Fool Portfolio Report
Tuesday, January 7, 1997
Jeff Fischer (MF BudFox)
ALEXANDRIA, VA, January 7, 1997 -- The Fool beat the averages as Iomega and America Online rose. The markets were strong again. During this short year the S&P has already gained 1.69%, while the Nasdaq 2.84%. For today:
Fool: + 1.20% S&P: + 0.75% Nasdaq: + 0.86%
But the Foolish Four are off to a slow start, down 0.70% since January 2nd. Today AT&T (NYSE: T) continued to fall after an analyst lowered estimates yesterday. But the Foolish Four, over time, is a proven strategy. Day-by-day concerns are lost energy.
It's more relevant for Fools to spend time valuing growth stocks in new industries, such as AMERICA ONLINE (NYSE: AOL). The stock soared in 1995 and early 1996, then turned a fast retreat downward, before rebounding in late 1996. Recently it has found itself in the mid $30's.
Valuing stocks is not a cut-and-dry process: there are many ways to skin a cat. With new industries, though, market cap, price-to-sales ratio, and revenue growth are some of the better measures. Earnings are important, but they are often sacrificed (as in AOL's case) while building a business model for the long haul. America Online's stock is arguably best valued by price-to-sales and revenue growth, while intangibles such as industry leadership and vision should be considered as well. Finally, compare the valuation to that of a peer.
Comparing AOL to COMPUSERVE (Nasdaq: CSRV) doesn't hold value. I don't view CompuServe as a dynamic leader, progressive enough to compare to AOL. NETSCAPE (Nasdaq: NSCP) is seen as such a leader, though, and makes a better comparison even though it's in a different (though related) market. Compare:America Online (NYSE: AOL) ($35) Market Cap: $3.3 billion Trailing 12 month revenues: $1.16 Billion Price-to-Sales Ratio (PSR): 2.8 Est. 5 year annual growth rate: 50% Earnings Estimate, fy98: $0.79/share, 7 quarters away P/E on forward earnings: 44 Netscape Corp (Nasdaq: NSCP) ($58) Market Cap: $5 billion Trailing 12 month revenues: $272 Million Price-to-Sales Ratio (PSR): 19 Est. 5 year annual growth rate: 50% Earnings Estimate, fy97: $0.56/share, 5 quarters away P/E on forward earnings: 100
America Online, a company with $1.3 billion in trailing revenues, holds a market cap of $3.3 billion -- 2.8 times sales. While Netscape, with only $272 million in trailing revenues, has a market cap of $5 billion, $1.7 billion more than America Online. Netscape trades at 19 times sales. America Online at 2.8 times.
Of course, Netscape will grow revenues more quickly percentage-wise than America Online, with past revenues much lower than AOL's, but both companies are projected to grow 50% annually the next five years. Comparing the two, is AOL cheap? Or is Netscape over-priced?
Which company is more assured of a solid future? Right now, this Fool claims AOL. The company has emerged as a strong market leader and possesses three revenue streams to start: subscribers, ads, and online transactions. Netscape is still battling for markets and frequently claims different revenue streams, but none seem guaranteed in the long-run. Netscape will probably lead certain niches of its market, but over-all its future appears much less certain than that of America Online. For one, Netscape is fighting Microsoft, and Microsoft has made great strides in a short period of time.
Comparing two dynamic leaders, their current stature and possible futures, either AOL is inexpensive, or perhaps Netscape is over-priced. Or maybe this comparison is invalid.
Either way, consider the many directions AOL can turn while leading its market and having hit its stride. It's one of the most exciting companies listed on the markets, trading at 2.8 times sales while projected to grow 50% per year. While "peer" Netscape trades at 19 times sales and arguably faces more uncertainty. Here the market seems inefficient, whatever the argument for Netscape may be. As America Online's revenues climb in fiscal 1997, the stock is poised to look quite inexpensive on a price-to-sales basis.
Meanwhile, today the IOMEGA (NYSE: IOM) board held conversations on several topics. Many Fools are expecting a Mac/Iomega announcement. That rumor is bouncing about. Also today a Fool wrote that, "Roland has just announced in Keyboard Magazine that the next software upgrade for the popular VS-880 digital recording system will only come on a ZIP disk." I find this notable: software firms making new programs available on Zip disks only. Consider that. While word is that Hambrecht&Quist expects decent results for the fourth quarter just ended.
This thought was first heard in Fooldom a few days after Christmas. Final channel checks on Iomega products were thought to show strong Zip sales, and fair Jaz sales. Iomega reports earnings the third week of January; 17 cents per share is the expected median, and 18 cents is the expected mean.
