ALEXANDRIA, VA (March 16, 1998) -- The Fool Portfolio finished slightly negative in the face of an up market Monday, losing 0.18% vs. an S&P 500 gain of 1.00%. Today was actually a microcosm of the portfolio's experience for 1998. Namely, Iomega pretty much singlehandedly brought down the portfolio's return, causing us to underperform the market averages despite strong performances by most other Fool stocks.
Iomega was the most active stock on the New York Stock Exchange today, trading 22.9 million shares. (It was the second most active stock on all exchanges, with only WorldCom trading more. To see the top 50 stocks by volume any time of day, bookmark one of my favorite pages: http://www.eDreyfus.com/pbscgi/fool50tc.) Iomega's heavy activity was wholly due to a company announcement at market open today that IOM would lose money in its first quarter. Yep, that's right, I said LOSE money. It's the first loss Iomega has reported since its June 1995 quarter.
I can't say that I'm particularly surprised, or that the market was, either. Iomega stock lost -- not $2 1/2, not $3 1/2, or more -- but $1 1/2 today, closing at $7 1/8. No small potatoes, considering that was a drop of 18%. But that it wasn't 25% or more indicates that some of this expectation was already priced into the stock.
The two reasons given by the company in its press release are flat sales and increased marketing expenses. Flat sales were not expected; increased marketing expenses were, which the market already knew about after IOM announced it would be boosting its marketing to $100 million this year. The company also announced an increase in inventory, which you'd certainly expect along with flat sales.
So between flat sales, increased expenses, new product delays, and lawsuits, you have a management which is losing the market's confidence, and a stock which is following suit.
You'll have a very hard time finding anybody who's particularly impressed with Iomega, at the moment.
We are certainly concerned about management's lack of recent success, combined with its institutionalized reticence. So you can find a number of reasons we're not particularly happy holding the stock right now, even completely apart from its recent performance. That said, the investment remains up 456% for our portfolio in less than three years, continuing to be our second-best investment ever. Obviously, you're also looking at a stock that is presently just 25% of the total value it reached in May of 1996 (!), but that value itself was artificially inflated by a gigantic short squeeze combined with media overexposure.
At this point, we have more money in International Paper than we have in Iomega, IOM now making up less than 8% of the FoolPort's total value. That's why on a day that one of our top stocks loses 18%, we still finish almost flat. As stocks and companies succeed, they occupy increasing percentages of your portfolio; that is good. As stocks and companies fail, they occupy decreasing percentages of your portfolio; that is also good. That's only bad if and when you add to your losers, which we continue not to recommend. If you bought Iomega at $15, you're hurting with the stock at $7. If you bought Iomega at $15 and added some at $13, $11, $9, and $8, you're really hurting. It wasn't till the stock opened at $8 this morning and quickly fell that you were actually able to see the clear picture of a company turning cash-flow and earnings negative. When you add to your losers, you throw money at a potentially debilitating situation that is only truly visible in retrospect.
As always, what is important for this stock and any other is not what has happened in the past, but what will happen in the future. That's the yardstick we use to judge our investments, though it may be said that we don't base our decisions on pure short-term meritocracy; we're stingy sellers who will consciously hold stocks through bad periods, sometimes, if we believe the disease isn't terminal. In Iomega's case, I continue to believe the probability of recovery is better than average. Let's talk about that for a sec.
I got an e-mail from a reader today which compared Iomega to another stock we once very successfully shorted, Quarterdeck (Nasdaq:QDEK). It read: "IOM is in a very similar situation as QDEK was back in '96 when you Fools shorted the stock at $7 in your portfolio. People asked how you can short a $7 stock and it turned out to be a brilliant move as QDEK started announcing forward losses. This announcement by IOM is almost FOR SURE going to be followed by another one this year. Add this to lawsuits, stupid stock splits, and all the other negativity and you have another Quarterdeck. Comments, Fools?"
I appreciate anyone who is able to draw off of the past to put a present scenario in a useful historical context. But at the same time, we mislead ourselves if we only "cherry-pick" our historical facts. While I agree with each of our reader's points, I disagree with the conclusion because it's not looking at the salient points. Yes, each company did have the same price per share, and each company did announce a forward loss. But that's where the comparison ends. Iomega is the storage technology industry leader with a growing installed base of over 11 million customers for its Zip drive alone. It has superior technology that has drilled down to the consumer level, creating brand-name recognition. It has potentially revolutionary new products like Clik! on the way (assuming the things get to market on time -- a recent problem with other introductions out of Roy, UT). Quarterdeck, in my opinion (and the market's apparently), had none of these things. It also had a sickly year of losses already behind it, with greater ones projected ahead of it. Iomega has announced a single quarterly loss largely brought on by a big marketing campaign. That oversimplifies things, but gets to the brunt of the issue.
