Fool Portfolio Report
Friday, February 7, 1997
by Jeff Fischer (MF BudFox)

ALEXANDRIA, VA., February 7, 1997 -- If a full moon rose tonight the Fool Portfolio would howl at it. What a dog.

Our collection of eleven stocks has been losing to the S&P since October of 1996. Only in November did the Fool manage a slight edge on Mr. S&P. Granted, four months is a short amount of time, and since inception the Fool Port is still tearing the S&P to shreds, but not lately. What fleas have we? Are some of the companies in the Fool portfolio infested, or is Wall Street full of idiotic vermin driving our stocks into the ground without care of valuation, or has the Fool made some costly mistakes?

All of the above.

First: A world-leading company is expected to grow 30% per year the next five years, was recently named "The best run company in Silicon Valley" by Upside Magazine, and presides atop one of the most promising industries unfolding over the next decade: computer networking. This company, though, suffered a slow December. A slow twenty business days. The stock has fallen 36%.

Wall Street: your vision is too short-sighted. The mentality of quarter-to-quarter company evaluations is useful only if taken in the context of the next three to five years. When you take one slow month at a company such as 3COM (Nasdaq: COMS) and extrapolate that into a $4 billion drop in market-cap, your thinking is flawed.

No argument can be that simplified, though. Of course the fear is a slow month for 3Com will lead to more slow months. Seeing the price fall this quickly, though, (interesting to note that the stock began to fall before the news of a slow December was released) let's now expect a flat quarter. Shall we? Why not. Somebody knows something. They must. The market has rebounded and 3Com has continued to fall admist more downgrades. So, let's assume a flat quarter and be done with it. 3Com: Flat quarter.

A flat quarter! That's three months! That's 60 business days! Oh, brother! So, do we sell the thing? I wonder if General Electric, Microsoft, or Intel have ever experienced slow quarters?

Every company has.

I understand the fear of a continuing slow-down. I also understand the concern of slowing sequential growth in the networking industry (though that's only natural). What I don't grasp is the amount of persons that have sold 3Com in the last week on news of one slow month. How many millions of these shares are going to be bought back in the coming weeks and months by the same folks who just sold them? And how many "investors" will truly replace their shares at a better price, including commissions and tax consequences?

3Com is still a leader. The fleas on this stock are Wall Street's own, because whatever 3Com does in the coming quarter, or even the next few quarters, the company is still poised to out-perform the market over the next five years. The selling which is influencing more selling among shareholders whom originally wanted to INVEST in the company is lining the pockets of one business: Wall Street and the brokers involved.

I can't surmise that overnight 3Com went from an industry leader with strong prospects to a stock to be dumped. If so, I missed that sudden transition. Either way, let's score another point for the Wise. They're cleaning up on 3Com's massive volume, while I'm sure hundreds of investors who wanted to own a piece of networking for the long-term are being whitewashed out of the stock on the shorter-term downgrades of the Wise.

Let's look for other fleas.

A small-cap company puts up impressive quarter-over-quarter earnings last fall, in a quickly growing industry. It shows up on the Fool radar screen as a possible small-cap purchase. The Fool goes into a study of the company, researches it, becomes aware of the risks, and runs the valuations on the stock. Those valuations come up high, but peers trade higher, and other stocks with PEGs well above 1.0 have soared for two years and counting (Ascend Communications, McAfee Associates, etc.) -- so it is decided.

I don't need to state how the decision turned out.

It has turned out very poorly. It has cost the Fool a large chunk of change. ATC COMMUNICATIONS (Nasdaq: ATCT) has fallen 67% in less than four months. Every risk found in our research, every risk mentioned in our buy report, has come true. And then some. The conference call was held this morning and earnings estimates have been cut dramatically for the next two years. The company said the transition to new management slowed business last quarter, and the implementation of new equipment had cost the company a few pennies in earnings per share as well. Still, the large shortcoming was not explained.

I listened to the conference call and was not entirely impressed, though I do believe management has a long-term plan and are setting it in place. The conference call summary will be available on the Fool by Monday, and the replay can be heard at 1-800-696-1588, authorization number 172196.

The Fool portfolio fell a big 7% this week, mainly on the declines of 3Com and ATC Communications. The goal of this portfolio is to serve as an example of investing to individuals while beating the S&P. We're accomplishing the one goal handily, up 152%, even after a poor four month performance. The decades ahead look extremely encouraging for Fools -- nay, downright joyful! -- especially as more and more lessons are learned along the way.

What worries me is another goal of the Fool Portfolo. The goal of being an example of managing one's own money based upon one's own decisions.

I find it discouraging that the day after the Fool announced plans to buy ATC Communications, the stock gapped up 10% and traded about ten times its normal volume. What I find hard to believe is that everyone buying the stock the very next morning had studied it the night before, extensively. Especially as it took Fool HQ much longer than a day or two to decide upon the stock -- and we still made a mistake!

The volume on ATC following the day we announced our intention to purchase shares told me one thing: The Fool is not telling its message clearly enough, at all. The message of learning how to invest for yourself, making decisions which make you comfortable, and knowing WHY you're investing, and for what time-span, while understanding your investments well enough to know how to react (or not react) to news or changes as that time-span unfurls. You will not know the answers to those questions if you're simply following along with someone else's stock picks. You will not.

Next week we'll have a surprise, as five different Fools will be writing this recap. Hopefully they'll share their candid thoughts in this space, as well as the news, of course, as it happens.

For weekend reading, Fortune has a decent article about Intel.

Have a Foolish weekend. Live it well.


Stock Change Bid -------------------- AOL -2 1/4 35.88 T - 1/8 38.25 ATCT -3 7.38 CHV + 1/2 65.75 GM + 3/8 56.75 IOM --- 16.88 KLAC +1 5/8 40.63 LU +1 1/2 54.88 MMM + 1/2 84.38 NCR --- 35.88 COMS -1 5/8 50.63
Day Month Year History FOOL -2.51% -7.18% -5.37% 152.54% S&P: +1.21% 0.43% 6.59% 72.24% NASDAQ: +0.84% -1.60% 5.16% 88.52% 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 35.88 393.27% 8/11/95 125 Chevron 50.28 65.75 30.76% 8/12/96 110 Minn M&M 65.68 84.38 28.47% 10/1/96 42 LucentTech 47.62 54.88 15.24% 8/12/96 280 Gen'l Moto 51.97 56.75 9.19% 8/13/96 250 3Com Corp. 46.86 50.63 8.03% 1/2/97 8 NCR 33.63 35.88 6.69% 8/12/96 130 AT&T 39.58 38.25 -3.35% 8/24/95 130 KLA Instrm 44.71 40.63 -9.14% 10/22/96 600 ATC Comm. 22.94 7.38 -67.85% 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 24395.00 $19449.44 8/12/96 110 Minn M&M 7224.44 9281.25 $2056.81 8/11/95 125 Chevron 6285.61 8218.75 $1933.14 8/12/96 280 Gen'l Moto 14552.49 15890.00 $1337.51 8/13/96 250 3Com Corp. 11714.99 12656.25 $941.26 10/1/96 42 LucentTech 1999.88 2304.75 $304.87 1/2/97 8 NCR 269.00 287.00 $18.00 8/12/96 130 AT&T 5145.11 4972.50 -$172.61 8/24/95 130 KLA Instrm 5812.49 5281.25 -$531.24 10/22/96 600 ATC Comm. 13761.50 4425.00 -$9336.50 CASH $4639.01 TOTAL $126269.51