Fool Portfolio Report
Monday, January 6, 1997
by David Gardner (MotleyFool)

ALEXANDRIA, VA, January 6, 1997-- Flat day for the Fool Portfolio. OK, OK, it wasn't flat; we were down. That's called "spin," though. Spin, baby... it's what the media's supposed to be all about. We can do it too.

OK, I'll be honest. The Fool Portfolio lost 0.21% today, vs. a loss of 0.05% for the S&P 500 and a gain of 0.43% for the Nasdaq. In this tender new year, we're now up a percent, ahead of the S&P and behind the Nasdaq. It's been a decent, though uninspiring, jump out of the gates.

Monday was marked by a number of new ratings on our stocks provided by the nation's brokerage firms. For instance, our most satisfying move today came from KLA Instruments, up $3 to $38 7/8. Huge new deal, you think? Company blew out its earnings report? Nah, nothing operational. Instead, Morgan Stanley raised its rating on KLAC to "strong buy" from "outperform."

Change gears, then. Kiss of death, instead? YOU make the call. While I don't have details on Morgan Stanley past downgrades of this security, I tend to expect that the firm was mimicking its brethren, downgrading these shares when they were below $25. That was, of course, a fine time to buy. Conversely, this new upgrade may represent a short-term peak. As shareholders, we hope not, but that can sometimes be the reality.

Fortunately, we overlook these short-term ratings boosts... they're not particularly material to our long-term prospects as investors. And the ratings themselves, while always market-moving, are generally not very helpful to us individual investors. That's because the typical announcement of such an upgrade is accompanied by the same phrase this one included:

"Additional details were not immediately available."

Wall Street firms are fairly tightfisted with their research. Bully for them... that's fine with me. The idea is that they reserve their opinions for their paying customers. I'm not sure how well this model will hold up in the New World (and I use capitals here quite purposefully, because that's what it is and will continue to be). If you want to hear my further opinions that way, well... additional details are not immediately available.

So let's move on to the next Fool winner today, another beneficiary of the ratings game. That'd be Foolish Four kingpin stock General Motors. The stock rose $1 1/4 to close at $59 1/4. Yep, that's a new high. For that, we have to thank the research wing of Smith Barney, which upgraded the shares to "buy" from "outperform"... with, um, no additional comments available.

Hey, what is it with the "upgrade" to "buy" from "outperform," anyway? Is the implication that we shouldn't be buying these stocks even when they're saying "outperform"? Given how difficult it seems to many people to beat the stock market, you'd think these "outperform" ratings would be all the impetus most of us needed; "buy" seems like a redundant afterthought. Further, "strong buy" seems calculated to induce account holders to grab the phone quick and dirty, punch up the old fella at the firm, and get that order in there pronto! Romantic image for some, perhaps, but not what I'd recommend for you.

These stealth upgrades were not enough to put us in the plus territory today, unfortunately. In part, we have Salomon Brothers to thank for that. Yep, now we enter the world of the downgrade. AT&T got downgraded today, although we're talking here about earnings, not ratings. Salomon lowered its earnings estimates on AT&T today, but left its "hold" rating firmly in place. AT&T dropped $1 7/8.

Salomon analyst Jack Grubman brought down his estimates for 1997 from earnings per share (EPS) of $3.60 to $3.00, and for 1998 from $3.80 to $3.25. Reuters reports that, "Grubman was not immediately available to comment or provide detail on the lower forecasts."

Anyone seeing a trend, here? Essentially, market forces are driven by institutional forecasts which are not made publicly available. I'm not up on our Foolish soapbox about this; there are other things to reform on Wall Street. But I do take the position of the amused observer, perhaps jingling a bell or two on my Fool cap. The very rich, Fitzgerald wrote in The Great Gatsby, "they are different from you and me." Best to let them play their game, and we'll play ours.

