Fool Portfolio Report
Friday, February 28, 1997
by Jeff Fischer (MF BudFox)

ALEXANDRIA, VA., (Feb. 28, 1997) -- The market rolled down a hill this week (a San Francisco trolley car brimming with riders, all of them peering through the windows). While descending, Fools knew to keep their eyes rising, focused on the horizon. The Nasdaq dropped 1.9%, after falling 2.4% last week. The Fool portfolio fell 3.8%, losing to the S&P by over 2%. Those investing on a regular basis cheer the market downward so they can steadily buy leaders at lesser prices. Dollar-cost averaging is an advantage this portfolio doesn't have.

If you've watched stocks scale higher since November and wondered why your portfolio wasn't rising as much, perhaps you own many small-cap companies. The Dow has sprinted while the Nasdaq has dawdled. The Nasdaq, though, has lagged even more than it appears. Small stocks have wilted while leaders the likes of Microsoft and Intel have pulled the Composite higher. More than a few small-cap indices appear flat over the past months.

The Fool has bought small caps, but they've disappeared. America Online was once a small cap. No more. Iomega: small cap. No longer. Meanwhile, the large have gotten larger. KLA Instruments is merging with Tencor to form the largest semiconductor equipment leader of its kind, unmatched in its scope of product. In another marriage, 3Com plans to wed U.S. Robotics in the largest networking merger in history. ATC Communications, meanwhile, is currently the Fool's only true small stock. ATC wears the beanie cap in this family.

As much as the stocks in the portfolio are changing, imagine Chicago in the 1920's, with half-built sky-scrapers, fanning rail yards, and streets over-flowing with identical Ford automobiles. Imagine it as an old black-and-white film, with everything moving at double-speed. With that type of efficiency, we slide forward... With that illusion of speed, stocks move... With that flavor of nostalgia, this recap briefly descends....

...Descends upon the city of Detroit where Henry Ford said, "I don't blame any person but the system." Ford was thought to rule the world of automobiles, and Ford did, until the 1920's. Since that decade, General Motors has been the most profitable auto-maker in the world. In 1996, GM sold 4.8 million cars -- nearly as many as Ford and Chrysler combined. Sales at GM last year were $162 billion.

After the First World War, America was lively; people wanted to express themselves. General Motors surpassed Ford in the 1920's as Ford continued to manufacture identical cars. General Motors made several models of cars -- directly against Ford's business plan. GM took the lead and never gave it back, and is now larger than Ford by $5 billion in market cap.

Microsoft has used this history to argue against Network Computers (NCs) -- the coming stripped-down dummy terminals. Oracle and Sun Microsystems are pushing for Network Computers, as the wide-spread use of NCs would benefit their core businesses. Microsoft doesn't want them. Microsoft is going the opposite way: personalized desk-tops. Meanwhile, Intel has developed its own Network Computer technology, in case the idea flourishes.

I've digressed.

World-leading General Motors became a Foolish Four holding in 1996. How? The stock fell as work strikes took place last year, resulting in less production and flat sales. So far this year, though, not many carboard picket lines, not many chants. Good for GM. The Fool is up 11% on the stock since August, and the company trades at 7.5 times estimates.

The Wise may find it difficult to believe that the Fool invested three times as much money in GENERAL MOTORS (NYSE: GM) as it did in IOMEGA (NYSE: IOM) -- or in America Online. The Fool must hype General Motors.

Recently the CEO of AT&T (NYSE: T) stated the stock was underpriced. The company held a monopoly on long-distance services until the 1984 reforms. Since then, AT&T has lost 40% of the long-distance market. That's to be expected. The company has also made poor investments, though, and wasted money looking for "direction." Friday AT&T announced another employee restructuring. Having ruled their market without challenge for decades, the company is still learning how to focus on attracting and keeping customers, while fighting in a fast-changing industry. For kicks, we'll look at the stock price next week in a Foolwire (not this column) -- to try to see if the CEO is correct. The stock is essentially at the same price it was four years ago.

Also in the Foolish Four arena stand 3M (NYSE: MMM) and CHEVRON (NYSE: CHV). 3M landed in the Foolish Four basket last year partially due to a recent restructuring. Since then, the company has been on fire, and the Fool is up 40% on the stock since August. Chevron -- well -- Chevron often moves when oil prices move, as happened last fall.

Monday I wrote about the main tech stocks in the portfolio, and today touched on the Foolish Four. But WHY? The beauty of the Foolish Four is that there is no homework. It's once a year. If you have questions about the Dow Dividend Approach (where the Foolish Four comes from), check out step six of the Fool's "13 Steps to Investing Foolishly." That sixth step could be the most important part of your investing career. Decades hence, while sitting on your porch looking over the beach, and sleeping with the waves outside your windows, you may recall that a jester helped put you there -- with very minimal work or worries.

Wrap-up thoughts on some stocks:

3COM (Nasdaq: COMS) probably would have fared much better announcing the merger with U.S. ROBOTICS (Nasdaq: USRX) three months ago, when networking was still in favor. The market's current mood on the sector is downright ugly, as some of the stocks are hitting historically low valuations. An industry basket of 66 networking stocks has fallen 17% since January 1st. Questions abound. Transitions abound. But had this merger happened last fall, it would have inspired much more positive responses and a more positive outlook from industry followers. That's something to keep in mind right now, looking at the merger going forward.

