Fool Portfolio Report
Friday, July 11, 1997
by Jeff Fischer (TMF Jeff)

ALEXANDRIA, VA, (July 11, 1997) -- For the week the Fool gained 2.36% while the S&P dropped 0.03%. Nasdaq was strong, gaining 2.39% and hitting new highs.

Can you believe this? AMERICA ONLINE (NYSE: AOL) made a new all-time high, breaking above the $71 peak reached in May of 1996. The company has been on a roll since restructuring itself, laying out a business model that makes sense, and bringing in substantial cash through several marketing agreements. A profit last quarter surprised everyone.

The stock trades at 81 times the $0.87 per share estimate for fiscal 1998, which ends in five quarters. The estimate is probably best called a "guesstimate." TMF Templr's latest subscriber-based valuation puts the stock at $87 1/2 within 18 months.

LUCENT TECH (NYSE: LU) and KLA-TENCOR (Nasdaq: KLAC) also made new highs this week. Unfortunately for us, our short TRUMP HOTELS (NYSE: DJT) rose, too. Trump held its annual shareholders meeting on Thursday, causing the stock to rise on Friday.

Trump announced that it wants to sell one of its Atlantic City casinos in order to service some of its $1.7 billion in debt. The Fool short report states that if debt is paid down significantly, much of the impetus for the short is lost. The question is: can Trump sell a property, and what price would the property command? It's believed that Trump will attempt to sell Trump Plaza, which had $418 million in 1996 revenue and $78 million in net income.

The value of the particular property and its business is of question -- and the answer would reside in the amount of demand for the property. The Trump message board on "Fool AOL" (as opposed to "Fool on da Web") has been intelligently populated with the likes of "Brigam," who speculates that the market has undervalued the Trump properties for years, and that the sale price of any property would surprise everyone. Others state that Trump has attempted to sell property before, and that no one wanted it at the prices asked, and that no one will want it now.

The value of all three of Trump's properties, including all assets, plus a riverboat in Indiana, totaled just over $2 billion at the end of fiscal 1996. Three large Vegas names plan to build new casinos in Atlantic City in the next two to three years, probably spending $700 million to $1.2 billion per property. Trump is supposedly aiming to sell a casino to one of these companies, before they begin to build anew.

Initially we're skeptical that Trump can court a buyer for the older property, and that a buyer would pay enough to put a meaningful hole in Trump's debt. The stock rose on the news, though, and on word that the summer season was the strongest yet for Trump -- admittedly good news. But stocks often rise after shareholder meetings and on "the good word," while reality isn't so easy. Can Trump realistically unload a property? We'll be digging to learn more about the possibilities, and we don't plan to cover the short on mere words alone. Unloading this type of property isn't like selling clam chowder in Boston.

INNOVEX (Nasdaq: INVX) announces earnings on Monday, the 14th. If the company meets estimates of $0.70 per share, it will have $2.05 in trailing earnings. At $28 1/2, the stock will be trading at 13.9 times trailing earnings and at 11.5 times year-end estimates. The year ends in September. To maintain its multiple of 17 to 18 on the estimated $2.05 in trailing earnings following Monday's announcement, the stock would rise to $35 to $38.

Stocks we've Considered: Over the past two weeks we reviewed the guidelines behind the Fool Portfolio (akin to seeing the steel beneath the surface of characters in the Terminator films). We also reviewed the Foolish 8 item checklist for evaluating growth stocks, and we shared how we find growth stocks to consider. Today we'll discuss a few of the stocks that we've considered over the past months, but we'll begin briefly with the stock that we bought: Innovex, Inc.

Innovex was first discovered (as are many interesting stocks) in the Investor's Business Daily "Weekend Summary" list. Every Friday the newspaper lists the stocks with the highest relative strength and earnings per share rankings on the market. This Fool first saw Innovex on the list in early 1995. From there, it was found that the stock had a decent following on the Fool message boards, even back then.

Recently Innovex began appearing on our fairly new "growth stock" spreadsheet that we run each month (the spreadsheet was outlined in the recap about finding growth stocks, and should be available as a service before too long). Many of us at Fool HQ already knew Innovex, and running it through the 8 item checklist it performed well; we liked that the company dominates its industry, using proprietary technology, and that it has high and expanding margins; also, we admire the consistently open nature that management has with investors, including the useful investor information at theie Web site. We also liked the stock's valuation.

Innovex appeared on the growth spreadsheet that we compile, while PICTURETEL (Nasdaq: PCTL) has appeared numerously on our "Gods and Dogs" spreadsheet. As explained in the same earlier recap, this spreadsheet begins with stocks having relative strength below 5 -- stocks that have been killed or are simply dogs. PictureTel has been killed.

The leading videoconferencing company in the country, PictureTel was a top-performing stock in 1994 and 95, but had fallen from a perch of $44 all the way to $14 when it showed up on our Foolish radar. Other companies on the list included networker SHIVA (Nasdaq: SHVA) and software game leader BRODERBUND (Nasdaq: BROD). About ten other names on the list were quickly waved off, like giant planes falling from the sky far too "hot" for safe landings. Those companies with poor balance sheets were considered for shorting, but we'll stick to long positions today.

