Fool Portfolio Report
Monday, November 10, 1997
by Jeff Fischer (JeffF@fool.com)


ALEXANDRIA, VA (Nov. 10, 1997) -- The ever-volatile shares of both America Online and Amazon.com lost over $3 to begin the week, bringing the Fool Port to its third loss in as many market days. The portfolio dropped 1.31%, even while all of the Foolish Four stocks rose in a down market.

Covering the good news first, 3M (NYSE: MMM) rose one dollar after the Board of Directors announced plans to repurchase up to 25 million shares of stock between now and 1999. 3M recently purchased 17.5 million shares under a similar plan. At a current price of $94, the company could buy back as much as $2.3 billion worth of stock, though rarely do companies buy to the maximum amount set.

Still, when a Dow stock is less expensive and the dividend yield is high (which is when a Dow stock often becomes part of the Foolish Four), the company involved is frequently buying back its own stock, which is one more small reason why the Foolish Four strategy has worked so well over the past three decades.

Other Foolish Four holding AT&T (NYSE: T) rose slightly, though under what pretense is anyone's guess. Today MCI Communications (Nasdaq: MCIC) agreed to merge with WorldCom (Nasdaq: WCOM) for an amount 22% sweeter than what WorldCom originally offered earlier this fall. WorldCom is arguably one of the most notable fishes eating the most fish food over the recent past, and by that I mean: acquiring itself into "giant" status. Let's hope that WorldCom doesn't someday get bloated and float heavily atop stagnant water.

On the downside now, America Online (NYSE: AOL) continued to fall after the announcement of record earnings last week. The stock rose sharply in anticipation of earnings and then began to deflate like a balloon, much like an ungrateful kid after he opens all of his presents on his birthday. Today AOL announced that the U.S. antitrust waiting period for its CompuServe acquisition had expired, so the company can proceed with the deal that was announced on September 8. As part of that deal, America Online's ANS Communications subsidiary is being sold to -- who else? -- WorldCom.

As with America Online, anything could happen next to the share price of Amazon.com (Nasdaq: AMZN), which fell today too. The market is attempting to value both companies while analyzing a new industry and any change in perception has a "compounded" effect, more or less, and results in volatile price swings. Late last Friday night Amazon announced that it finalized a $75 million, three-year credit commitment with Deutsche Morgan Grenfell, Inc. Though Amazon has $48 million in cash, the credit gives the company access to the resources that it needs to execute its long-term strategy (namely, brand building and marketing). (And people argue that the barriers to entry in Internet commerce are low? That may be true, but the barriers to successful or leading Internet commerce are apparently very high.)

At $50 1/2 per share, the stock trades at 8 times the revenue run rate of $151 million ($37.9 million last quarter multiplied by four). This month (as happens with all initial public offerings at some point) the stock's lock-up period ends. Bears argue that the 19 million shares previously held up will flood the market, bringing the share price down.

First, we doubt that a significant fraction of the shares will be sold. Second, the shares outstanding does not change, as some people believe. The count remains at 23.8 million shares. And third, the short-term concerns of some selling -- much like periodic insider selling -- are not of importance to long-term investors. If it was, the Fool would have sold AOL long ago. It's actually good to learn that Amazon lined up a $75 million credit agreement because it's now less likely that the company will offer more shares to the public in the near future.

Innovex (Nasdaq: INVX) rose early in the day despite the continued slaughter of many disk drive brethren. Read-Rite (Nasdaq: RDRT) dropped after announcing that it plans to move more quickly to magnetoresistive heads (MR). MR sales constituted 67% of Innovex's total revenue in the third quarter of 1997 -- as the conference call shares -- so Read-Rite's news is actually good for Innovex. The move will hurt Read-Rite's margins and earnings, but Innovex profits are higher on MR than in its traditional inductive wires. Still, industry blues brought Innovex lower by the end of the day. Western Digital (NYSE: WDC) and Hutchinson Technology (Nasdaq: HTCH) have been crunched for losses of about 40% each following recent earnings revisions. Also, Hutchinson's TSA technology (which is meant to compete with Innovex's new HIF technology) may not be ramping up quite as expected.

Innovex trades at 10.9 times trailing earnings and expects to grow 20% to 25% in fiscal 1998. Arguably the company is harmed less than any other in the recent but ongoing storage technology slide. Pricing competition isn't a concern at Innovex, as it already offers by far the least expensive product and in volumes that drive makers need. The one concern is just that -- volume. Volume fluctuates with industry demand, but the company's margins and earnings have remained as solid as ever.

