Trump and Lucent
Think of Trump, but win Coca-Cola stock

by Jeff Fischer
(JeffF@fool.com)

ALEXANDRIA, VA (July 30, 1998) -- If you're beginning to feel seasick, you're watching too closely -- yet, who can blame you? There was no towering storm cloud, no shift in the wind, and no rise in the waves preceeding the stock market's recent storm of volatility. After striking new highs, the S&P and Nasdaq recently declined more than 5% and 7%, respectively.

But today we again had smooth and fast sailing. The S&P gained 1.6%, the Nasdaq over 2%, and the Fool Port -- like pinning the tail back on a donkey (or perhaps an animal with more dignity) -- tacked 4.7% back on its posterior. Again there was no explanation for the market's volatility. We're on a ship that's crashing through the waves -- up and down and back and forth -- and the Foolish captain, rather than trying to steer away from the storm, is merely yelling to the crew, "Look at the horizon, ye Foolish mates, not down at the water! Look at the horizon!"

Indeed, we're trying to keep our focus on the horizon with all of our stocks, including our short of Trump Hotels (NYSE: DJT). Our only short position has been a raging success, if truth be told, in a soaring stock market. Trump has fallen nearly 20% -- our stated goal when shorting -- while the market has gained over 30%. Recently the discussion has been, "Do we cover the Donald, declare the big V for victory, and move on?" Or, "Do we wait and hope that Trump continues to sink?"

Since shorting it, Trump has announced good news just about as frequently as... well, as frequently as never. Being a Trump shareholder must be something like being the U.S. President: no matter what you do, there is never any good news (reported on you or for you) to take pride in. There is only bad news. Trump has been denied a casino in Detroit, won't be going to Vegas anytime soon, was denied the right to expand a current location, has been hurt by competition in Indiana and Atlantic City with more to come (a key highway for coming competition is set to be built), and losses have been as steady as planes landing at O'Hare airport.

In fact, we're breezing through gambling's high season without even a draft of good news or an uptick in the stock price. Things were so quiet that we figured Atlantic City was still in the dead of winter, not experiencing summer like the rest of the country. But heck, it takes more than sun to shed hope on this company. Trump Hotels could win the $290 million Powerball lottery and still only be able to pay off 15% of its debt. In fact, even without a tax bite, the winnings would be gone after eighteen months of debt interest payments alone. Ask Trump what he'd do with all of the money if he'd won and you'd get the most depressing answer of anyone in the country: "Pay some of my bills."

Trump stock -- good old DJT on the NYSE -- essentially represents a mountain of debt and a business that loses money every month. That and some dated property. That's about it. It's not the type of equity in which the American public should invest. Considering the interest rates that Trump pays, you're essentially investing in a company with billions of dollars of credit card debt that revolves every 30 days, while management continues to spend more than it makes. (Yes, you're investing in Great Aunt Mildred, the compulsive shopper and debtor, but on a larger scale.)

The question remains, however, "Do we cover the short now? Do we cash out?" David Gardner asked you this question several months ago as well. We've now almost made our 20% -- should we take the victory and boast about it for the rest of our lives, like France will do with the World Cup, or should we let it ride? What do you say? Do we feel lucky?

Please post your thoughts under the heading "My Foolish thoughts on Trump" on our website's Trump message board (so everyone can see everyone else's answer). What we feel is the most Foolish post will win the author the opposite of Trump: they'll win a share of Coca-Cola (NYSE: KO). Yes, Coke -- the American icon of bubbling success. Coca-Cola is cash rich and always pouring more money into its growing business. Post the winning thoughts on Trump and we'll enroll you, with one share to start, in Coca-Cola's dividend reinvestment plan (a $100 current value, with a future value of ???). Your post must be made by Sunday night, August 2, by 11:59:59 p.m., Eastern Time.

You must answer these three questions: 1) Should the Fool cover Trump Hotels? 2) Why or why not? 3) What is the best vacation spot in the world and why?

Good luck! (Odds of winning depend on the number of entries received. It could be 1 in 1 odds.)

Elsewhere in the Fool Port, we have dogs that have been even larger woofers than Trump Hotels. And they continue to lag. 3Com, 3Dfx, and Innovex all declined in the face of a giant 2% gain in the Nasdaq. The most puzzling of the three is 3Dfx. The business has been stellar, the stock a flop. We'll soon review 3Com and 3Dfx, following Lucent today. Before Lucent, though, the one bit o' news...

Starbucks (Nasdaq: SBUX) announced sales of $101 million for the four weeks ended July 26, an increase of 25% from last year. For the 43 weeks ending July 26 sales rose 35%. The past four weeks, same-store sales (those open 13 weeks or more) rose 2% from last year (monthly anomalies do occur), while for the past 43 weeks same-store sales are up 6%. Hey, we'll even be reviewing Starbucks soon. But now...

STOCK REVIEW

In our methodical review of each Fool stock, it's time to consider (raise your voice and read this as a ringside announcer) -- the gift that keeps giving, the houseguest that we've never asked to leave, the son that puts Ma Bell to shame...

