Fool Portfolio Report
Thursday, February 6, 1997
by Tom Gardner (TomGardner)
ALEXANDRIA, VA., February 6, 1997 -- The four o'clock bell rang in the twelfth consecutive market-losing day for The Fool Portfolio. Yes, today's losses were relatively inconsequential -- with our stocks off 0.24% and the S&P 500 up 0.24%. No, we're not ignoring the complex problems that face a few of the companies in The Port.
It has been a wrenching two weeks for belled-cap investors, as one Fool stock after another has pitched off its aluminum springboard into waterless pools below. Snap!
In this case, the numbers tell it better than can any cheap diving imagery. Consider this:
Fool Portfolio Losers Since January 22, 1997 3Com $73 5/8 to $52 1/8: - 29.2% ATC Comm. $12 1/2 to $10 1/2: - 16.0% Iomega $19 1/8 to $16 3/4: - 12.4% Genl. Motors $61 7/8 to $56 3/8: - 7.3% S&P 500 786.23 to 780.13: -0.8%
Two of our three largest holdings (Iomega and 3Com) and our twice-heavy Dow investment (General Motors) have underperformed the market, in rather dismal fashion.
Sadly, our mangy-cur performance dates back further than January 22nd, all the way back to December 1, 1996. On that day, the portfolio was showing 2 1/2-year historical returns of 192%. Today, Foolishness is up a mere 159% versus S&P gains of 70%.
While we've blasted past our stated aims here of outperforming the Vanguard Index Fund -- which consistently has outperformend 70-80% of the mutual funds in America -- nevertheless, this is the winter of our discontent. December and January, typically the months which most reward our style of investing, have been unkind, generously unkind. As the market has risen five percentage points since December 1st, The Fool Portfolio has lost thirty-three percentage points!
Perhaps, gentlemen and ladies, it is time for us to proudly and noisily promote our historical returns and then to formally close down this feature. With hollers and hoots, we'd just announce that we succeeded at kicking a few bricks from off Wall Street's too handsome structures. Then, we'd announce The Fool IPO as we aggressively sold shares all the way to the Canary Islands. I'm seeing David wiggling his toes, sprawled out on a dock, with a fishing stick in his hand, a half-peeled banana to his right, and a single worthless share of Fool stock stitched into the backside of his bathing suit. [Did you know that the Canary in Canary Island comes from canis, the Latin word meaning "dog!"]
The alternate plan is just to stay right here and keep trying to beat the market.
Let there be no confusion. These last two months exemplify the very worst for investors that concentrate their energies on beating the market. Curiously, certain members of The Wise intentionally or unintentionally have misunderstood the mission of this portfolio, it being to beat the S&P 500.
I say this because when next the market falls 25%, if The Fool Portfolio is down a disheartening 17.5%, we'll be clapping high-fives amidst the fanfare of kazoos at Global HQ. We will have beaten the market. By the same token, when an eight-week period guts our savings account during a market rise, well well well. . . this runs contrary to our aims.
Accordingly, I now command the stock market to, at least, lay-off our stocks. Heck, we'll accept a window of merely market-matching returns.
Two of our companies announced earnings after market-close today and I shouldn't even pretend to do their reports justice, without having carefully scrutinized the financials and lent an ear to their conference calls.
Isn't it phenomenal that private investors across the country can now gain access to these conferernce calls? Actually, no, not really. Private investors never ever should have been excluded from these calls -- as was noted in a recent report by the National Investor Relations Institute (NIRI). Our Rogue staff wrote eloquently about NIRI's clear direction that none of its 3,000-member public companies preferentially provide institutional investors with undisclosed information. NIRI wrote last April:"Under no circumstances should a company respond to an individual analyst's inquiry or conduct a conference call with analysts before making a public announcement." (cf. Rogue: 1/10: Attacking Selective Disclosure)
The market is changing, though it should always have been what it will become -- an open environment supporting an free and even flow of information. ATC Communication's conference call will take place tomorrow morning, and The Fool will offer full coverage of the event. America Online's conference call replay can be heard by calling 1-800-633-8284, and entering authorization code 2362052.
America Online's quarterly numbers are right now all jumbled on the left of my screen. Restructuring charges of $74.3 million; accrued expenses and liabilities totaling $264 million; and both are packaged beneath rather extraordinary top-line growth to $409 million for the quarter.
It's a tough read. Anyone who has participated in our AOL folder expected nothing less than a blurry stream of one-time charges. USA Today didn't make money for years upon years. Neither did MTV. And in Charlie Munger's excellent analysis of Coca-Cola, he explains that fundamental to that Company's enduring growth was management's willingness to forego early profits. So, are we still on the verge of something great here, or should we be distressed by the red ink? I think two of the questions that AOL shareholders must ask themselves are:
1. Does this service present the possibility of high profitability and a superior customer experience that both endure?
2. Does management appear committed to creating and defending those values over a sustained period of time (twenty years)?