Trump Hotels (NYSE: DJT) fell on Friday after word that the company was rejected from Detroit's casino plans. We have mixed emotions on the news. We'd like to see Trump take on even more debt and add to its $200 million-plus in annual interest payments, but we're also glad that the market sees the rejection as a negative, for whatever reason. (Rejection may actually have been a blessing to the debt-laden Trump.) Four casinos were selected as finalists for the three proposed casinos in Detroit. The big three winners were Mirage (NYSE: MIR), Circus Circus (NYSE: CIR) and MGM Grand (NYSE: MGG).

Finally, 3Com (Nasdaq: COMS) continued to fall and is now at prices that it hasn't seen since May. The stock trades at less than 18 times estimates for the year ending in May and 13 times estimates for May of 1999. The modem channel is currently fuller than hoped for, though perhaps the holiday season will help it along.

To close: I spent a good deal of Saturday answering email, all of it written by considerate Fools the world over -- from Hawaii to Canada, to Asia to Europe. Leaving the office after a full day of sending out email to dozens of Fools -- not even knowing where in the world most of the email was going -- was again a strange and great experience. A person can't lose wonder with something so amazing as a world all connected on a line. (Or, OK, connected on several lines.) Anyway, one question that came up more frequently than others (other than the omnipresent Drip Port questions) regarded online banking and discount brokers. Many new Fools are rummaging about for information on these new services.

Good news.

On the Web, the Fool has a new Fool Financial Center that contains information about several leading online discount brokers and leading online bankers. If you're looking for information on where to begin, or services to consider, be sure to give it a read. Also, it helps to visit the attached Fool message boards to see what other Fools are saying about the services offered. The Fool Financial Center will change as more companies become listed, too, so you're likely to often find some of the best deals around.

Fool on and prosper!

--Jeff Fischer


TODAY'S NUMBERS

Stock Change Bid ---------------- AMZN -3 1/8 50.50 AOL -3 3/8 75.88 T + 5/16 48.31 CHV + 5/16 83.81 DJT + 1/8 8.88 GM + 11/16 65.44 INVX - 11/16 25.13 IOM + 5/8 28.81 KLAC -1 3/16 44.31 LU -1 1/8 82.44 MMM +1 94.00 COMS -2 36.06
Day Month Year History FOOL -1.31% -1.14% 22.67% 227.39% S&P: -0.69% 0.71% 24.35% 100.94% NASDAQ: -0.73% -0.18% 23.21% 120.88% Rec'd # Security In At Now Change 5/17/95 980 Iomega Cor 2.52 28.81 1043.35% 8/5/94 355 AmOnline 7.27 75.88 943.26% 10/1/96 42 LucentTech 47.62 82.44 73.13% 8/11/95 125 Chevron 50.28 83.81 66.68% 8/12/96 110 Minn M&M 65.68 94.00 43.13% 9/9/97 290 Amazon.com 38.22 50.50 32.12% 8/12/96 280 Gen'l Moto 51.97 65.44 25.91% 8/12/96 130 AT&T 39.58 48.31 22.07% 8/24/95 130 KLA-Tencor 44.71 44.31 -0.89% 4/30/97 -1170 *Trump* 8.47 8.88 -4.80% 6/26/97 325 Innovex 27.71 25.13 -9.33% 8/13/96 250 3Com Corp. 46.86 36.06 -23.04% Rec'd # Security In At Value Change 5/17/95 980 Iomega Cor 2509.60 28236.25 $25726.65 8/5/94 355 AmOnline 2581.87 26935.63 $24353.76 8/11/95 125 Chevron 6285.61 10476.56 $4190.95 8/12/96 280 Gen'l Moto 14552.49 18322.50 $3770.01 9/9/97 290 Amazon.com 11084.24 14645.00 $3560.76 8/12/96 110 Minn M&M 7224.44 10340.00 $3115.56 10/1/96 42 LucentTech 1999.88 3462.38 $1462.50 8/12/96 130 AT&T 5145.11 6280.63 $1135.52 8/24/95 130 KLA-Tencor 5812.49 5760.63 -$51.86 4/30/97 -1170*Trump* -9908.50 -10383.75 -$475.25 6/26/97 325 Innovex 9005.62 8165.63 -$840.00 8/13/96 250 3Com Corp. 11714.99 9015.63 -$2699.37 CASH $32438.81 TOTAL $163695.87