I am not here to champion this company or its stock, just as long-term readers know that I am not here to champion ANY company or ANY stock. I am here only to explain why we do what we do with our money. That's the purpose of The Fool Portfolio, and in fact every portfolio here in Fooldom. Iomega has been a good long-term investment for us and for many of you; it has also been a lousy recent performer for us and for many of you. There's good education to come from both of these points, and I hope you're soaking it up, just as we are. IOM remains just one of 14 investments in the Fool Portfolio, several of which I consider a good deal more exciting over the next 12 months (and virtually all of which have been a better investment over the past 12 months). As always, we must all make our own decisions; in our case, we're predisposed to hold onto this longer-term winner despite a year of snafus, based on our belief that consumer-branded technology companies that maintain market leadership make good investments. Let's watch together to see whether we're right... not just yesterday, last month, or since last June, but over the long haul.
In the end, not every investment will be a winner over every period; some will turn in poor performances over intermediate-term periods, and some will unfortunately wind up being net losers, period. (Ask Warren Buffett about Blue Chip Stamps, on which even he once lost his entire investment.) The goal is of course to find and hold enough winners over time that you beat the market averages with your overall portfolio -- the only measure that really counts, dear Fools. We'll hope we're right on Iomega, and that a year from now we'll look back and think what a great deal it was at $7, after announcing just one quarterly loss to an incredibly cynical Wall Street. That's what we'll hope, but we're not fortune tellers, and have never met one who was worth even a dime anyway, apart from the entertainment value.
Iomega dominated our news today, despite new highs for AOL stock (which will split 2-for-1 Tuesday and open Wednesday -- we believe -- at its new adjusted price), more good things from Foolish Four stock International Paper, another three-buck gain by Lucent, and a strong move into profitable territory by 3Dfx (up $1 7/16 to $26 5/8). So we finished about even.
I want to close tonight by mentioning a new feature in Fooldom, Polling All Fools, our weekly poll which kicks off this week asking you whether or not you think Microsoft is monopolizing the software industry. Click in and vote.
Also, our rockin' game of Stock Madness closed out its first day, and you can now click in there to see how you personally did today. The stocks you're ahead on are in green, and the stocks you're behind on are in red. Bookmark that and check each day at market close. The first week of this March Stock Madness game closes Friday. Click in to see your results so far! Best of luck to you all.
-- David Gardner, March 16, 1998
DELIVER - Get Fool Portfolio Nightly Reports
delivered straight to your e-mailbox every evening!
Today's FoolWatch: all the latest in Fooldom.
Day Month Year History FOOL -0.18% 2.09% 8.15% 262.96% S&P: +1.00% 2.85% 11.22% 135.44% NASDAQ: +0.93% 1.00% 13.87% 148.30% Rec'd # Security In At Now Change 8/5/94 355 AmOnline 7.27 129.75 1684.03% 5/17/95 1960 Iomega Cor 1.28 7.13 456.46% 10/1/96 42 LucentTech 47.62 118.00 147.81% 9/9/97 290 Amazon.com 38.22 79.00 106.69% 8/12/96 130 AT&T 39.58 65.19 64.71% 1/8/98 115 S&P Depos. 95.91 108.25 12.87% 2/20/98 270 Int'l Pape 47.69 52.56 10.21% 2/20/98 215 DuPont 59.83 64.13 7.17% 1/8/98 425 3Dfx 25.67 26.63 3.73% 2/20/98 200 Exxon 64.09 64.19 0.15% 8/24/95 130 KLA-Tencor 44.71 38.44 -14.03% 4/30/97 -1170*Trump* 8.47 9.94 -17.34% 6/26/97 325 Innovex 27.71 22.19 -19.93% 8/13/96 250 3Com Corp. 46.86 34.88 -25.58% Rec'd # Security In At Value Change 8/5/94 355 AmOnline 2581.87 46061.25 $43479.38 9/9/97 290 Amazon.com 11084.24 22910.00 $11825.76 5/17/95 1960 Iomega Cor 2509.60 13965.00 $11455.40 8/12/96 130 AT&T 5145.11 8474.38 $3329.27 10/1/96 42 LucentTech 1999.88 4956.00 $2956.12 1/8/98 115 S&P Depos. 11029.25 12448.75 $1419.50 2/20/98 270 Int'l Pape 12876.75 14191.88 $1315.13 2/20/98 215 DuPont 12864.25 13786.88 $922.63 1/8/98 425 3Dfx 10908.63 11315.63 $407.00 2/20/98 200 Exxon 12818.00 12837.50 $19.50 8/24/95 130 KLA-Tencor 5812.49 4996.88 -$815.62 4/30/97 -1170*Trump* -9908.50 -11626.88 -$1718.38 6/26/97 325 Innovex 9005.62 7210.94 -$1794.68 8/13/96 250 3Com Corp. 11715.99 8718.75 -$2997.24 CASH $11233.54 TOTAL $181480.48