Fool Portfolio Report
Wednesday, July 16, 1997
by David Gardner (DavidG@Fool.com)
ALEXANDRIA, VA, (July 16, 1997) -- Intel announces estimate-beating earnings, inflation comes in low, everyone's enjoying the summer, and the market spazzed out again Wednesday, sending all indices skyrocketing to new annual (and all-time) highs.
The Fool tried to play along as best it could, winding up at a new annual high as well, though our money was unable to keep pace with a strong S&P 500 and a soaring Nasdaq. The Fool rose 0.82%, the S&P 500 rose 1.17%, and the Nasdaq left Earth's biosphere, rising 2.50%. For the year now, we have this:
S&P 500: 26.44%
A ton of news today. Fight through it with us to reach the end of today's recap, which is an important little historical lesson for us all.
LUCENT TECHNOLOGIES (NYSE:LU) reported outstanding earnings, its net income more than tripling to $213 million. Here's a company whose quarterly sales exceed $6 billion, turning in revenue growth in excess of 18%. Couple that with improving margins, a ton of money spent on research and development (R&D rose 42% to $800 million plus), strong international sales, and technological dominance in its industry and you have a great long-term winner.
I admit it. I love Lucent Technologies. Unabashedly. Ever since I saw a documentary entitled The Astronomers, informing the general public of the latest discoveries of contemporary astronomers, I've loved Lucent. Lucent, you see, is one of the world's few public companies that actually employs astrophysicists. One of them, a fellow named Tony Tyson, was featured in The Astronomers (the series is a few years old now). Tyson is the discoverer of the so-called "faint blue galaxies," galaxies so far away that they register only as a dim blue haze on our strongest telescopes. I checked the Web a few weeks ago, and saw he's still there... I hope the guy's loaded down with LU options that vest over the long term. Gotta love it. Meantime, Lucent continues to crank out new products, its quarterly dividend, and happy shareholders.
Oh yeah, the stock rose $5 3/4 to a new all-time high of $88 1/2 today. Lucent is now up 86% for the Fool Portfolio.
Other strong movers in Fooldom today were Iomega (up $1 1/2... the company reports earnings tomorrow at market close, and as usual we'll have the complete Foolish story for you), Innovex (up $1 1/2 to $35 1/2... a new Fool high), KLA Instruments (up $1 9/16... a new all-time high), and... can you believe it?! AT&T. Ma Bell actually rose more than a buck today. Man, the market must have been strong.
GENERAL MOTORS (NYSE:GM) put up some robust earnings today, the highest in the company's history, in fact (is this "highest" theme beginning to make itself obvious?). On sales of $39.7 billion GM scored a second-quarter profit of $2.88 per share excluding extraordinary items, which is what you have to do with these multibillion-dollar blue chips.
Pointing to his company's $14.9 billion cash position at quarter's end, Chairman and CEO John Smith said, "The continued strong cash generation of our operations made it possible to fund our capital-spending programs and acquisition activities during the quarter, keep an appropriate level of cash reserves, and at the same time continue to repurchase shares of GM common stock during the second quarter." The company repurchased 8 million of its shares at a cost of just over $450 million. Not too shabby, though GM had bought back more than 27 million in the first quarter.
The stock reacted strongly during the morning, hitting $56, but closed up just $1/8 at $54 3/8. Maybe it was because the company lost market share in North America -- now 30.5%, vs. 32.0% in the year-ago quarter. That figure is up from 30.2% last quarter, however.
Regardless, come our Foolish Four switch in August, we're almost completely guaranteed of holding our GM over another year. As it's up only 5 lousy percentage points for us right now, we'll hope the second year's the charm.
AMERICA ONLINE (NYSE:AOL) brought us down today, the difference between market victory and market defeat. The company was downgraded by a Chicago Corp. analyst from BUY to HOLD. Reuter quoted the fellow saying, "Fair market value is always difficult to measure, but AOL is trading at very high p/e multiples, while earnings expectations have not risen as fast.... We would wait for a 15 to 20 percent correction before building a significant position." That sunk AOL shares $3 3/8, dropping them below $70 on a smash-up day.
I liked TMF Nico's comments in our AOL folder on the Web: "One of the things that makes AOL such an interesting company to watch -- and stock to own -- is that you can have confidence in its being a sure thing (quote unquote, of course) over time, but at the same time you are assured of totally unpredictable twists and turns along the way. Pretty cool. And worth the price of admission!"
OK... lots of excitement lately, eh? Almost all stock-market investors -- including so many of you who've come to The Motley Fool to learn how to invest your money profitably on your own -- are very happy people today. So are we. In fact, it's possible to be so happy that we forget how things were just this spring.
It was March 19... almost four months ago to the day. The Fool Portfolio had just been crushed. AOL down $3 7/8, KLA Instruments down $2 5/8, Lucent Technologies off $2 3/4, 3Com off $1 5/8... Fool Portfolio down 3.64% for the day.
Fool Portfolio, in fact, down 11.80% for the year!