Lucent Technologies (NYSE: LU)
Stock Price: $95
Market Cap: $126 billion
Trailing Sales: $28.9 billion
Price/Sales: 4.3
Last Qtr Sales: $7.2 billion (up 14%)
Recent Gross Margin: 43%
Recent Operating Margin: 6%
5-year est. growth rate: 19%
P/E on far estimate: 48
Earnings Estimate: $1.95 in FY99

What caused the Fool to buy it? Lucent was spun off from AT&T while the Fool was holding AT&T as a Foolish Four stock. We still hold AT&T and we've also kept Lucent. Lucent has represented a hybrid Foolish Four holding (as it resulted from a Foolish Four stock) and, thankfully, a high-growth investment, too. Though it doesn't pay a dividend, it represents unlocked value from AT&T. When the roll-over of our Foolish Four stocks in February included AT&T again, we kept both it and Lucent. The value of the two together roughly represent a Foolish Four investment, but when the model calls for the sale of AT&T, we might keep Lucent Technologies.

What has happened since? Since the spin-off, Lucent has quickly become the fourth best-performing stock in the Fool Port, behind AOL, Amazon, and Iomega. The business has been incredible and the stock appreciation more so.

What lessons have been learned? Studies have been done on spun-off companies, but they're generally inconclusive. Some do well, some languish. One lesson learned here, though, is that sure, AT&T looked like a real dog when we bought it as a Foolish Four stock (that's the point -- it was a dog), but the potential value of some of its spun off businesses was something that we didn't really consider. Giant Foolish Four companies often spin off divisions, and investors should consider their merits before merely ditching them.

What could cause the Fool to sell it? When it comes time to sell AT&T from our Foolish Four holdings we might sell Lucent as well, though very likely we won't. If we decide to hold Lucent, we'll tackle this question then. For now, it's full speed ahead. An excellent review of Lucent's recent conference call can be found by clicking here: 7/24/98: Lucent Q3. And an array of other company information is available on our website: click here.

Don't forget: post on Trump to win Coke stock.

Fool on!

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Bookmark Live Fool Port Quotes

07/30/98 Close

Stock Change Bid ---------------- AMZN +5 7/8 113.63 AOL + 8 117.63 T +1 1/4 59.94 DJT + 1/8 7.00 DD + 3/16 62.56 XON +1 3/8 72.06 INVX - 1/16 13.56 IP +1 5/16 43.63 IOM - 1/4 5.25 KLAC +1 7/8 29.94 LU +6 1/4 95.25 SBUX + 5/16 47.38 COMS - 3/8 24.88 TDFX - 1/8 14.38
Day Month Year History Annualized FOOL +4.72% 4.65% 49.34% 389.83% 49.01% S&P: +1.58% 0.80% 17.78% 149.33% 25.78% NASDAQ: +2.03% 1.31% 22.24% 166.55% 27.90% Rec'd # Security In At Now Change 8/5/94 710 AmOnline 3.64 117.63 3134.62% 9/9/97 580 Amazon.com 19.11 113.63 494.56% 5/17/95 1960 Iomega Cor 1.28 5.25 310.03% 10/1/96 84 LucentTech 23.81 95.31 300.34% 8/12/96 130 AT&T 39.58 59.94 51.44% 4/30/97 -1170*Trump* 8.47 7.00 17.34% 2/20/98 200 Exxon 64.09 72.06 12.44% 2/20/98 215 DuPont 59.83 62.56 4.56% 2/20/98 270 Int'l Pape 47.69 43.63 -8.53% 7/2/98 235 Starbucks 55.91 47.38 -15.26% 8/24/95 130 KLA-Tencor 44.71 29.94 -33.04% 1/8/98 425 3Dfx 25.67 14.38 -44.00% 8/13/96 250 3Com Corp. 46.86 24.88 -46.92% 6/26/97 325 Innovex 27.71 13.56 -51.05% Rec'd # Security In At Value Change 8/5/94 710 AmOnline 2581.87 83513.75 $80931.88 9/9/97 580 Amazon.com 11084.24 65902.50 $54818.26 5/17/95 1960 Iomega Cor 2509.60 10290.00 $7780.40 10/1/96 84 LucentTech 1999.88 8006.25 $6006.37 8/12/96 130 AT&T 5145.11 7791.88 $2646.77 4/30/97 -1170*Trump* -9908.50 -8190.00 $1718.50 2/20/98 200 Exxon 12818.00 14412.50 $1594.50 2/20/98 215 DuPont 12864.25 13450.94 $586.69 2/20/98 270 Int'l Pape 12876.75 11778.75 -$1098.00 8/24/95 130 KLA-Tencor 5812.49 3891.88 -$1920.62 7/2/98 235 Starbucks 13138.63 11133.13 -$2005.50 6/26/97 325 Innovex 9005.62 4407.81 -$4597.81 1/8/98 425 3Dfx 10908.63 6109.38 -$4799.25 8/13/96 250 3Com Corp. 11715.99 6218.75 -$5497.24 CASH $11876.47 TOTAL $250588.72

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