Spinoffs
Monday, May 11, 1998
by David Gardner (DavidG@fool.com)

ALEXANDRIA, VA (May 11, 1998) -- The Fool Portfolio got whomped on by the market averages today, particularly our Internet darlings AOL and Amazon.com. Both declined $3+, overshadowing a sterling day for Fool Four entrant DuPont, which rose more than $5 a share on the announcement of its coming spinoff of Conoco. The numbers, as they drop out the bottom of today's pachinko machine (you remember that game? -- where are those things, these days?), show that the Fool Portfolio declined 1.80%, while the S&P 500 lost only 0.14%, and the Nasdaq got thrown for a 0.88% loss.

DuPont (NYSE: DD) announced that before the end of the year it would spin off a 20% stake in Conoco, its (at present) wholly-owned oil producer and refiner. That means that shareholders of DuPont will receive some shares of Conoco, just as we got shares of Lucent (and NCR) as part of our AT&T stake. DuPont announced its eventual intention to sell off Conoco in full, in order to concentrate its efforts on biotechnology and agricultural products.

History looks very kindly on spinoffs, as has been pointed out in the recent book You Can Be A Stock Market Genius, by Joel Greenblatt. In his interview with Amazon.com, Greenblatt mentions one of his favorite sorts of investments: spinoffs.

"In the case of spinoffs," he states, "shareholders of a parent company are distributed shares in a subsidiary or division they never asked for. So [many] simply sell them. I look at these situations because time and time again this system of distributing shares to investors who don't want them creates wonderful buying opportunities. Studies have shown that just by investing in spinoffs investors can double the return of the market averages. And if you learn to pick your spots in an area like spinoffs you can do even better."

(If you're interested in this book, you can look into it more by clicking that blue link above.)

We've certainly seen this to be the case with Lucent (NYSE: LU), which we've held since AT&T (NYSE: T) jettisoned the rest of its ownership two years ago: Lucent is up 206% since we got it on the first of October, 1996. Less impressive but still proving the same point, Allstate (NYSE: ALL) got spun off from Sears back in 1995, and rose 24% for us before we cashed it in on Fool Four switchover day (Web link) and moved on. Was that smart? Well, not really. I mean it wasn't a significant holding for The Motley Fool, at less than $3000, but how has ALL done since? ALL stock has more than tripled, from $30 that August day to today's close a shade over... $94.

Which I guess proves two things: (1) Mr. Greenblatt seems to be right, and (2) we sometimes seem to be idiots.

(I'm trying to deal with that, through hours and hours of self-help audio tapes and the right vitamins. Wish me luck.)

By the way, this all reminds me to ask this Foolish QuikQuiz (tm) for Monday. Ladies, gentlemen, and Fools, heeeeeere's your Foolish QuikQuiz (tm):

FOOLISH QUIKQUIZ (tm)

What's the worst investment mistake the Motley Fool Portfolio managers have ever made?

The answer in a moment....

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OK, and now back to the answer to this week's Foolish QuikQuiz....

Well, if you answered that it was our purchase of ATC Communications, a stock which lost 84.94% of its value before we eventually dumped it 12 months later at $3 17/32, you would be exactly...

...

... wrong.

Nope, it was our selling of half our AOL stake at $23 1/16, back in April of '97. In our effort to balance the portfolio (a move we actually don't regret), we shipped out 650 post-split shares of AOL and in so doing have paid an opportunity cost that today runs to exactly $41,398.50.

We only lost $11,661 on ATCT...

... all of which I guess proves the Foolish point that riding your winners (or failing to) generally matters much more than getting rid of your losers. This runs contrary to most Wise thinking, which is exactly why it's such a good point.

Most of the world seems paranoid about avoiding losers.

So anyway, we'll be welcoming Conoco to the Fool Portfolio before the year is out. We're already welcoming Conoco to the FoolPort, in one sense, as its pending spinoff added almost six bucks to our DuPont holding, which is now up 33% since our Fool Four purchase in February. Brainless and beautiful.

