Fool Portfolio Report
Wednesday, February 5, 1997
by David Gardner (Motley Fool )
Thus woe succeeds a woe, as wave a wave.
Robert Herrick, "Sorrows Succeed"
ALEXANDRIA, VA., February 4, 1997 -- Robert Herrick (1591-1674) was a poet I studied in my junior year of college. He was a poor man's John Donne... a 17th-century man like Donne, a clergyman like Donne, a sensualist like Donne, with metaphysical leanings, but he just didn't quite have the distribution, or the marketing, or the business partners. Donne Incorporated has pretty much had a higher market cap ever since.
OK, I'm somewhat kidding: while helping to run this Fool business thing, I'm very much an English major at heart, and I know as well as the next English major that more than distribution, marketing, or business partners, Herrick just didn't quite have Donne's PRODUCT.
But they are both great poets.
It's appropriate to lead off with a bit of RH today because today's report is indeed a tale of woe. I pulled today's epigraph from an uncharacteristically downbeat Herrick quotation, as it allows us something of an insight into woe.
And today was woeful. Eleven stocks in the portfolio, every single one of them down, seven down $1 or more. Hey, not a great day for the market overall either, with the Nasdaq and S&P 500 down 1.84% and 1.39%, respectively. That said, we managed to do a good percentage point or two worse... off 3.25%.
This wouldn't be particularly sickening if the past few weeks hadn't been so sickening in themselves. Two weeks ago this very day, on January 22nd, the Fool Portfolio crossed over the 8% total return mark for the year, a couple points over the S&P 500, and looking like Tiger Woods stepping off the first or second green. Now picture Tiger hitting the next ball into the water, teeing up again, sand trap, shot out of the trap hits a tree, shot out of the trees strikes a spectator, and (why not?) a four-putt, and you have an idea of the Fool Portfolio's recent performance.
Fortunately, it's only one hole.
As The Man says, "Thus woe succeeds a woe, as wave a wave." Those words should speak eloquently to stock market investors like you and me. If you were to look at the history of the Fool Portfolio, I expect you'd find that the typical way we lose 11 percentage points off our annual return is quickly, a two-week job, just as we've witnessed. I haven't done any scientific study of this, but it certainly feels that way, at least. An old investor off of whose wisdom I used to draw once said to me, speaking of stocks, "They always go down faster than they go up." Quite true. Also true, fortunately for you and me, is my own corollary to that point: "... but they always go up more than they go down."
Well, I'm bored of writing about 3COM right now. "More of same" is the theme, and that's why. The stock dropped $3 3/4 to $54 7/8 bid today, attributable to another brokerage firm downgrade ("as wave a wave," these guys move like the tides) and negative sentiment about Cisco's short-term outlook. You may have heard quite enough about 3Com and Cisco on TV or in newspaper headlines, but if you want the Foolish take we have a FoolWire package of info about what's been happening to networking stocks put together by our own MF BudFox (growing out of his Fool recap last night).
To repeat the Foolish theme: while the industry may have a quarterly -- perhaps even year-long -- slowdown, it's not going to be a decline... probably won't decline for years and years. You think computer networking might be a pretty good business to be in for the long term? Don't let everyone else's short-term focus cloud your long-term view. Trois Com, Cisco, Ascend, and a bunch of others are major long-term growth stories. When great industries get munched over short-term worries, those often make fine entry points for the Foolish investor.
Remember Intel's "slowdown" over worries about the calculation ability of its new Pentiums?
ATC COMMUNICATIONS is an ongoing frustration and confoundment for me. At today's closing price of $9 1/2 (down another $5/8), ATCT's market cap -- the value of the overall company, obtained by multiplying number of shares by share price -- is a shade over $150 million. The company's sales? That'd be $100 million. ATC, a profitable and cash-flow-positive entity, is now trading at 1.5 times sales.
Compare this figure to that of Sykes Enterprises (Nasdaq:SYKE), a peer company in the telecommunications outsourcing industry. Sykes also has sales of $100 million, but a market cap of $850 million. The companies have similar amounts of earnings per share. Our stock, ATCT, which has been completely crushed (down 59% since our October purchase), trades at 1.5 times sales; Sykes Enterprises, similar in so many ways, trades at 8.5 times sales. (Industry leader APAC Teleservices has $225 million in sales and a market cap of $1.6 billion, so it trades at seven times sales.)
So what do they got that we don't got?! Apparently, the easiest answer is positive sales momentum. ATCT was killed after its September quarter revenues came in below its previous quarter... this was against our expectations (we'd bought a week ahead of the report) and against the market's as well... the stock dropped ten bucks that week. Contrarily, both APAC and Sykes had positive quarter-over-quarter growth for September.
