Fool Portfolio Report
Thursday, January 23, 1997
by Tom Gardner
ALEXANDRIA, VA., January 23, 1997 -- Galumph.
After a pleasing afternoon snooze today, the market fell out of bed in the last hour, with the Dow closing off 100 points. Fool stocks fared worse, as will be there wont when the market hits the floor. What caused the sudden sell-off?
Our favorite contrary-indicator cartoon character raced across the screen. Elaine Garzarelli advised Wall Street today that, "It is time to buy stocks again." Oh, the absolute foolishness of it all. It hurts. For any unfamiliar with Ms. Garzarelli, after departing her post as chief market strategist at Lehman Brothers, her plunge headlong into Wisdom is well-document in Fooldom:
1. 8/02/96 Garzarelli Shouts, "SELL ALL YOUR STOCKS!"
then. . .
2. 10/08/96 Boring Port, Garzarelli Calls for 15-25% Correction
Veteran Fools may remember the April portfolio report in which I quoted a deliciously-ludicrous passage from some of Garzarelli Edge's grim marketing materials. Let me refresh your memory:
"Over the last 14 years, the Garzarelli Edge
has correctly forecast every major turn in the
US stock market. Every single one, bar none!"
April, 1996)
Ladies and gents, fire those hats skyward. Pull off your shoes in the park, get yer hands round that cider jug, take the evening off trying to throw a frisbee as far as it will go... in a word, celebrate.
Why?
Well, get this, on July 23, 1996, when Garzarelli literally instructed her listeners to sell all their stock, the Dow Jones Industrials were supposedly "teetering" at 5420. Two months later, when Garzarelli vociferously restated her expectations on CNBC that stocks would promptly fall 15-25%, the Dow was supposedly "overblown" like a red, red balloon at 5990.
Curiously, even after the sharp selloff at market-close today, the Dow closed at 6755, well higher than its autumn and its summer perch. And that provides the following record of performance for stocks since Elaine Spoke And Some People Listened:
Performance of US Stocks During The Elaine Scare Since 07/23/96 + 24.6% Since 10/08/96 + 12.8%(Hoo-haaa. The promotions must stop now!)
In this context, what followed from Ms. Garzarelli today reads like a standard transcript of Soviet misrepresentations to the United Nations in the early 1980s. We never said that. We were never involved in that. This is but a continuation of existing Soviet policies.
Quite Foolishly, the stock market late this afternoon was driven by Glasnost-ian breezes. The people caught word from the Old Guard, and inverted it. And the Party is looking foolish right about now. Our emperors still think they are finely- and fully-clothed.
Running contrary to Garzarelli's word-for-word blessing that "Now is the time to get back into stocks," investors headed for the exits around 2:45 this afternoon. During the last hour of trading, the Dow fell nearly 1.5%. At that rate, public companies will be worthless in ten days. So, that one-hour departure was notable. It was also gloriously contrarian. The winds have shifted.
What happened to The Fool Portfolio? It was tagged for 3.18% in losses. And compared to the 1.10% losses for the S&P, that wasn't pretty. At day's end, we are now 0.33% behind the S&P in 1997. Is this the year we lag the market? Gasp.
Today, I'd like to take a look at four of our growth stocks: KLA Instruments, 3Com, America Online, and Iomega.
The tea-time attack on the market quickly erased our reasonable hopes that KLA Instruments (Nasdaq: KLAC) would close out today in the black. That would've marked the first time since (get this) September 22, 1995 that KLA was making us money. Hey, we're talking about sixteen months under water for our KLAC position, including a drop as low as $17 1/2 -- down 60.9% for us. Since that dark September day in 1996, when KLA clacked against its lowest low, the stock has risen relentlessly. Closing the day at $43 3/8, up $1 today, KLA is up more than 140% over the past four months. We're a point-and-a-half from KLAC getting back in the black.
KLA Instruments is YPEGged at $46 a share.
Our other large capitalization growth stock, 3Com (NASDAQ: COMS), has been quite otherwise, blasting into the ether ever since we chained it to The Fool Portfolio on August 13, 1996. On December 21, 1996, 3Com absolutely blew out Wall Street's 2nd quarter estimates, posting the following:
Sales $820.0 million
Earnings $112.2 million
EPS $0.60
That ran four cents above expectations. The quarter included the acquistion of ATM products supplier, OnStream Networks. The Company achieved its noble and rather Foolish goal of outgrowing its industry. COMS showed 16% sales growth, 20.5% earnings growth, and 20% earnings-per-share growth over the previous quarter.
3Com is capitalized at $12.8 billion, or around 4.5x sales. Its chief competitor, Cisco Systems, is capitalized at $47 billion, or around 10.0x sales. By providing this comparison, I do not for a second mean to imply that Cisco and 3Com are relative clones and that COMS ought trade at a similar multiple off sales. Most coitainly not. Right now, Cisco is the superior company, with a broader base of corporate customers, with broader margins, and with healthier underlying financials. I do, however, think that 5-6x sales is not unreasonable for 3Com, which is reaching consumer price points and corporate performance demands, and which is doing a bang-up job of markerting its services.
COMS is YPEGged at $93 a share.
Elsewhere in the land of growth and volatility, America Online (NYSE: AOL) was sold off today, falling fully $2 5/8. You don't need me to tell you that the company has been under public pressure to upgrade their network before courting the next load of subscribers.
I personally think there is some merit to the various class-action lawsuits, when looked at rationally. The offer of an unlimited usage plan does present certain access expectations. Combine the consumer-advocacy divisions in the offices of attorney generals across the land with some basic logic, and I personally think this matter will be settled, not battled, by America Online. [Please note -- that is pure speculation on my part.] Now, it behooves me to clarify that from a practical standpoint, I find these lawsuits almost unpardonable and distastefully opportunistic.
If there's a lawyer out there that agrees with me, I'd love it if you'd project legal fees in an email or on our AOL board if, for example, the California suit draws a $20 million settlement. It would seem to me that bunches of $19.95 payments will be made to consumers while the class-action lawyers -- certainly the primary motivators here -- will pull down profits in the millions. Yes? And if this is so, I'll ask aloud, "When does the online community that pokes holes in the business modeling of the legal industry open its digital doors?" Charge me entry, price your primers, I'll buy 'em.
America Online is YPEGged at $38 1/2.
And to close out today's discussion of our Foolish growth stocks, Iomega Corporation (NYSE: IOM) tumbled $1 1/8 to $18 after inching forward to $19 5/8 in the morning. Iomega is slated to announce earnings on January 28th (Tuesday) and the Street is expecting 18 cents. The channel-checks posted in our Iomega folder on America Online indicate that Iomega will post strong sales figures for the quarter, ranging roughly around $410-$420 million. We'll be watching closely.
With around $0.80 projected for fiscal 1997, Iomega is YPEGged at around $28 a share.
There's a brief tale of the tape on our handful of growth stocks. Iomega, America Online, and 3Com stand 1-2-3 as the largest positions in our portfolio. Given that our initial investments in these three amounted to never more than 12% of our total assets, their status today supports Peter Lynch's belief that growth stocks in the most enterprising of lands will, over time, show consistently stronger earnings growth and post consistently greater price appreciation than their peers.
We are ardent admirers of Peter Lynch's work (One Up on Wall Street and Beating the Street), his methodical approach to studying businesses, and what might fairly be labeled the joy he takes as a student of one of the greatest of enduring games -- our stock market. Much as we love him, however, we always buy our Dow stocks first!
I implore you to remain Foolish,
Tom Gardner
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