"The Good, The Bad...
& Iomega."
by Paul Larson
([email protected])
CHICAGO, IL (June 19, 1998) -- The Fool Portfolio ended a volatile week with a bang, easily outpacing the market this Friday by jumping forward 0.83%. On the week, the portfolio was up exactly 5.93%, a fine performance by any measure. Let me pull my compounding clown costume out of the closet and see what we could earn if we did this week in and week out. A 5.93% weekly return compounded would give us 20x our money in one year. Too bad all weeks can't be like this one, no?
Nine of our stocks traded over 3 million shares today, while twelve of them had volume of over a million shares. No point to be made really, just an interesting observation.
Today's recap will play a little game of "The Good, The Bad, and The Ugly." First, let's take a look at the good. Amazon (Nasdaq: AMZN), which was down most of the day, carried the portfolio in the afternoon when it continued its volatile ways and rose $3 13/16 to bid at $75 3/4. On the week, the stock was up about $15. Amazing.
Also in the "good" column, we saw 3Dfx (Nasdaq: TDFX) gap open today and end this Friday a dollar higher than it ended on Thursday. The stock was chopped earlier this week on no substantive news, thus the slight rebound is a welcome change. Well, the stock did get downgraded to a "hold" rating from NationsBanc Montgomery Securities on Thursday, but the analyst still has his 1999 earnings estimate at $2.00. This puts the company trading at 8.5x this forward estimate versus the S&P that is trading at over 20 times 1999 estimated earnings. Plus, 3Dfx is slated to have much higher than average growth for the foreseeable future. In other words, I can believe the analyst's profit assumption, but the logic on the rating seems a little out of whack.
I also have an interesting 3Dfx story to tell. Earlier this week, I found myself at the computer store, a place I'm known to frequent from time to time. I was only there to grab an ink refill for my printer, but I wandered over to the video card aisle to just see what was available. I picked up one of the cards that had "3Dfx" and "VooDoo2" plastered on the front and started to read the specifications. In the three minutes I was holding the box, I had two other customers come up to me and say, "That's the stuff, dude. I have one of those and it rocks. You should buy it." Keep in mind that these were not salespeople, but folks who are happy customers of our company's products. You'll never get this kind of grass-roots research by staring at spreadsheets all day.
Let me recommend that fans of the company should be sure to read Thursday's recap. David Gardner does an excellent job of putting forth his opinions on why he thinks 3Dfx is a bargain at these prices. I couldn't have said it better myself.
Moving on, we had Innovex (Nasdaq: INVX) solidly on the bad side of the ledger today, losing another $5/8 to bid at $12 1/2 . The company has seen its earnings multiple dramatically shrink over the past several months. If you think about, the price of any stock is its earnings per share multiplied by its PE multiple. While the company's earnings have held or declined modestly, it has seen its market multiple, and therefore its stock price, wither hideously. The market, fickle as it is, is worried about Innovex's future and has assigned the stock a low PE multiple because of these concerns. The stock is now at roughly 6x trailing earnings, and still less than 9x the recently downgraded earnings estimates for 1999.
Anyone else notice that the dividend yield on Innovex is now above one percent?
As has been reported widely around Fooldom, Iomega (NYSE: IOM) announced that it expects the second quarter to be an unprofitable one for the company. The fiscal year is not expected to be profitable, either. Furthermore, the once high-flying company also announced that it plans on laying off about 12% of its 5,000 employees. To add insult to injury, the company hinted its continued cash-burn could put it in violation of some of its existing credit-agreements with its lenders.
I've got one word to describe this situation: UGLY.
The market chopped another $13/16 off the stock today when it closed at $5 1/2 on the bid, but it had been as low as $4 3/4. Personally, I think the writing is on the wall for the company, and it has been on the wall for some time now. I tend to believe that Iomega once had a chance at being a true world-conquering company but that their window of opportunity is closing fast. That is, if the window is not closed already.
Just sit back and look at this situation. The company is currently unprofitable, and does not expect to be profitable in the near future. Sales in the second quarter are expected to be at the same level as those in the first. Color me stupid, but flat sales are not exactly the sign of a strapping, healthy growth company. Continuing, the company's future is banked on 1996 technology, while we are almost halfway through with 1998. Competition is heating up in the sector, and alternative technologies are getting dramatically cheaper every day that goes by. Furthermore, the layoffs are a sure indication, at least to this Fool, of how truly dim the company thinks its future is. While it is a short-term cost-cutting measure, the long-term ramifications are not pleasant at all.
