Fool Portfolio Report
Wednesday, February 19, 1997
by Tom Gardner (TomGardner)
ALEXANDRIA, VA., (Feb. 19, 1997) -- A couple hours after returning to Fool HQ from our semi-literary jaunt, my eyes darted across the Quotes & Portfolios screen on America Online, and froze like a snow-cone.
What is that, what there? I
called across the office, I say
over there, when did 3Com
Empty silence, no reply.
Our chief technologist, MF Dwight COMS Graph: Weekly for 1 year , ducked his head under his collar. I blinked a few times.
Hey Dwight, what's the deal
with 3Com, when did our
sugar-dumpling stock split
Headphones. Before digging back into the process of better automating The Motley Fool Online, the guy put his headphones on! Hmph. I spun around, spring in my step, and asked Jill, MF Speedy, who runs the superstore we call FoolMart.
Hey, Jill, do you own 3Com. . .
when did it split?
No, she didn't.
But she twittered a laugh along with the nope, the sort my younger sister has called on any number of humiliating times in my life -- spilling red wine on my one collared shirt ten minutes before a wedding, getting ticketed for jaywalking on a sidestreet (!) in Washington DC, fumbling my entire lunch tray simultaneous to colliding with the cafeteria salad bar, all in an attempt to keep sight of my future wife.
It's a simple, sharp laugh -- one that means silly, silly. . . silly boy. As I know that laugh, it didn't take long for me to realize I needed to invert to remedy the situation. I had simply mistook a passive for an active verb -- a seemingly trivial error that, when fixed, immediately changed everything entirely. One new note had overthrown the entire song. Because the truth was not that 3Com had split. No, not that. 3Com had been split. Flashbulbs went off; my mind reeled; I was back in the second grade. Ms. Belin was in front of the class, correcting me: No, Thomas, George didn't hit the ball. George was hit by the ball.
If Woody Allen were directing the movie, right now, in a very rapid succession of black-and-white images, winds fall out of sails, a glorious fifty-story Manhattan office building tumbles into a ballooning dust, a silent-picture actress with enormous eyes turns her cheek to a kiss, an old Ford Fairlane skids nearly to a stop -- then drops off the cliff's edge.
3Com was split.
Ladies and Gentleman, this isn't the first stock in our portfolio that has passively been split (cf. ATC Communications, Sonic Solutions, Applied Materials, KLA Instruments). And quite certainly, it won't be the last.
3Com was met with price cuts by competitors and the ongoing worries that the indefatigable Intel will be most aggressive in the world of adapter cards (those networking cards installed in your personal computer responsible for providing a network connection). These developments didn't blindside us, as evidenced in our Buy Report from August 12, 1996:
In fact, [computer networking] sales and
earnings have grown so heartily that the
biggest fear for the group is that the leading
providers -- Cisco and 3Com -- have
broadcast too loudly to the technology
giants -- Intel and Compaq -- that they'd be
extremely foolish (small "f," of course) not
to [more actively] participate in these markets.
But they did startle us, and certainly surprised Wall Street which had driven 3Com estimates higher in January. What happened? Well, Intel and Cisco in a sense double-teamed 3Com this month, forcing aggressive price cuts from our networker. And this came at a time when December and January sales had slackened. So, our player was actually triple-teamed.
3Com has found at least its temporary safety-net here around $40 a share. It closed down $7/8 to $40 1/2 today. Once up as much as 71% for us since our August purchase, 3Com is now down nearly 14%, instantly metamorphosed from Kentucky-Derby winner to show dog.
But not a throwaway mutt.
No, no, that honor goes to ATC Communications (NASDAQ:ATCT) which teamed together atrociously-underperforming earnings with a logic-free (tm) explanation of its performance by management. The only thing less impressive than the company's earnings report was our decision to add this stock to our portfolio. Here's a quick lesson that I am going to teach to ourselves -- look-in only if you made the mistake of investing in ATC Communications. Businesses that are:
- unbranded (does ATC ring a bell with consumers?)
- labor-intensive (one employee per telephone)
- indefensible (phone-answering isn't a proprietary deed)
- second-tier (these guys weren't the leaders)
don't make for great investments. This is particularly true if the market is valuing them dearly, at a P/E considerably higher than the projected growth rate. We violated some basic principles with this one, among them a snippet from Peter Lynch's great work: Don't buy laggards in booming industries.
Which begs that we ask ourselves whether or not 3Com is a laggard in the giant world of networking. I don't happen to think so. I still love the model they're working off of; I think selling networking equipment to small enterprises and home-PC users is a great idea; and I think the consumer familiarity with their products will prove very valuable. Finally, I believe in CEO Eric Benhamou. With management, past performance often is a fine indicator of future results.