There's something to celebrate about Grubman. Namely, I believe he's the first big-time analyst to depart from the consensus view on AT&T. I can see a number of Grubman's peers following suit now, as in the coming weeks the Street repeatedly penalizes AT&T for the same basic news. (First Boston appears to have downgraded estimates too, today, though it didn't grab any headlines.) And later in the day, Grubman did actually make some more of his feelings known, which is always appreciated by us lowly individual investors.

Fourth quarter 1996 earnings will be closer to $0.70 per share than the $0.78 per share he had been forecasting. This is due to "competition in the telecommunications market," which we would certainly consider an ongoing major factor. Not only does AT&T need to spend millions in attracting new local phone service business, but it also needs to spend more money than usual promoting and protecting its core long-distance business.

Further, Grubman painted a fairly unattractive picture of the current management's efforts:

Q4 is getting hurt by accelerating SGA (selling, general and administrative expenses), a harbinger of things to come in 1997, expanding losses in Worldnet [the Internet service provider biz], rising uncollectables and softening revenues, especially international, in business long distance and overall volume growth stuck in the five to six percent range.

All this has depressed these shares, which had made a strong recent move. We're about flat on our overall investment here (including Lucent and NCR), since the August purchase. We acknowledge that AT&T's near-term future does not look very pretty. Then again, neither does that of most of the stocks we buy using our Dow Dividend Approach. It's the nature of the beast. Most of the picks work out well, but not every single one. Which group AT&T falls in will make an interesting story, and it's a story that you and I will learn a lot from.

Being shareholders galvanizes us to watch, study, and learn from situations like these in the most focused way of all: with our fortunes tied to it. In that way, I'll consider this a profitable investment whether it spills black ink or red by this August.

Fool on!

--- David Gardner, January 6, 1997


Stock Change Bid -------------------- AOL + 1/4 35.00 T -1 7/8 39.63 ATCT --- 13.63 CHV + 3/4 66.88 GM +1 1/4 59.25 IOM - 1/2 16.50 KLAC +3 38.88 LU - 5/8 45.25 MMM + 1/8 84.88 NCR +1 7/8 35.63 COMS - 1/8 75.50
Day Month Year History FOOL -0.21% 1.37% 1.37% 170.55% S&P 500 -0.05% 0.93% 0.93% 63.10% NASDAQ +0.43% 1.97% 1.97% 82.79% Rec'd # Security In At Now Change 5/17/95 2010 Iomega Cor 2.52 16.50 555.03% 8/5/94 680 AmOnline 7.27 35.00 381.24% 8/13/96 250 3Com Corp. 46.86 75.50 61.12% 8/11/95 125 Chevron 50.28 66.88 32.99% 8/12/96 110 Minn M&M 65.68 84.88 29.23% 8/12/96 280 Gen'l Moto 51.97 59.25 14.00% 1/2/97 8 NCR 33.75 35.63 5.56% 8/12/96 130 AT&T 39.58 39.63 0.12% 10/1/96 42 LucentTech 47.62 45.25 -4.97% 8/24/95 130 KLA Instrm 44.71 38.88 -13.05% 10/22/96 600 ATC Comm. 22.94 13.63 -40.60% Rec'd # Security In At Value Change 5/17/95 2010 Iomega Cor 5063.13 33165.00 $28101.87 8/5/94 680 AmOnline 4945.56 23800.00 $18854.44 8/13/96 250 3Com Corp. 11714.99 18875.00 $7160.01 8/12/96 110 Minn M&M 7224.44 9336.25 $2111.81 8/11/95 125 Chevron 6285.61 8359.38 $2073.77 8/12/96 280 Gen'l Moto 14552.49 16590.00 $2037.51 8/12/96 130 AT&T 5145.11 5151.25 $6.14 1/2/97 8 NCR 269.00 269.00 $0.00 10/1/96 42 LucentTech 1999.88 1900.50 -$99.38 8/24/95 130 KLA Instrm 5812.49 5053.75 -$758.74 10/22/96 600 ATC Comm. 13761.50 8175.00 -$5586.50 CASH $4600.04 TOTAL $135275.17 Transmitted: 1/6/97