"Going forward" is the operative phrase. Some of the Wise are upset that U.S. Robotics sold itself "so cheaply." The company replied that it wanted to position itself for the long-term good of the shareholders, to gain market-share and strength in the coming years. The company is looking long-term. The Wise are looking short-term, at the immediate selling price. The premium wasn't high, but U.S. Robotics is also benefiting from the merger going forward -- that's the point.

The networking market is growing 30% to 50% per year, and the industry has dropped from a top-performer to near the bottom of the list.

Almost as quickly, the sixty stock basket of semiconductor equipment stocks has risen from the very bottom of the performance list to the number ONE position. Investor's Business Daily lists 197 industries each day. Semi-equipment has gained 19% since January 1st. Flip-flop. Networking will one day bounce back as well, as do all strong-growing industries. For the week, 3Com fell a whole 14%, while KLA INSTRUMENTS (Nasdaq: KLAC) fell 2%.

ATC COMMUNICATIONS (Nasdaq: ATCT) was a winner this week, gaining over 30%, after earlier making a new 52 week low. The company had three press releases this week, one of which was simply to question the new low of the stock -- a welcome word from a priorly reticent management. Other news: ATC hired a Public Relations firm. Brand building is championed by all Fools. Thursday the company hired two new executives, filling the chief operating officer (COO) position with an executive from Frito-Lay, and filling vice-president of marketing with a vice-president from Memorex-Telex.

AMERICA ONLINE (NYSE: AOL) gained 10% this week, after implying membership churn was down significantly, and after signing a contract with TEL-SAVE HOLDINGS (Nasdaq: TALK). Marketing of long-distance services through AOL is a revenue source some investors may not have considered -- and lends credence to many other types of marketing opportunities ahead for AOL. America Online has more readers with its eight million subscribers than three of the country's more popular newspapers, combined.

There is no love lost between the Fool and February. We dropped 10.8% this month -- though far from our worst month, still not an entirely joyful experience (except maybe in a perverse way, it was). Still, very Foolish nonetheless! The drama is here online to learn from, indefinitely, each month being listed day-by-day.

So long, wintry old February... Bring it on, March!

Weekend Reading:

1. If you haven't yet read the 13 steps to Investing Foolishly, you probably shouldn't be following the Fool portfolio!
2. MF Boring has been writing, nightly, great recaps about the Boring portfolio stocks and the market -- concentrating lately on Cisco Systems.
3. Industry Reports
4. Fool's Gold
5. 3Com / U.S. Robotics Merger

NCR Update

Monday we announced we were selling our eight shares of NCR CORP (NYSE: NCR), and Wednesday we told our broker. We're selling the shares back to NCR for a $10 buy-back fee, incurring no broker commissions. The stock was around $35 1/2 Wednesday, but the exact tender offer price we receive won't be known for two or three weeks. We'll receive around $35 a share, though, which is the price figured in the portfolio and added to cash, minus the $10 fee. Any adjustments (which will be dollars and cents at most) will be made as soon as the final price information is available. Removing the stock from the port now, though, at $35 per share, is less confusing (and more accurate) than leaving the stock listed in the portfolio.

Good bye, NCR. Even great loves one day have to part. Or so they say.

Aurevoir. Be unWise with your weekend! Be Foolish. Have fun!

--February 28, 1997

(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 + 1/2 37.50 T - 1/4 39.88 ATCT - 3/8 7.63 CHV -1 7/8 64.50 GM + 1/8 57.88 IOM - 3/8 15.38 KLAC + 5/8 41.38 LU - 3/8 53.88 MMM - 1/2 92.00 COMS -1 7/8 33.00
Day Month Year History FOOL -1.08% -10.80% -9.06% 142.70% S&P: -0.54% 0.59% 6.76% 72.52% NASDAQ: -0.28% -5.13% 1.39% 81.76% Rec'd # Security In At Now Change 5/17/95 2010 Iomega Cor 2.52 15.38 510.37% 8/5/94 680 AmOnline 7.27 37.50 415.61% 8/12/96 110 Minn M&M 65.68 92.00 40.08% 8/11/95 125 Chevron 50.28 64.50 28.27% 10/1/96 42 LucentTech 47.62 53.88 13.14% 8/12/96 280 Gen'l Moto 51.97 57.88 11.36% 8/12/96 130 AT&T 39.58 39.88 0.75% 8/24/95 130 KLA Instrm 44.71 41.38 -7.46% 8/13/96 250 3Com Corp. 46.86 33.00 -29.58% 10/22/96 600 ATC Comm. 22.94 7.63 -66.76% Rec'd # Security In At Value Change 8/5/94 680 AmOnline 4945.56 25500.00 $20554.44 5/17/95 2010 Iomega Cor 5063.13 30903.75 $25840.62 8/12/96 110 Minn M&M 7224.44 10120.00 $2895.56 8/11/95 125 Chevron 6285.61 8062.50 $1776.89 8/12/96 280 Gen'l Moto 14552.49 16205.00 $1652.51 10/1/96 42 LucentTech 1999.88 2262.75 $262.87 8/12/96 130 AT&T 5145.11 5183.75 $38.64 8/24/95 130 KLA Instrm 5812.49 5378.75 -$433.74 8/13/96 250 3Com Corp. 11714.99 8250.00 -$3464.99 10/22/96 600 ATC Comm. 13761.50 4575.00 -$9186.50 CASH $4909.01 TOTAL $121350.51