Fool Portfolio Report
Tuesday, January 27, 1998
by David Gardner (DavidG@fool.com)

ALEXANDRIA, VA (Jan. 27, 1998) -- All of our top growth stocks -- AOL, Iomega, Amazon.com -- dropped, as the Fool Portfolio continued to languish miserably on Tuesday, scoring a half-percent loss in the face of 1%+ gains for the market indices. We're near posting one of our poorer months in recent memory, off 10% vs. a flat market.

It was an exceptionally rainy and gray day in Alexandria, so that with the poor performance of the Fool Portfolio I am reminded of the Winnie the Pooh story where it "rain, rain, rained," to the point of drearily flooding. (Did you read the story growing up, see the cartoon special, or rent it on video recently -- or, as is the case with me, all three?!) With two toddlers on my knee at bedtime these days, I've gotten reacquainted with all these stories once again, and today has left me feeling a lot like the disconsolate Eeyore who can't catch a break.

"The market probably won't reward me... and even if it did... I'd probably underperform anyway..."

The stock market can leave you feeling cold over various periods of weeks, months, or even occasionally, years. We must all be prepared for that. Yeah, it'd be nice to beat the market every single day without fail, but last I checked there was still war, pestilence, and famine in the world, so I don't think any of us should expect perfection from our investments. That said, we've been used to a higher standard of performance than this, so I'm looking forward to a great February!

You know, as I scan over our Fool Portfolio holdings, I see the following companies that look a little bit TOO beaten up at this point. Alphabetically:

Innovex, Iomega, KLA-Tencor, 3Com

Each is involved in computer hardware of one stripe or another, and (importantly) each is either #1 or #2 in its industry. No, none of them are Intel, but if you look back at the 5-year trailing gains for each one, you'll find a market-beater -- in some cases, a market-crusher. (There ARE other good computer hardware companies besides Intel!) Anyway, despite the poor short-term performance, I actually feel quite confident in the prospects of each of these going forward. That is to say, I expect at least three of these four to post market-beating gains from the present price over the NEXT five years. Mark this day down on the calendar -- January 27, 2003 -- and e-mail me to let me know.

Speaking of computer hardware companies... this just in:

3Dfx (Nasdaq: TDFX) announced strong estimate-beating earnings after market close today. The company had reported unprofitable sales of $10 million in its third quarter (still a record quarter for a near startup). But it preannounced on December 5th that its 4Q sales would exceed "by at least double" its previous expectation of 40% growth over the third quarter. Simple math (of the fifth-grade variety, always in keeping with our Foolish level) reveals that the company expected sales of at least $18 million -- keep in mind, that was announced more than three weeks before the end of the quarter.

Here are the actual 4Q numbers as they've just hit the wire:

3Dfx (4th quarter)
Sales: $22.3 million
Income: $1.7 million
Earnings per share: $0.15

Consider that trailing 12-month sales prior to this quarter were $26.2 million, and consider also that 3Dfx just turned its first-ever quarterly profit. This was a great report. In fact, let's compare these numbers to the third quarter:

3Dfx (3rd quarter)
Sales: $10.0 million
Income: -$0.9 million
Earnings per share: -$0.07

One thing to watch is the movement of gross margins. To obtain gross margin, we first subtract cost of revenues from revenues to obtain gross profits. Then you just take gross profits as a percentage of sales. In the case of 3Dfx, the company had cost of revenues of $5.4 million for the third quarter, making for gross profits of $4.6 million... or gross margins of 46%. For the fourth quarter, you subtract cost of revenues ($11.4 million) from that $22.3 million in revenues to obtain gross profits of $10.9 million. Gross margins for the quarter just closed were therefore three percentage points higher, at 49%. You want to see your companies becoming more profitable as they go.

Something else to note with satisfaction, as a shareholder. The company had committed $3.2 million to research & development in the third quarter. While many contributing to our 3Dfx message board discussion were looking for an increase to about $4.0 million, TDFX actually spent $4.9 million, as it continues to develop improved technology for the future. Other than that misguess, I was amazed by how well our readership predicted this earnings report. Tap into our extremely active 3Dfx folder to read all the best stuff in cyberspace on this company -- I love that discussion.