Gotta close today with a note I received from Norris. Norris -- an inspiration to Fools everywhere -- wrote me a week ago:

"Greetings! I'd like to take this opportunity to thank you for the books and information you have made available to individual investors like myself. My father is a physician and was investing his money in terrible performing mutual funds (among them were Fidelity Select Electronics and Putnam's OTC). To make a long story short, my father had an account with Merrill Lynch. His bonds were doing terrible and the aforementioned mutual funds were doing worse. Having some guidance with your book on allocation of capital, I instructed him to shift his money out of the mutual funds and into the Vanguard Index, Dow 10, and Foolish Four. Needless to say, they bested his old returns by a whopping amount. I can still remember him telling me how, 'You don't know more than these financial advisors who spend their life on this stuff!' Hmm... results sure look like it!"

Best of all, Norris made these moves a year and a half ago, shortly after completion of our book. He was 16 years old.

So saying... Fool on!

-- David Gardner, May 11, 1998

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TODAY'S NUMBERS

Stock Change Bid ---------------- AMZN -5 5/16 86.88 AOL -3 3/4 86.38 T - 1/16 57.56 DD +5 1/2 79.56 DJT - 1/16 8.69 XON - 1/4 72.94 INVX - 1/2 24.50 IP + 5/8 53.00 IOM - 1/8 7.75 KLAC --- 41.38 LU - 15/16 72.88 COMS - 7/8 30.94 TDFX - 1/2 24.13 SPY - 3/8 110.75
Day Month Year History FOOL -1.80% 1.38% 23.23% 313.55% S&P: -0.14% -0.46% 14.04% 141.41% NASDAQ: -0.88% -1.09% 17.68% 156.61% Rec'd # Security In At Now Change 8/5/94 710 AmOnline 3.64 86.38 2275.26% 5/17/95 1960 Iomega Cor 1.28 7.75 505.28% 10/1/96 84 LucentTech 23.81 72.88 206.09% 9/9/97 290 Amazon.com 38.22 86.88 127.29% 8/12/96 130 AT&T 39.58 57.56 45.44% 2/20/98 215 DuPont 59.83 79.56 32.97% 1/8/98 115 S&P Depos. 95.91 110.75 15.48% 2/20/98 200 Exxon 64.09 72.94 13.80% 2/20/98 270 Int'l Pape 47.69 53.00 11.13% 4/30/97 -1170*Trump* 8.47 8.69 -2.58% 1/8/98 425 3Dfx 25.67 24.13 -6.01% 8/24/95 130 KLA-Tencor 44.71 41.38 -7.46% 6/26/97 325 Innovex 27.71 24.50 -11.58% 8/13/96 250 3Com Corp. 46.86 30.94 -33.98% Rec'd # Security In At Value Change 8/5/94 710 AmOnline 2581.87 61326.25 $58744.38 9/9/97 290 Amazon.com 11084.24 25193.75 $14109.51 5/17/95 1960 Iomega Cor 2509.60 15190.00 $12680.40 2/20/98 215 DuPont 12864.25 17105.94 $4241.69 10/1/96 84 LucentTech 1999.88 6121.50 $4121.62 8/12/96 130 AT&T 5145.11 7483.13 $2338.02 2/20/98 200 Exxon 12818.00 14587.50 $1769.50 1/8/98 115 S&P Depos. 11029.25 12736.25 $1707.00 2/20/98 270 Int'l Pape 12876.75 14310.00 $1433.25 4/30/97 -1170*Trump* -9908.50 -10164.38 -$255.88 8/24/95 130 KLA-Tencor 5812.49 5378.75 -$433.74 1/8/98 425 3Dfx 10908.63 10253.13 -$655.50 6/26/97 325 Innovex 9005.62 7962.50 -$1043.12 8/13/96 250 3Com Corp. 11715.99 7734.38 -$3981.62 CASH $11558.06 TOTAL $206776.75

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