +1 1/2 62.50 T - 1/8 35.88 ATCT --- 5.00 CHV + 3/8 75.88 DJT - 1/2 10.13 GM --- 56.94 INVX + 1/8 27.63 IOM + 1/2 20.44 KLAC +1 54.25 LU +2 3/16 75.50 MMM + 13/16 101.81 COMS - 1/4 47.88
Day Month Year History FOOL +1.33% 4.07% 9.75% 192.91% S&P: +1.42% 3.59% 23.78% 100.03% NASDAQ: +0.82% 1.77% 13.68% 103.78% Rec'd # Security In At Now Change 8/5/94 355 AmOnline 7.27 62.50 759.70% 5/17/95 980 Iomega Cor 2.52 20.44 711.01% 10/1/96 42 LucentTech 47.62 75.50 58.56% 8/12/96 110 Minn M&M 65.68 101.81 55.02% 8/11/95 125 Chevron 50.28 75.88 50.89% 8/24/95 130 KLA Tencor 44.71 54.25 21.33% 8/12/96 280 Gen'l Moto 51.97 56.94 9.55% 8/13/96 250 3Com Corp. 46.86 47.88 2.17% 6/26/97 325 Innovex 27.71 27.63 -0.31% 8/12/96 130 AT&T 39.58 35.88 -9.36% 4/30/97 -1170 *Trump* 8.47 10.13 -19.56% 10/22/96 600 ATC Comm. 22.94 5.00 -78.20% Rec'd # Security In At Value Change 8/5/94 355 AmOnline 2581.87 22187.50 $19605.63 5/17/95 980 Iomega Cor 2594.53 20028.75 $17434.22 8/12/96 110 Minn M&M 7224.44 11199.38 $3974.94 8/11/95 125 Chevron 6285.61 9484.38 $3198.77 8/12/96 280 Gen'l Moto 14552.49 15942.50 $1390.01 8/24/95 130 KLA Tencor 5812.49 7052.50 $1240.01 10/1/96 42 LucentTech 1999.88 3171.00 $1171.12 8/13/96 250 3Com Corp. 11714.99 11968.75 $253.76 6/26/97 325 Innovex 9005.62 8978.13 -$27.50 8/12/96 130 AT&T 5145.11 4663.75 -$481.36 4/30/97 -1170*Trump* -9908.50 -11846.25 -$1937.75 10/22/96 600 ATC Comm. 13761.50 3000.00-$10761.50 CASH $40625.59 TOTAL $146455.97