Fool Sell Announced
Plus, 3Dfx, Innovex, and AOL
by Jeff Fischer
ALEXANDRIA, VA (June 30, 1998) -- Disney wasn't any fun today. The Mickey Mouse bellwether dropped $8 and brought the Dow Jones Industrial Average's five-day winning streak to an end. At least the Nasdaq didn't goof around. It advanced again and finished June up a healthy 6.5%, but the Fool Port was this month's Cinderella, gaining a record 23.87%. This tops our previous best month by three shoestrings. This time, can we hold onto the gain?
Riding the magic wagon of Iomega (a wagon that went poof!), our pumpkin chariot gained 20.2% in May of 1996. The following month the portfolio gave it all back and more, falling 20.4%. That gain and loss was nearly all due to Iomega, while this month's gain comes courtesy of America Online and Amazon.com, as Paul Larson shared yesterday. Still, will 1996 repeat? Place your bets for July of 1998, and don't be shy if you're predicting doom for the Fool Port. Being long-termers, it's hard to care much what happens in any particular month. In other words, bring it on!
Today, let's first address our largest news. Yes, the Fool Port is pulling the trigger on a position -- selling a holding lock, stock, and barrel. And it's a winner, which makes it more difficult to sell. Yet, we believe that we've found something better. Tonight the Fool Port announces the impending sale of its trusty Spider (AMEX: SPY) shares.
We bought SPY in January as a way to invest idle cash in the equivalent of the S&P 500 index while searching for a potential market beater. The market was good to us while we searched. We're now ready to cash in our 18% gain on SPY and parlay the money into our new buy. Details on the SPY sell are in the sell report. The big question is, understandably, "What's the new investment replacing SPY?"
We'll announce our new purchase tomorrow. (Boo... hiss... you Fools are evil!) Actually, we're still polishing the buy report and, either way, we do need to sell SPY before we can buy the new stock, so it made sense to announce the sell first. Regarding the new buy, we do want to share that nearly everyone has heard of this company, a majority of readers likely patronize it or have tried its products, and there is nothing like it currently in the Fool Port. A common response to tomorrow's buy announcement might be, "Well, why didn't you buy it earlier?"
So, today it's good-bye SPY, and tomorrow it's hello new guy. Let's consider some of our more static holdings -- namely, 3Dfx and Innovex.
At times, little will test a Fool's patience more than a dog stock with a great underlying story. In this case, the mutt is 3Dfx (Nasdaq: TDFX). Watching this stock trade is something like reading a news column by Hemingway in The Toronto Star. You sense wasted potential. At least young Ernest knew to flee for higher ground when the time was right, but with 3Dfx, when will the time be right? The stock did receive respect today, bouncing up 10%, but that's hardly consolation. Why is 3Dfx trading so low in the first place?
This stock's largest downfall might be the fact that it represents a semiconductor chip seller. If 3Dfx somehow convinced the market that it sold software, for example -- rather than technology on a chip -- the stock might be trading at a P/E of 50, rather than at 9 times this year's earnings estimate of $1.91 per share. The market is especially fickle when it comes to semiconductor investments. The mistaken hoopla of 1995 (i.e. semis will never trade at such low valuations again, this is the new age of a non-cyclical business!) stung investors when it proved incorrect. That past now makes everyone even more gun-shy when it comes to valuing chip-related stocks.
So even if 3Dfx grows earnings 200% this year, the stock might continue to trade at 8 times 1999 estimates and the market might simply... well, shrug. Like the 100-year-old lady pitching that giant expensive diamond into the ocean at the end of The Titanic movie (you might have seen it) -- an uninterested shrug was all that she could muster. That's about all the interest that the market is mustering for 3Dfx, too, and until that changes, the valuation is unlikely to rocket. It's more likely to just stay afloat or even sink (though we're hoping we've hit bottom by now!).
The Fool Port has been burned twice on chip-related investments (Applied Materials and KLA-Tencor), and not for lack of patience. KLA-Tencor (Nasdaq: KLAC) has been a guest in our Foolish home for three years and has only cost us. The thing refuses to even wash the dishes. Hopefully the five-year story will differ.