So, we found industry-leading names with strong balance sheets, some of which had stock prices 75% below their recent highs, and we continued the research from there. PictureTel was a serious consideration, being the industry-leader with proprietary technology in a new and growing sector. The company had $35 million in cash, only $8 million of long-term debt, growing revenues and a good name, as well as recent agreements with both 3Com and U.S. Robotics (this fact is somewhat interesting, considering that the two companies announced a merger a little later).

Running the stock through the Foolish 8 item checklist, it met most of the requirements, except that PictureTel had net profit margins of only 7%, when we like to see 10% or higher. So why had the stock fallen so sharply?

Growth was slowing sequentially. In fact, estimates had recently been lowered for the coming quarter, though at the time the future still looked good, even with the lower estimates. Looking deeper, though, competition from INTEL (Nasdaq: INTC) made us cautious. Intel has a partnership with Microsoft and Cisco Systems that addresses videoconferencing, and everyone expected that Intel would snag marketshare from PictureTel.

In the end, considering the lower than desired margins, coupled with pressure from Intel, and the fact that PictureTel was selling more lower-priced products (which would further affect margins), the stock was avoided. In fact, it was decided that if a person wanted to buy into videoconferencing, the best current choice was Intel.

Of course, the lower earnings estimates for PictureTel also weighed significantly on our decision, due to the nature of them. Estimates weren't lowered due to an industry slow-down, or the industry being cyclical. Something else was at work, and who was to say that it would turn around? Momentum too often works in two directions. Much later, after the quarter was announced (margins had dropped from 7% to 2.6%), estimates were lowered again. Significantly.

The stock has since fallen to $9 1/2 but it still pops up on the radar. It'll be interesting to see what becomes of it.

Earnings this year are expected to be significantly lower than last year. In fact, PictureTel trades at 11 times trailing earnings, but at 42 times the new 1997 estimate, and 19 times the 1998 estimate. What the needs for videconferencing will be in the future is anyone's guess, with the Internet at play. We know that Intel wants to make computers more powerful every six months or so -- and that videconferencing is one of the means to do so. As with Intel's networking division, the company sells "ancillary" products inexpensively in order to drive demand for computer processing power, while maintaining steep margins on its latest computer chip.

Next week we'll look at a few other stocks that we've considered from the growth spreadsheet, (and perhaps the Gods and Dogs spreadsheet too, where PictureTel was listed), and at a stock or two that we've considered because we're familiar with the products sold by the companies. Of course, beginning with what you know is best, while screening for stocks is simply a way compile lists for further consideration.

Well, the crowd of people here at Fool HQ is thinning out, as everyone runs off to play the company softball game. Have a Foolish weekend! Forget about stocks for a few days.

--Jeff Fischer, Fool

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Stock Change Bid ---------------- AOL +2 9/16 71.25 T - 9/16 35.25 ATCT - 1/8 4.69 CHV +1 1/8 75.75 DJT + 3/4 11.25 GM -1 3/16 55.06 INVX --- 28.38 IOM + 1/16 20.63 KLAC +1 3/16 56.25 LU +1 3/16 78.56 MMM + 1/2 103.31 COMS + 3/8 53.88
Day Month Year History FOOL +0.07% 6.53% 12.35% 199.84% S&P: +0.32% 3.56% 23.75% 99.97% NASDAQ: +0.78% 4.20% 16.39% 108.65% Rec'd # Security In At Now Change 8/5/94 355 AmOnline 7.27 71.25 880.06% 5/17/95 980 Iomega Cor 2.52 20.63 718.45% 10/1/96 42 LucentTech 47.62 78.56 64.99% 8/12/96 110 Minn M&M 65.68 103.31 57.30% 8/11/95 125 Chevron 50.28 75.75 50.64% 8/24/95 130 KLA Tencor 44.71 56.25 25.81% 8/13/96 250 3Com Corp. 46.86 53.88 14.97% 8/12/96 280 Gen'l Moto 51.97 55.06 5.94% 6/26/97 325 Innovex 27.71 28.38 2.40% 8/12/96 130 AT&T 39.58 35.25 -10.93% 4/30/97 -1170 *Trump* 8.47 11.25 -32.84% 10/22/96 600 ATC Comm. 22.94 4.69 -79.56% Rec'd # Security In At Value Change 8/5/94 355 AmOnline 2581.87 25293.75 $22711.88 5/17/95 980 Iomega Cor 2594.53 20212.50 $17617.97 8/12/96 110 Minn M&M 7224.44 11364.38 $4139.94 8/11/95 125 Chevron 6285.61 9468.75 $3183.14 8/13/96 250 3Com Corp. 11714.99 13468.75 $1753.76 8/24/95 130 KLA Tencor 5812.49 7312.50 $1500.01 10/1/96 42 LucentTech 1999.88 3299.63 $1299.75 8/12/96 280 Gen'l Moto 14552.49 15417.50 $865.01 6/26/97 325 Innovex 9005.62 9221.88 $216.25 8/12/96 130 AT&T 5145.11 4582.50 -$562.61 4/30/97 -1170*Trump* -9908.50 -13162.50 -$3254.00 10/22/96 600 ATC Comm. 13761.50 2812.50-$10949.00 CASH $40625.59 TOTAL $149917.72