Fool Portfolio Report
Tuesday, December 2, 1997
by Jeff Fischer (

ALEXANDRIA, VA (Dec. 2, 1997) -- Nasdaq chose its own path today, and it was a dark one. The market whose existence is based on computer technology decided to forsake its creator by trashing technology stocks for a 1.5% loss, while the S&P 500 suffered a more palatable 0.32% decline. The short circuit in the Nasdaq was more pronounced for much of the day, with the S&P up and the Nasdaq down, until finally the lights went out on the S&P as well.

The Fool lost 0.79%, splitting the two indices. The portfolio is slightly ahead of the Nasdaq for the year, but still trails the S&P by six percentage points. Oooomph.

The fun story of the day was going to be Trump Hotels (NYSE: DJT), as the stock stooped down and touched its 52-week low of $8 1/4 in the early afternoon. The drop put the Fool in the money for the first time since the short position was initiated. Alas, our luck didn't last. Donald hit blackjack and the stock turned profitable for the day, ending up $3/16. The Fool is still losing money on the short, but Trump has a long -- and perhaps bleak -- winter ahead of it.

Since the Fool shorted Trump on April 30, the company has paid over $150 million in interest payments alone, while its long-term debt hasn't been scratched -- at all. Debt still stands above $1.7 billion. Since April, the road leading to future casinos in Atlantic City has been approved, Trump has been declined a Detroit casino, and new river boats have opened in competition with Trump in Indiana, where the company has lost market share. Foolishly, we shout, "Go Trump!"

After the market closed, 3Com (Nasdaq: COMS) announced that it has reduced inventory with channel partners and that it has revised its inventory practices. The company is hoping to make its needed inventory levels more predictable, while aiming to make its entire inventory and distribution process much simpler and more efficient. This is good news for the long term, but the market is going to take the stock lower tomorrow -- and perhaps significantly. Why? Management stated, "Because 3Com decided to converge on the new inventory management model quickly, second quarter sales are now expected to be between $1.22 billion and $1.24 billion... Sales in this range are expected to result in a slight profit for the quarter."

The second quarter ended in November and earnings per share of forty-four cents were expected before today's news. Instead, $1.22 billion in sales would be a four hundred million dollar decrease from the previous quarter's sales of $1.6 billion, making the previous earnings estimate sky high. Modem sales -- the lower-margin products that are constituting less of 3Com's bottom line earnings as the company continues to focus on high-end products -- have been slow and jammed up the inventory channels, to speak Wisely.

This means that fiscal '98 earnings estimates need to be lowered from $2.02 per share to, at most, about $1.60 per share, which assumes that 3Com can accelerate numbers again in the coming quarters and meet later estimates. That's not a very realistic assumption, though. Assuming there is an inventory glut and that it will take a few quarters to clear, 3Com may earn much less than $1.60 per share for the year ending in May. As reported Friday, Hambrecht & Quist analysts recently lowered estimates to $1.79 per share -- a number that already will probably need to come lower.

Is this the end of the world?

At this point, we're invested in a business that is expected to continue growing for the foreseeable future. This sounds like a broken record after a year of disappointment, and we may well be saying the same thing a year from now still, perhaps, but then we need to remember that Coca-Cola's stock didn't go anywhere for ten years beginning in the early 70s and still it has been one of the best investments of the last three decades. If we're truly long-term investors in 3Com, I don't think that we'll end up disappointed as long as management can continue to execute in the future as it has in the past.

Meanwhile, tomorrow the stock will probably get hammered for several points. 3Com has traded at between 12 and 54 times trailing earnings over the past ten years, with the high multiple being reached last year. The stock was reportedly at $30 in after-hours trading (something that Fools worry very little about -- or actually, not at all). At that price, though, it trades at 20 times a random estimate of $1.50 per share, which assumes that 3Com can earn $1.02 per share in the next three quarters -- which may still be high.

