(FOOL GLOBAL WIRE -- Friday, December 26, 1997)
by Jeff Fischer (TMF Jeff)

CHICAGO, IL (Dec. 26, 1997) -- On not a lick of news, the Fool Port stocks traded slightly lower on dips in Amazon and Iomega, while the S&P and Nasdaq gained 0.40% and 0.79% respectively.

Let's start with perhaps the most boring, shall we? Even it holds a lesson.

The stock of AT&T (NYSE: T) has continued to rise, gaining nearly one dollar on Friday. The stock has doubled from its $31 low set this spring, making many investors happy, as AT&T is the most widely held stock in the country.

The hiring of Mr. Armstrong as CEO and the initiatives taken have done more to help AT&T's stock than any recent earnings report. Mr. Armstrong aims to eliminate 10% of the long-distance leader's annual expenses, or $4 billion, while new compensation structures are also being implemented. Going forward, most AT&T executives will be paid bonuses based primarily on how well the company performs, rather than based on personal performance (75% of bonuses will be paid on company performance, 25% on personal performance). Also in the news recently, the company isn't so interested in the local phone business right now, while the Baby Bells are having a difficult time entering the long-distance market.

AT&T is trading at a historically expensive valuation -- at over twenty times earnings estimates when the average P/E for AT&T over the past ten years has been closer to 14. If there is one simple lesson to learn this year, though -- one that has been reiterated again and again -- it is to remember not to value stocks on earnings estimates alone, and in the same breath don't always take earnings estimates at face value. Apparently Wall Street thinks that AT&T can top the current estimate and is trying to value the stock accordingly. AT&T is now poised to be one of the best performing Foolish Four stocks of the year.

Another company that taught the "earnings lesson" this year is 3Com (Nasdaq: COMS). During the spring while networking stocks fell, it was much more important to look at the reasons behind the decline rather than reiterate how inexpensive the stocks might be if the earnings estimates could be met. (This is something that I've been guilty of at times, though I have kept a five-year outlook on networking stocks.) Looking at the businesses very closely might have intimated that, indeed, the companies might be hard-pressed to make estimates, and so the falling stock prices were merited.

This is very easy to say in hindsight, but the lesson still remains the same: If you're invested in stocks beyond the S&P and Foolish Four (meaning, you're invested in small- and mid-caps) and you're wondering how your stocks are valued going forward, consider the business and any possible changes before you consider the weight of the current earnings estimates alone, especially in situations similar to 3Com's.

3Com trades at 33 times the new May of '98 earnings estimate of $0.98 per share. While looking ahead to the May '99 estimate of $1.89 per share is premature. There's too much guesswork involved in the '99 numbers, so instead we should look at the 1998 earnings estimate and the price-to-sales ratio and other valuation measures, and perhaps extrapolate that into 1999 at a more conservative pace than the analysts have. Randy Befumo wrote about the status of networking stocks in a recent issue of the Evening News.

One company in a similar situation to 3Com is Oracle (Nasdaq: ORCL), a former Boring Portfolio stock. After estimate revisions early this month, Oracle is expected to grow earnings only 7% in the current fiscal year, then 23% in the next year. The estimates for next year are too much guesswork, though, considering the uncertainty of the slowdown, so an investor should discount those estimates and look at other measures to value the company, or perhaps work under their own, more conservative estimates for now.

Meanwhile, the "trouble" at Microsoft (Nasdaq: MSFT) is much less likely to have an influence on the company's future earnings power, so one needn't worry quite so much about Microsoft's current earnings estimates. For what it's worth regarding Microsoft's battle with the government, I find it interesting that the Department of Justice doesn't realize (or is ignoring) the fact that Microsoft has been working to integrate the Web (and so its Web browser) with its desktop software for the past few years. Requiring the company to remove its browser in any way from Windows 95 seems rather ignorant, as the system doesn't work so well without it. Meanwhile, if consumers want to use a different browser, they can easily install it on their computer.