To refresh your memory further, the report that day was entitled "Tech Stocks," inspired by a rather outrageous pronouncement by one of Wall Street's more gooroolike gooroos. That day's edition of The Wall Street Journal quoted Barton Biggs, the market strategist for Morgan Stanley, saying that "technology" was entering a secular growth slowdown. Largely on the strength of that one man's opinion, the Nasdaq lost almost 2% of its value.
The whole notion of anyone valuing the market has always brought a smile to our Foolish faces. Yes, you can use an indicator here or there as a short-term guide, perhaps, but the very idea of "market strategist" strikes us as pretentious at best. As we've written before, the role of most market strategists is to predict the future of the financial markets and accordingly help allocate his firm's money. "We're recommending raising cash position from 5% to 10%, raising bonds from 25% to 35%, and reducing stock holdings from 70% to 55%." Not only does this bit of advice enable brokerage firms to churn some accounts, but it's also of tiny to zero benefit for average investors. Why the media reports on it is surprising to us at all... that the media then fails to hold these guys accountable is not surprising... I don't often read The Wall Street Journal, but even if I did I doubt I'd've seen anything since Biggs's pronouncement reminding us of what he said.
So here am I, four months later.
For the Fool Portfolio, that day (not surprisingly) represented the absolute bottom for the year. Interestingly, the "technology slowdown" heralded that day essentially came to an end that very day. I'm happy to say that I was at least somewhat aware that might be the case. My report stated, "3Com is down from $80 to $30, and we have talking heads telling us that we're entering a bear market. Where was Barton Biggs with 3Com at $81?!" And indeed, 3Com closed today at $58 5/16, up 80% since.
Does the adjective "Garzarellian" here speak eloquently to any of you, as it does to me?
The very notion that "technology" would slow down should strike you as exceptionally near-sighted; the very notion that anyone can generalize about what "technology" even is should strike you as humorous. We as individual investors need to look past the old powers-that-were and see truth for ourselves, as best we can see it. Please remember that Mr. Biggs's motivations are NOT yours. Mr. Biggs makes headlines for that story; his firm gets publicity. His focus is terribly short-term, relative to what your focus should be.
Dear Fools, remember that day. And please remember this one, and these words. March 19 was the day that taught us that the "Biggs shots" of this world speak to themselves. They do not speak to us. We listen to their short-term cries at our long-term savings' peril.
Play Odysseus, the resourceful ancient adventurer who did two things before his ship glided past the Sirens' haunt: He had his men rub beeswax in their ears to deafen themselves, then had himself lashed to the mast. Not a bad plan to keep from jumping off your own skiff, next time it enters market strategist waters.
-- David Gardner, July 16, 1997
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Stock Change Bid ---------------- AOL -3 3/8 69.63 T +1 5/16 36.31 ATCT - 1/8 4.56 CHV +1 77.56 DJT + 1/4 11.13 GM + 1/8 54.38 INVX +1 1/2 35.50 IOM +1 1/2 23.38 KLAC +1 9/16 59.44 LU +5 3/4 88.50 MMM - 1/2 102.00 COMS + 5/8 58.31Day Month Year History FOOL +0.82% 11.13% 17.20% 212.78% S&P: +1.17% 5.81% 26.44% 104.32% NASDAQ: +2.50% 9.61% 22.43% 119.48% Rec'd # Security In At Now Change 8/5/94 355 AmOnline 7.27 69.63 857.70% 5/17/95 980 Iomega Cor 2.52 23.38 827.58% 10/1/96 42 LucentTech 47.62 88.50 85.86% 8/12/96 110 Minn M&M 65.68 102.00 55.31% 8/11/95 125 Chevron 50.28 77.56 54.25% 8/24/95 130 KLA-Tencor 44.71 59.44 32.94% 6/26/97 325 Innovex 27.71 35.50 28.11% 8/13/96 250 3Com Corp. 46.86 58.31 24.44% 8/12/96 280 Gen'l Moto 51.97 54.38 4.62% 8/12/96 130 AT&T 39.58 36.31 -8.25% 4/30/97 -1170 *Trump* 8.47 11.13 -31.36% 10/22/96 600 ATC Comm. 22.94 4.56 -80.11% Rec'd # Security In At Value Change 8/5/94 355 AmOnline 2581.87 24716.88 $22135.01 5/17/95 980 Iomega Cor 2594.53 22907.50 $20312.97 8/12/96 110 Minn M&M 7224.44 11220.00 $3995.56 8/11/95 125 Chevron 6285.61 9695.31 $3409.70 8/13/96 250 3Com Corp. 11714.99 14578.13 $2863.14 6/26/97 325 Innovex 9005.62 11537.50 $2531.88 8/24/95 130 KLA-Tencor 5812.49 7726.88 $1914.39 10/1/96 42 LucentTech 1999.88 3717.00 $1717.12 8/12/96 280 Gen'l Moto 14552.49 15225.00 $672.51 8/12/96 130 AT&T 5145.11 4720.63 -$424.49 4/30/97 -1170*Trump* -9908.50 -13016.25 -$3107.75 10/22/96 600 ATC Comm. 13761.50 2737.50-$11024.00 CASH $40625.59 TOTAL $156391.65