And yet compare Sykes's 1996 to ATC's and you see extremely similar companies in terms of size, margins, profitability, business, you name it. Look at the most recent 10-Q's! One trades at 8.5 times sales, and the other at 1.5? I'll be the first to concede that Sykes has outpaced little ATC over the past several months, but I think maybe we've gotten a little carried away, here.
Given the drop of ATCT stock from $25 to $15, then the slow and hard-to-take leakage from $15 now to $9, the market seems to be suggesting that ATC's earnings report -- which comes out tomorrow night -- is going to be disastrous. At this point, I'll take anything profitable... if the December quarter was even a couple of shiny pennies -- well below estimates -- I wouldn't be surprised if the stock rose.
Annoyingly, the company has been completely silent. I disagree with the posture. If you've seen your stock drop from $25 to $9, you should say something. You should at the very least manage expectations by pre-announcing poor earnings (or good earnings, or whatever sort of earnings you have)... be up front with your shareholders. As it is, we part owners are left guessing in the dark about the quarter, waiting for a slightly-delayed earnings report that one can only assume is a serious disappointment... a disappointment most likely currently reflected in the stock. Come on, then, corporate communications... I'm not saying you are legally bound to say anything... I am saying that good business says you should. The company's name, as suggested in the subtitle of my report today, is in danger of becoming an oxymoron. No press releases for three months; this is no doubt part of the problem. Woe is succeeding woe.
Robert Herrick gave us our theme today, but fortunately for Robert and for us, it's an uncharacteristic theme. Herrick's poetry is about youth and beauty; sorrow arises only in the context that "this too shall pass." He's full of life. Our schtick is similar. We'll certainly acknowledge that there are bad stocks (we'll always have ours), there are disturbing times in the stock market, and there are difficult periods in our long lives. But overall? Long term? Take it all and all? A combination of ongoing business growth and great companies make the stock market an amazingly good entity. And Life is about Joy, else we wouldn't all be making such a go of it!
Just takes a little poetry to step away from it all and think, from time to time.
--- David Gardner, February 5, 1997
Stock Change Bid -------------------- AOL -1 1/2 38.38 T - 3/4 38.38 ATCT - 5/8 9.50 CHV -1 65.63 GM - 3/8 57.13 IOM - 5/8 16.75 KLAC -2 38.63 LU -1 1/2 53.88 MMM -1 84.13 NCR -1 36.50 COMS -3 3/4 54.88
Day Month Year History FOOL -3.25% -4.56% -2.70% 159.67% S&P 500 -1.39% -1.00% 5.07% 69.78% NASDAQ: -1.84% -2.28% 4.45% 87.24% Rec'd # Security In At Now Change 5/17/95 2010 Iomega Cor 2.52 16.75 564.95% 8/5/94 680 AmOnline 7.27 38.38 427.64% 8/11/95 125 Chevron 50.28 65.63 30.51% 8/12/96 110 Minn M&M 65.68 84.13 28.09% 8/13/96 250 3Com Corp. 46.86 54.88 17.10% 10/1/96 42 LucentTech 47.62 53.88 13.14% 8/12/96 280 Gen'l Moto 51.97 57.13 9.91% 1/2/97 8 NCR 33.63 36.50 8.55% 8/12/96 130 AT&T 39.58 38.38 -3.04% 8/24/95 130 KLA Instrm 44.71 38.63 -13.61% 10/22/96 600 ATC Comm. 22.94 9.50 -58.58% Rec'd # Security In At Value Change 5/17/95 2010 Iomega Cor 5063.13 33667.50 $28604.37 8/5/94 680 AmOnline 4945.56 26095.00 $21149.44 8/12/96 110 Minn M&M 7224.44 9253.75 $2029.31 8/13/96 250 3Com Corp. 11714.99 13718.75 $2003.76 8/11/95 125 Chevron 6285.61 8203.13 $1917.52 8/12/96 280 Gen'l Moto 14552.49 15995.00 $1442.51 10/1/96 42 LucentTech 1999.88 2262.75 $262.87 1/2/97 8 NCR 269.00 292.00 $23.00 8/12/96 130 AT&T 5145.11 4988.75 -$156.36 8/24/95 130 KLA Instrm 5812.49 5021.25 -$791.24 10/22/96 600 ATC Comm. 13761.50 5700.00 -$8061.50 CASH $4639.01 TOTAL $129836.89