Before we continue guessing we need more information, which we'll get by the week of December 19 at the latest, when the company announces second quarter earnings. Suffice it to say that 3Com's business is slow right now, and the stock is paying the price. (Tom recently wrote about 3Com's inventory.) Adding to networking woes today, Cabletron (NYSE: CS) announced an earnings disappointment that was covered in tonight's Evening News. For an interesting and Foolish read, please see TMF Boring's recent interview with the head of the investor relations department at Cisco Systems (Nasdaq: CSCO), the one networking company that so far has stood up well.

To present some good news: Innovex (Nasdaq: INVX) announced that Seagate (NYSE: SEG), the largest disk drive maker in the world, has accepted Innovex's new HIF technology for some of its disk drive lines. The news is a shot across the bow of Innovex competitor, Hutchinson Technology (Nasdaq: HTCH), and it helped Innovex keep somewhat afloat even while Western Digital (NYSE: WDC) announced yet another downward earnings estimate revision.

The question to end the day: why did KLA-Tencor (Nasdaq: KLAC) rise while semiconductor stocks were slammed after Altera's (Nasdaq: ALTR) management allegedly told analysts that earnings will miss estimates for the fourth quarter? I'm not sure why KLAC rose, but won't question it further.

Drip yourself a pot of coffee (decaf), have a peaceful evening, think long term, and Fool on!

--Jeff Fischer

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Stock Change Bid ---------------- AMZN - 5/16 50.81 AOL + 3/16 77.19 T - 7/16 56.25 CHV -1 1/8 78.50 DJT + 3/16 8.75 GM + 1/4 62.00 INVX - 3/8 23.13 IOM - 1/4 32.63 KLAC +1 1/2 41.06 LU - 3/16 82.44 MMM - 5/16 98.31 COMS -3 35.31
Day Month Year History FOOL -0.79% 0.72% 24.96% 233.51% S&P: -0.32% 1.70% 31.18% 111.97% NASDAQ: -1.49% 0.36% 24.43% 123.05% Rec'd # Security In At Now Change 5/17/95 980 Iomega Cor 2.52 32.63 1194.64% 8/5/94 355 AmOnline 7.27 77.19 961.31% 10/1/96 42 LucentTech 47.62 82.44 73.13% 8/11/95 125 Chevron 50.28 78.50 56.11% 8/12/96 110 Minn M&M 65.68 98.31 49.69% 8/12/96 130 AT&T 39.58 56.25 42.13% 9/9/97 290 38.22 50.81 32.94% 8/12/96 280 Gen'l Moto 51.97 62.00 19.29% 4/30/97 -1170 *Trump* 8.47 8.75 -3.32% 8/24/95 130 KLA-Tencor 44.71 41.06 -8.16% 6/26/97 325 Innovex 27.71 23.13 -16.55% 8/13/96 250 3Com Corp. 46.86 35.31 -24.64% Rec'd # Security In At Value Change 5/17/95 980 Iomega Cor 2509.60 31972.50 $29462.90 8/5/94 355 AmOnline 2581.87 27401.56 $24819.69 9/9/97 290 11084.24 14735.63 $3651.39 8/12/96 110 Minn M&M 7224.44 10814.38 $3589.94 8/11/95 125 Chevron 6285.61 9812.50 $3526.89 8/12/96 280 Gen'l Moto 14552.49 17360.00 $2807.51 8/12/96 130 AT&T 5145.11 7312.50 $2167.39 10/1/96 42 LucentTech 1999.88 3462.38 $1462.50 4/30/97 -1170*Trump* -9908.50 -10237.50 -$329.00 8/24/95 130 KLA-Tencor 5812.49 5338.13 -$474.37 6/26/97 325 Innovex 9005.62 7515.63 -$1490.00 8/13/96 250 3Com Corp. 11714.99 8828.13 -$2886.87 CASH $32438.81 TOTAL $166754.62