In short, it's hard to believe that this is the Department of Justice's place to interfere. It's like suing Disney to stop the company from selling only Disney products at its stores and theme parks. When buying a Microsoft operating system, you expect to receive all of the relevant Microsoft software. An operating system without a Web browser imbedded is now bordering on blasphemy.

Finally, (Nasdaq: AMZN) might be swamped, because I haven't received an order that was placed over one week ago -- not even the snail mail gift certificate that I ordered. Other Fools at Fool HQ have had orders trickle in "late" over the holiday as well. If the Fool Portfolio didn't own the stock, I might mind the delay. As it is, though... aw, what the heck! Hopefully next year Amazon's system will be more up to speed -- that is, if the company did indeed experience some chaos this year. Anyway, we'll see Amazon's fourth quarter results in mid-January. Hey... the doorbell just rang.

Have a Foolish weekend. Don't miss David and Tom on the radio, both Saturday and Sunday!

--Jeff Fischer

Fools: Please read Friday's Drip Port column and let us know if you'd like the Fool Portfolio column to quickly review its past week's columns every Friday, as well, in a similar fashion (FoolWatch does this daily, but there is value-added here, too, we believe). Email your thoughts to Thanks!

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Stock Change Bid ---------------- AMZN -1 3/8 53.88 AOL + 3/16 86.94 T + 15/16 63.06 CHV - 1/16 75.31 DJT - 1/16 6.94 GM + 3/8 59.31 INVX - 5/16 20.19 IOM - 3/16 12.31 KLAC +1 3/16 38.44 LU + 1/8 77.63 MMM - 11/16 83.56 RTN.A - 1/4 48.94 COMS + 5/16 33.25
Day Month Year History FOOL -0.22% -1.94% 21.67% 224.72% S&P: +0.40% -1.98% 26.42% 104.29% NASDAQ: +0.79% -5.57% 17.07% 109.86% Rec'd # Security In At Now Change 8/5/94 355 AmOnline 7.27 86.94 1095.37% 5/17/95 1960 Iomega Cor 1.28 12.31 861.61% 10/1/96 42 LucentTech 47.62 77.63 63.02% 8/12/96 130 AT&T 39.58 63.06 59.34% 8/11/95 125 Chevron 50.28 75.31 49.77% 9/9/97 290 38.22 53.88 40.95% 8/12/96 110 Minn M&M 65.68 83.56 27.23% 4/30/97 -1170 *Trump* 8.47 6.94 18.08% 8/12/96 280 Gen'l Moto 51.97 59.31 14.12% 12/19/97 17Raytheon 53.21 48.94 -8.03% 8/24/95 130 KLA-Tencor 44.71 38.44 -14.03% 6/26/97 325 Innovex 27.71 20.19 -27.15% 8/13/96 250 3Com Corp. 46.86 33.25 -29.05% Rec'd # Security In At Value Change 8/5/94 355 AmOnline 2581.87 30862.81 $28280.94 5/17/95 1960 Iomega Cor 2509.60 24132.50 $21622.90 9/9/97 290 11084.24 15623.75 $4539.51 8/11/95 125 Chevron 6285.61 9414.06 $3128.45 8/12/96 130 AT&T 5145.11 8198.13 $3053.02 8/12/96 280 Gen'l Moto 14552.49 16607.50 $2055.01 8/12/96 110 Minn M&M 7224.44 9191.88 $1967.44 4/30/97 -1170*Trump* -9908.50 -8116.88 $1791.63 10/1/96 42 LucentTech 1999.88 3260.25 $1260.37 12/19/97 17Raytheon 904.57 831.94 -$72.63 8/24/95 130 KLA-Tencor 5812.49 4996.88 -$815.62 6/26/97 325 Innovex 9005.62 6560.94 -$2444.68 8/13/96 250 3Com Corp. 11715.99 8312.50 -$3403.49 CASH $32484.33 TOTAL $162360.58