Another Iomega news-bit: today ADAPTEC (Nasdaq: ADPT) announced development of a new product which will run portable computer peripherals up to 10 times faster than currently capable. The press release cited the Zip drive as one product which would benefit; currently Zip drives run at less than maximum rated speeds, due to computer limitations.
Finally, here we are in January. The hectic fourth-quarter recently ended for many public companies, and earnings are around the corner. To help prepare, as far as Fool stocks are concerned:Earnings dates and estimates, according to First Call: KLA Instruments (KLAC): January 16th, $0.40 estimated. Iomega (IOM): Week of January 24th, $0.18. ATC Comm (ATCT): Week of January 30th, $0.10. America Online (AOL): Week of February 3rd, loss of $0.52. 3Com (COMS): Week of March 25th, $0.62. Foolish Four: Chevron (CHV): January 23rd, $0.98 estimated. General Motors (GM): Week of Jan. 27th, $0.49. AT&T (T): Week of January 27th, $0.80. 3M (MMM): Week of February 6th, $0.88.
Of course the earnings of the Foolish Four, while interesting, are not terribly relevant to investors using the strategy, as reactions to earnings would be a mistake. The stocks are meant to be held for 12 months, rain or shine. The 22% average annual return over the past few decades was achieved as such, and we don't need to follow the earnings, truly, or worry about them.
Speaking of the Foolish Four, there have been questions lately regarding its presentation online. The Fool Port began its online Foolish Four strategy with real-money in August of 1994, and therefore does the Dow switch in early August of each year. While the Foolish Four model portfolio, run by MF DowMan, completes the Foolish Four switch at the beginning of each year, on the first trading day in January. Therefore, the two separate portfolios will sometimes hold different Dow stocks, depending upon which met the criteria upon the respective switches. Conveniently, both portfolios currently hold the same stocks (T, GM, CHV, MMM) and will until August, when the Fool Port updates its four stocks.
Finally, I asked you for suggestions about this recap last Friday and received quite a bit of mail. I haven't responded to everyone yet, but will. Many people asked us not to change anything at all, while several of you asked for more individual Fool stock coverage. If you have any suggestions or thoughts, zap 'em to me. They were interesting for us to read, and beneficial. As a result, I hope to make some interesting "additions" to this recap very soon, which I'll write about later -- hopefully Friday.
Also, several of you have asked for more coverage of the Foolish Four stocks in this column. That's entirely possibly, though as the strategy is meant to be "hands-off, very low maintenance," it isn't much needed. Also, as referenced above, Robert Sheard (MF DowMan) already offers a daily recap on the Foolish Four. Regardless, news and major events with the stocks will still be covered here as well, of course.
Last but not least: don't miss tonight's Foolish auditorium event with Tom Gardner and Industry Fools! Details are below...
Stock Change Bid -------------------- AOL + 5/8 35.63 T - 3/4 38.88 ATCT --- 13.63 CHV + 7/8 67.75 GM --- 59.25 IOM + 5/8 17.13 KLAC --- 38.88 LU +1 5/8 46.88 MMM -1 83.88 NCR - 5/8 35.00 COMS - 1/8 75.38 Day Month Year History FOOL +1.20% 2.59% 2.59% 173.79% S&P 500 +0.75% 1.69% 1.69% 64.32% NASDAQ +0.86% 2.84% 2.84% 84.36% Rec'd # Security In At Now Change 5/17/95 2010 Iomega Cor 2.52 17.13 579.84% 8/5/94 680 AmOnline 7.27 35.63 389.83% 8/13/96 250 3Com Corp. 46.86 75.38 60.85% 8/11/95 125 Chevron 50.28 67.75 34.73% 8/12/96 110 Minn M&M 65.68 83.88 27.71% 8/12/96 280 Gen'l Moto 51.97 59.25 14.00% 1/2/97 8 NCR 33.75 35.00 3.70% 10/1/96 42 LucentTech 47.62 46.88 -1.56% 8/12/96 130 AT&T 39.58 38.88 -1.78% 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 34421.25 $29358.12 8/5/94 680 AmOnline 4945.56 24225.00 $19279.44 8/13/96 250 3Com Corp. 11714.99 18843.75 $7128.76 8/11/95 125 Chevron 6285.61 8468.75 $2183.14 8/12/96 280 Gen'l Moto 14552.49 16590.00 $2037.51 8/12/96 110 Minn M&M 7224.44 9226.25 $2001.81 1/2/97 8 NCR 269.00 269.00 $0.00 10/1/96 42 LucentTech 1999.88 1968.75 -$31.13 8/12/96 130 AT&T 5145.11 5053.75 -$91.36 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 $136895.29