Cold, Hot, Lukewarm
...it's still coffee. Plus, AOL and AMZN
by Jeff Fischer
ALEXANDRIA, VA (Aug. 24, 1998) -- The Dow Jones Industrial Average traded in a one-hundred point range on Monday, yet it didn't seem to be a volatile day. Following weeks of wild swings that would have made Tarzan proud, today's volatility simply leaves one scratching his head: "So, sometimes stocks don't move that much. Interesting."
That is, they don't always swing much except for stocks in the Fool Port. Since its launch in 1994, the Fool Port has always carried at least one extremely volatile investment, beginning with America Online and moving to KLA-Tencor and Iomega, and later Amazon.com and now Starbucks. Most of these companies were and are small and young companies (even Starbucks only has a $3.4 billion market value) with high growth prospects, making them difficult to value in the near-term and so, naturally, volatile.
Today the volatility worked in the Fool's favor. The portfolio gained 0.78% to beat the S&P's 0.64% gain and crush the Nasdaq's 0.32% loss. All on little to no news, Amazon rose $5, DuPont continued its steady climb from the hit that it took two weeks ago, and Starbucks continued its descent into Dante's infernal world.
Yet, coffee, being the second-most consumed beverage in the world after water, and the second-largest commodity in the world after oil, is perhaps the best market by size that Starbucks (Nasdaq: SBUX) could be in (other than water and oil). The coffee market is enormous with opportunity and over the coming years, if management continues to perform Foolishly, the Fool Port will be rewarded for buying the company at a $4 billion market value.
We'd never cash out of Starbucks in the meantime, so whether the stock is down more than 30% for us right now (as it is), or up since our purchase, it wouldn't matter in the near-term but for our near-term performance. That's rationalization, you might claim -- but we're not rationalizing the price that we paid. Nope. It's merely a fact that we bought Starbucks with at least a five-year outlook, and hopefully four times that, so our victory or loss will be determined over that amount of time, not a matter of weeks, months, or even a few years. That's not our strategy. The Foolish strategy is long-term, if not lifelong.
Amazon.com (Nasdaq: AMZN) rose $5 today, closing above $130 for the first time since the third week of July. The online conglomerate (as it's fast becoming) has a $6.7 billion market cap, or one-fourth the value of America Online, and that's enough to make any Fool take a good hard gander.
If we have a ten-year outlook (as we typically do -- we'll hold as long as a business is performing and sometimes longer), it's easy to say, "Well, this hog is expensive right now, but it could very likely be higher in ten years." Because that's true: it could. Is the risk-to-reward worth it, though? That depends on the objectives that you have for your Amazon.com holding and for the rest of your portfolio in relation to it. But will Amazon.com outperform the S&P 500 from this price going forward in the next five and ten years?
I won't -- and can't -- venture to answer. There's so much uncertainty that, indeed, Amazon could outperform just as easily as it could badly under-perform. Rather than try to guess a stock's price action, though (that being impossible), a Fool always studies the underlying business in order to understand it. If you're investing in Coca-Cola for decades, you might not need to know much more than the fact that the company sells your favorites: Coke, Sprite, Minute Maid, and Barq's. But if you're investing in a new and volatile young company, such as Amazon, you might want to build a financial model for its future business to see if there's potential value to be captured in the present.
We consistently hear people say that Amazon's stock is overvalued, but I've never seen anyone present analytical numbers for the years ahead to sustain the argument. Of course, it's not easy to do -- but it's also irresponsible not to do so if you're presenting an argument on the stock one way or another. If the bears had worked out a financial model on America Online three years ago they might have known to avoid shorting the stock based on projected membership and subscriber revenue growth alone. (And you'd think that they'd have learned by now that AOL will likely be much larger in 2001 than it is currently, and potentially much more valuable as an ongoing business.)
I've been working on a financial model for Amazon and will share some of the numbers tomorrow, up to the year 2001.
As for our other large Internet holding: The Motley Fool's StockTalk team will interview Richard Hanlon, Vice President of investor relations at America Online (NYSE: AOL), on Wednesday. Please post your questions for Mr. Hanlon on the AOL message board before then. The Fool will address as many questions as possible and will provide an audio replay of the interview as well as a written transcript. Please know that AOL can't answer forward-looking statements regarding business numbers (that's what models are for!). Again, you can send your questions to StockTalk@fool.com.
For supreme Foolishness tonight (not to be mistaken with Taco Bell's Taco Supreme), Tom Gardner is reviewing the Cash-King's past week in today's column, while the Boring Port begins an excellent retrospective. Today is part one. Don't miss the series.
Also, today the Drip Port announced that it's sending more money to Campbell Soup at these prices. Finally, we bid farewell to TMF Sheard, who is leaving the Fool this week.
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Today's FoolWatch: all the latest in Fooldom.
Day Month Year History Annualized FOOL +0.78% 3.28% 51.89% 409.73% 49.47% S&P: +0.64% -2.90% 12.13% 137.38% 23.78% NASDAQ: -0.32% -4.36% 14.04% 148.66% 25.21% Rec'd # Security In At Now Change 8/5/94 710 AmOnline 3.64 108.81 2892.28% 9/9/97 580 Amazon.com 19.11 134.75 605.10% 5/17/95 1960 Iomega Cor 1.28 4.81 275.86% 10/1/96 84 LucentTech 23.81 87.75 268.57% 4/30/97 -1170*Trump* 8.47 4.69 44.65% 8/12/96 130 AT&T 39.58 57.06 44.18% 2/20/98 200 Exxon 64.09 70.56 10.10% 2/20/98 215 DuPont 59.83 60.94 1.84% 2/20/98 270 Int'l Pape 47.69 42.69 -10.49% 7/2/98 235 Starbucks 55.91 38.56 -31.03% 8/24/95 130 KLA-Tencor 44.71 28.81 -35.56% 8/13/96 250 3Com Corp. 46.86 30.06 -35.85% 1/8/98 425 3Dfx 25.67 12.88 -49.84% 6/26/97 325 Innovex 27.71 13.25 -52.18% Rec'd # Security In At Value Change 8/5/94 710 AmOnline 2581.87 77256.88 $74675.01 9/9/97 580 Amazon.com 11084.24 78155.00 $67070.76 5/17/95 1960 Iomega Cor 2509.60 9432.50 $6922.90 10/1/96 84 LucentTech 1999.88 7371.00 $5371.12 4/30/97 -1170*Trump* -9908.50 -5484.38 $4424.13 8/12/96 130 AT&T 5145.11 7418.13 $2273.02 2/20/98 200 Exxon 12818.00 14112.50 $1294.50 2/20/98 215 DuPont 12864.25 13101.56 $237.31 2/20/98 270 Int'l Pape 12876.75 11525.63 -$1351.13 8/24/95 130 KLA-Tencor 5812.49 3745.63 -$2066.87 7/2/98 235 Starbucks 13138.63 9062.19 -$4076.44 8/13/96 250 3Com Corp. 11715.99 7515.63 -$4200.37 6/26/97 325 Innovex 9005.62 4306.25 -$4699.37 1/8/98 425 3Dfx 10908.63 5471.88 -$5436.75 CASH $11876.47 TOTAL $254866.84