Another Fool investment with a similar (yet very different) story is Innovex (Nasdaq: INVX). Last year investors believed that the days of price wars and cyclical sales in the disk drive industry were over. But when the gift horse was looked in the mouth, we saw a few cavities. Suddenly the industry slowed and prices were slashed, and then Asia threw its own snowball at the situation, making everything even colder. Louis Corrigan gives an excellent summary of Innovex's story in today's Daily Trouble. Twice a week the Trouble column looks at a stock that has been sliced in half and gives the who, what, why, and how, before trying to determine which way the damaged ship will lean going forward. Will the wind fill its sails again, or is the company in question destined to founder?
Two stocks doing anything but foundering continue to be Amazon.com (Nasdaq: AMZN) and America Online (NYSE: AOL). Amazon booked a new closing high today, nearly ending above $100, and America Online rebounded from yesterday's decline. Monday, AOL fell after management announced a $500 million shelf sale of shares. With 220 million shares existing, the sale of another 4.8 million shares doesn't present much dilution (though it's nice cash for our guy!). Today AOL shared that a previously announced agreement to provide France with "an unparalleled Internet experience" has been signed. Our company is working with Bertelsmann, Canal+, and Cegetel. AOL was rated a "Strong Buy" from a new analyst today, and it also announced a $75 million ad deal with three discount brokers.
Again, nice cash for our guy! We suspect, over the months and years, that there will be much more cash flowing into AOL than flowing out... that, in a nutshell, is why we're investors.
Until tomorrow, be Foolish...
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Day Month Year History FOOL +0.80% 23.87% 42.71% 378.92% S&P: -0.41% 3.94% 16.84% 147.35% NASDAQ: +0.19% 6.51% 20.66% 163.09% Rec'd # Security In At Now Change 8/5/94 710 AmOnline 3.64 105.13 2790.88% 9/9/97 580 Amazon.com 19.11 99.69 421.63% 5/17/95 1960 Iomega Cor 1.28 5.88 358.84% 10/1/96 84 LucentTech 23.81 83.25 249.67% 8/12/96 130 AT&T 39.58 57.13 44.34% 2/20/98 215 DuPont 59.83 74.50 24.51% 1/8/98 115 S&P Depos. 95.91 113.31 18.15% 4/30/97 -1170*Trump* 8.47 7.06 16.61% 2/20/98 200 Exxon 64.09 71.31 11.27% 2/20/98 270 Int'l Pape 47.69 43.00 -9.84% 1/8/98 425 3Dfx 25.67 17.06 -33.52% 8/13/96 250 3Com Corp. 46.86 30.69 -34.52% 8/24/95 130 KLA-Tencor 44.71 27.69 -38.08% 6/26/97 325 Innovex 27.71 13.00 -53.08% Rec'd # Security In At Value Change 8/5/94 710 AmOnline 2581.87 74638.75 $72056.88 9/9/97 580 Amazon.com 11084.24 57818.75 $46734.51 5/17/95 1960 Iomega Cor 2509.60 11515.00 $9005.40 10/1/96 84 LucentTech 1999.88 6993.00 $4993.12 2/20/98 215 DuPont 12864.25 16017.50 $3153.25 8/12/96 130 AT&T 5145.11 7426.25 $2281.14 1/8/98 115 S&P Depos. 11029.25 13030.94 $2001.69 4/30/97 -1170*Trump* -9908.50 -8263.13 $1645.38 2/20/98 200 Exxon 12818.00 14262.50 $1444.50 2/20/98 270 Int'l Pape 12876.75 11610.00 -$1266.75 8/24/95 130 KLA-Tencor 5812.49 3599.38 -$2213.12 1/8/98 425 3Dfx 10908.63 7251.56 -$3657.06 8/13/96 250 3Com Corp. 11715.99 7671.88 -$4044.12 6/26/97 325 Innovex 9005.62 4225.00 -$4780.62 CASH $11662.57 TOTAL $239459.95