Of course, the above opinions are mine and mine alone. I know both Jeff and David, the ones who truly run this particular show, each have their own opinions about the company and what to do with the Iomega stock still in this portfolio. Jeff, while not nearly as bearish as I am, nevertheless indicated after the company announced coming losses that we might want to thank the stock for a fun ride and handsome profits while showing it the door. David argues that the company is still the absolute leader in its industry, and until that changes, the future holds promise.
One interesting note should be made that Iomega, once owning the largest portion of the Fool Portfolio, is now only the seventh-largest stock of the fourteen positions held. Yup, our old super-star player has gone from batting clean up to flirting with being a benchwarmer. So far, it's only a good thing that half of the position was sold last year at a price exactly 40% higher than today's.
Another interesting thought: Just think, calling a stock "The Next Iomega" may actually now carry a negative connotation. Who woulda thunk it?
Before signing off and enjoying the weekend, make sure to swing by and visit our Stocks For Dad feature. You see, we Fools sometimes give unusual gifts for the holidays. There are some interesting investing ideas in the feature, and last year's gifts did quite well (sans my stock). I know quite a few Fools here learned how to invest from their fathers, myself included. I'll be thanking my Dad this weekend for showing me the ropes and introducing me to the wonderful world of investing. So if your Pa also showed you how to invest, make sure to give him some special thanks for it this weekend. And if you are a father yourself, why not swing by the Fool's School and grab some ideas about teaching the little ones how to save and invest? You just might get thanks down the road, too.
Have a great weekend, Fools!
-- Paul Larson
WE
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Day Month Year History FOOL +0.83% 11.92% 28.94% 332.73% S&P: -0.52% 0.90% 13.42% 140.11% NASDAQ: +0.48% 0.14% 13.43% 147.34% Rec'd # Security In At Now Change 8/5/94 710 AmOnline 3.64 96.38 2550.26% 5/17/95 1960 Iomega Cor 1.28 5.50 329.55% 9/9/97 580 Amazon.com 19.11 75.75 296.37% 10/1/96 84 LucentTech 23.81 72.25 203.47% 8/12/96 130 AT&T 39.58 63.06 59.34% 2/20/98 215 DuPont 59.83 74.13 23.88% 1/8/98 115 S&P Depos. 95.91 110.06 14.76% 4/30/97 -1170*Trump* 8.47 7.31 13.65% 2/20/98 200 Exxon 64.09 70.06 9.32% 2/20/98 270 Int'l Pape 47.69 44.00 -7.74% 1/8/98 425 3Dfx 25.67 16.94 -34.01% 8/24/95 130 KLA-Tencor 44.71 26.50 -40.73% 8/13/96 250 3Com Corp. 46.86 26.63 -43.19% 6/26/97 325 Innovex 27.71 12.50 -54.89% Rec'd # Security In At Value Change 8/5/94 710 AmOnline 2581.87 68426.25 $65844.38 9/9/97 580 Amazon.com 11084.24 43935.00 $32850.76 5/17/95 1960 Iomega Cor 2509.60 10780.00 $8270.40 10/1/96 84 LucentTech 1999.88 6069.00 $4069.12 2/20/98 215 DuPont 12864.25 15936.88 $3072.63 8/12/96 130 AT&T 5145.11 8198.13 $3053.02 1/8/98 115 S&P Depos. 11029.25 12657.19 $1627.94 4/30/97 -1170*Trump* -9908.50 -8555.63 $1352.88 2/20/98 200 Exxon 12818.00 14012.50 $1194.50 2/20/98 270 Int'l Pape 12876.75 11880.00 -$996.75 8/24/95 130 KLA-Tencor 5812.49 3445.00 -$2367.49 1/8/98 425 3Dfx 10908.63 7198.44 -$3710.19 6/26/97 325 Innovex 9005.62 4062.50 -$4943.12 8/13/96 250 3Com Corp. 11715.99 6656.25 -$5059.74 CASH $11662.57 TOTAL $216364.07
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