We could be wrong on 3Com. Dammit, it's true. We could be wrong. But right now, the steep drops in ATC Communications and 3Com signify very different things to us. ATC's decline dresses it up as a mutt. That's what I see. 3Com's tumble has effected in my ears the sounds of only temporary barking. Keeping close watch over their financials and listening to the words of Mr. Buffett (Be prepared for 50% losses from even your best investments) and Peter Lynch (I always plan on waiting three years for my best investments to shine), we're comfortable sitting on this one.
Non-Legal Insert: If you are invested
in any Fool stocks without first having
stabilized your portfolio with Dow
high-yielders and then moving into
stocks (Nike, Coke, Gillette, The Gap,
Intel, Microsoft, General Electric, Pfizer),
I think you approach this model portfolio
from unstable ground.
Now, what happened with The Fool Portfolio today? Another fairly dismal day, actually. All but one of our stocks reached lower, with America Online off $7/8 and Iomega down $1/2. Not to be ignored: General Motors off $1 1/4, KLA Instruments down $1, and 3M off $1 1/4.
What one stock rose during the downdraft? Lucent Technologies.
Lucent Technologies has absolutely been a monster since being spunoff by AT&T on October 1st. The stock has risen 25.22%, far outpacing the market. Over the last three months, Lucent has created the following:
1. A fine brand-building advertising campaign;
2. A joint manufacturing venture with Cirrus Logic;
3. A new charge card for wireless pay-phones;
4. Entry into China's toll network;
5. Software to Sprint's Natl. Operations Control Center;
6. The sale of a new modem-chip set to Hewlett-Packard;
phew. . . and. . .
7. Bang-up earnings, announced on January 21st.
All told, Lucent looks quite attractive to us Fools, but only from a long-term perspective. For my Yogi Berra of the week: The stock is certainly not looking as cheap here around $60 as it did a few months back at $48. That said, Lucent is a financially-strong, gi-normous telecommunications equipment company that is now free to negotiate freely with anyone it chooses. Time for a mental note: Spinoffs from giants in a deregulating industry probably deserve a close look.
Let us not walk away from this report without having marked down clearly our 2.01% loss today versus the S&P 500's 0.47%. The market is all over us in 1996, up an unthinkable sixteen percentage points. Fifteen years from now, I think we'll all look back on this somewhat fondly. The days when ATC cleaned our clock. When 3Com seemed threatened. When we actually held eight measly shares of NCR. And when the market ate our lunch.
Hopefully we'll be smiling. We're certainly going to work hard at it, to get beyond hearing range of my sister's playfully mocking giggle.
Tom Gardner, Fool
Stock Change Bid -------------------- AOL - 7/8 35.38 T - 3/8 40.00 ATCT --- 6.38 CHV - 3/4 67.25 GM -1 1/4 57.75 IOM - 1/2 16.88 KLAC -1 46.50 LU + 5/8 59.63 MMM -1 1/4 84.38 NCR - 5/8 35.50 COMS - 7/8 40.50
Day Month Year History FOOL -2.01% -8.52% -6.74% 148.91% S&P: -0.47% 3.35% 9.68% 77.24% NASDAQ: -0.02% -1.03% 5.77% 89.62% 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 35.38 386.40% 8/11/95 125 Chevron 50.28 67.25 33.74% 8/12/96 110 Minn M&M 65.68 84.38 28.47% 10/1/96 42 LucentTech 47.62 59.63 25.22% 8/12/96 280 Gen'l Moto 51.97 57.75 11.12% 1/2/97 8 NCR 33.63 35.50 5.58% 8/24/95 130 KLA Instrm 44.71 46.50 4.00% 8/12/96 130 AT&T 39.58 40.00 1.07% 8/13/96 250 3Com Corp. 46.86 40.50 -13.57% 10/22/96 600 ATC Comm. 22.94 6.38 -72.21% 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 24055.00 $19109.44 8/11/95 125 Chevron 6285.61 8406.25 $2120.64 8/12/96 110 Minn M&M 7224.44 9281.25 $2056.81 8/12/96 280 Gen'l Moto 14552.49 16170.00 $1617.51 10/1/96 42 LucentTech 1999.88 2504.25 $504.37 8/24/95 130 KLA Instrm 5812.49 6045.00 $232.51 8/12/96 130 AT&T 5145.11 5200.00 $54.89 1/2/97 8 NCR 269.00 284.00 $15.00 8/13/96 250 3Com Corp. 11714.99 10125.00 -$1589.99 10/22/96 600 ATC Comm. 13761.50 3825.00 -$9936.50 CASH $4639.01 TOTAL $124453.51