In the short-term, I am mildly disappointed by these results. I expected to be mildly disappointed. I say this because I believe that America Online could have derived greater bang for the marketing buck, as marketing costs ballooned to $146 million this quarter, thrice that in the comparable quarter in 1996. Likewise, I believe that AOL could have and should have concentrated on their network capacity and user interface over the past year -- bearing down on becoming the runaway first-class distributor in the burgeoning world of online.
This has been the concentration of our coverage on AOL throughout the past twelve months. And it has provided a great deal of frustration, both for shareholders and for customers of the service. Today's quarterly report from America Online, I think, illustrates a lack of marketing discipline and an unfortunate deviation from the company's focus -- to provide the most vibrant communications network on the planet so that third-party publishers can enrich the lives of customers.
Thankfully, most everything that has come out of America Online since their move to flat-rate pricing has indicated their intention of bearing down on strengthening the network and on consistently positive cash-flows. Right now, America Online is facing a more severe challenge than they ever have since we picked up shares in August, 1994. While I'm disappointed that these quarterly figures had to flow just so, I'm heartened by the company's two-pronged vow -- to improve the experience for existing members and to generate bottom-line profits for their owners.
ATC Communications (NASDAQ:ATCT) also announced earnings after market close. My presumption is that ATCT's dismal showing of 4 cents per share was already factored into the market's valuation. Here's the financial box:ATC 2nd Quarter Earnings (in millions) 1996 1995 Sales $25,114 $22,961 Earnings $850 $1,069 EPS $0.04 $0.05
Sales grew 9.4%, though profit margins fell to 3.4% and the Company underperformed estimates by 6 cents, or 60%. Rather than attempting, at this late hour, to provide something useful about this report. . . let's sort through the numbers and meet over in the ATCT folder. Obviously, though, we're disappointed by the company's performance this quarter. ATC did rise $7/8 to $10 3/8, as the stock has been beaten down relentlessly of late. Let's discuss valuation in the ATC folder.
To close, after twelve days of market underperformance, I'm going out on a limb and betting we beat the market tomorrow. If I lose, the first glass of ice water at Fool Global Conference, 1999. . . is on me.
Tom Gardner, Fool
(c) Copyright 1997, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool.
Stock Change Bid -------------------- AOL - 1/4 38.13 T --- 38.38 ATCT + 7/8 10.38 CHV - 3/8 65.25 GM - 3/4 56.38 IOM + 1/8 16.88 KLAC + 3/8 39.00 LU - 1/2 53.38 MMM - 1/4 83.88 NCR - 5/8 35.88 COMS -2 5/8 52.25 Day Month Year History FOOL -0.24% -4.79% -2.93% 159.05% S&P 500 +0.24% -0.76% 5.32% 70.19% NASDAQ: -0.15% -2.42% 4.29% 86.95% Rec'd # Security In At Now Change 5/17/95 2010 Iomega Cor 2.52 16.88 569.92% 8/5/94 680 AmOnline 7.27 38.13 424.21% 8/11/95 125 Chevron 50.28 65.25 29.76% 8/12/96 110 Minn M&M 65.68 83.88 27.71% 10/1/96 42 LucentTech 47.62 53.38 12.09% 8/13/96 250 3Com Corp. 46.86 52.25 11.50% 8/12/96 280 Gen'l Moto 51.97 56.38 8.47% 1/2/97 8 NCR 33.63 35.88 6.69% 8/12/96 130 AT&T 39.58 38.38 -3.04% 8/24/95 130 KLA Instrm 44.71 39.00 -12.77% 10/22/96 600 ATC Comm. 22.94 10.38 -54.77% Rec'd # Security In At Value Change 5/17/95 2010 Iomega Cor 5063.13 33918.75 $28855.62 8/5/94 680 AmOnline 4945.56 25925.00 $20979.44 8/12/96 110 Minn M&M 7224.44 9226.25 $2001.81 8/11/95 125 Chevron 6285.61 8156.25 $1870.64 8/13/96 250 3Com Corp. 11714.99 13062.50 $1347.51 8/12/96 280 Gen'l Moto 14552.49 15785.00 $1232.51 10/1/96 42 LucentTech 1999.88 2241.75 $241.87 1/2/97 8 NCR 269.00 287.00 $18.00 8/12/96 130 AT&T 5145.11 4988.75 -$156.36 8/24/95 130 KLA Instrm 5812.49 5070.00 -$742.49 10/22/96 600 ATC Comm. 13761.50 6225.00 -$7536.50 CASH $4639.01 TOTAL $129525.26