Last but certainly not least, those earnings per share of 15 cents came in well above the consensus estimate of 8 cents per share. The highest estimate on Wall Street was 10 cents per share. So 3Dfx shareholders should be cheering... I certainly am.

How the market treats this news is anybody's guess, though I'd expect TDFX to open up tomorrow. But you know what? I don't care much whether it does or not. What was important about today's report is not whether it juices up the short-term return, but that the company is now profitable, well-run, executing its business plan, and preparing for the release of the awesome new Voodoo 2 in a month and a half.

TDFX looks like a winner... even if we did have to pay five bucks more for it than when we wrote our darned buy report!

Good to be back and writing again, after the long book tour. Fool on!

-- David Gardner, January 27, 1998

WE DELIVER - Get Fool Portfolio Nightly Reports
delivered straight to your e-mailbox every evening!

Today's FoolWatch: all the latest in Fooldom.

Buy a Book and Get It Signed! -- Book Tour '98


TODAY'S NUMBERS

Stock Change Bid ---------------- AMZN -1 1/4 56.50 AOL - 5/8 91.56 T +1 11/16 63.25 CHV + 7/8 76.44 DJT - 3/16 9.56 GM + 1/4 57.38 INVX - 1/4 20.31 IOM - 9/16 8.06 KLAC + 9/16 36.56 LU +1 5/8 84.56 MMM -1 7/16 80.56 RTN.A + 11/16 52.06 COMS + 15/16 31.06 TDFX + 1/8 22.25 SPY +1 3/16 96.84
Day Month Year History FOOL -0.48% -9.95% -9.95% 202.20% S&P: +1.26% -0.15% -0.15% 111.39% NASDAQ: +1.12% 0.54% 0.54% 119.24% Rec'd # Security In At Now Change 8/5/94 355 AmOnline 7.27 91.56 1158.96% 5/17/95 1960 Iomega Cor 1.28 8.06 529.68% 10/1/96 42 LucentTech 47.62 84.56 77.59% 8/12/96 130 AT&T 39.58 63.25 59.81% 8/11/95 125 Chevron 50.28 76.44 52.01% 9/9/97 290 Amazon.com 38.22 56.50 47.82% 8/12/96 110 Minn M&M 65.68 80.56 22.67% 8/12/96 280 Gen'l Moto 48.74 57.38 17.71% 1/8/98 115 S&P Depos. 95.91 96.84 0.98% 12/19/97 17 Raytheon 53.21 52.06 -2.16% 4/30/97 -1170 *Trump* 8.47 9.56 -12.91% 1/8/98 425 3Dfx 25.67 22.25 -13.31% 8/24/95 130 KLA-Tencor 44.71 36.56 -18.23% 6/26/97 325 Innovex 27.71 20.31 -26.70% 8/13/96 250 3Com Corp. 46.86 31.06 -33.72% Rec'd # Security In At Value Change 8/5/94 355 AmOnline 2581.87 32504.69 $29922.82 5/17/95 1960 Iomega Cor 2509.60 15802.50 $13292.90 9/9/97 290 Amazon.com 11084.24 16385.00 $5300.76 8/11/95 125 Chevron 6285.61 9554.69 $3269.08 8/12/96 130 AT&T 5145.11 8222.50 $3077.39 8/12/96 280 Gen'l Moto 13647.92 16065.00 $2417.08 8/12/96 110 Minn M&M 7224.44 8861.88 $1637.44 10/1/96 42 LucentTech 1999.88 3551.63 $1551.75 1/8/98 115 S&P Depos. 11029.25 11137.03 $107.78 12/19/97 17 Raytheon 904.57 885.06 -$19.51 8/24/95 130 KLA-Tencor 5812.49 4753.13 -$1059.37 4/30/97 -1170*Trump* -9908.50 -11188.13 -$1279.63 1/8/98 425 3Dfx 10908.63 9456.25 -$1452.38 6/26/97 325 Innovex 9005.62 6601.56 -$2404.06 8/13/96 250 3Com Corp. 11715.99 7765.63 -$3950.37 CASH $10740.46 TOTAL $151098.86