A Record Week
Plus, Starbucks ice cream & 3Com

by Jeff Fischer

ALEXANDRIA, VA (Sept. 25, 1998) -- Perhaps small stocks are finally bouncing back from the depths of steep underperformance. The Nasdaq gained 1.3% on Friday and 4.8% for the week, while the S&P added 2.4% over the last five days. The rebound happened despite shaky world markets and a presidency in turmoil. More powerful than those, apparently, is the prospect of lower interest rates next week. If the government does move to lower rates, the cost of borrowing money declines, it's easier to fund corporate growth, and interest-bearing investments become even less attractive compared to stocks.

But that's near-term talk. Close your eyes (in a moment) and think what the world and stock prices might look like in ten or fifteen years. Ready? Prepare to think ten years ahead. Now close your eyes.

(Oops. I just wrote myself into a corner. I didn't say for how long to close them, and now readers around the world are sitting at their monitors with their eyes shut... except for you. You're smarter than that. The rest of this humble column is for you alone.)

This week the Fool Port achieved the equivalent return of seven years in a savings account. Our basket of stocks gained 17% on a week that gets inked into the Foolish record books. But the lesson remains the same: invest for the long-term. If we didn't, we might not have been invested during this short-term gain.

The stock of Starbucks (Nasdaq: SBUX) has added 19% since last Friday, recovering from its recent decline. On Thursday, David explained how much he likes Starbucks ice cream -- it's his favorite. The country agrees. Starbucks coffee ice cream is already the leading brand of its kind in the U.S. How it came about and why it tastes so good is a great story.

The Foolish story is encapsulated as follows: A cell biology expert in California was exploring the process of isolating molecules within human cells without destroying them. One day, without giving it much thought, he tried the same technique that he'd been using on cells on coffee beans. The result: he found that he could capture the flavor and aroma of coffee in a concentrated extract. His wife, for reasons not explained, told him that he should show the extract to a Starbucks location. So he did.

The Starbucks employees behind the counter were on the ball and realized that he'd discovered something good. Word got to Starbucks HQ and the biologist received a phone call two days later. The extracting process is now protected by Starbucks and it's why the company is able to make such great tasting ice cream, and also bottled Frappuccino (both of which you can try from your local grocery store!).

On an otherwise slow week for news, 3Com (Nasdaq: COMS) announced earnings on Tuesday that were at least much better than recent results (the trend is in the right direction), but not yet incredibly great. Sales growth of high-end system products was flat when you exclude the growth provided by 3Com's PalmPilot. This is unfortunate because we want 3Com to sell more high ticket, high-margin networking technology, especially considering it has a new product line.

But perhaps some Fools are painting this fact (which came from the conference call summary) too negatively. Remember that international sales were rather dismal (down 10% from last quarter), while U.S. sales compensated (up 13%). This means that more high-end products did indeed sell in countries that are still buying, but weakness in other localities masked it. 3Com stated that interest is high for its new networking systems; given the steep decline in international sales, interest must, indeed, be considerable in the U.S.

The company decreased its operating costs but is still far from the financial performance that it desires. One step at a time, though. Management is confident it can get there. Earnings estimates for fiscal 1999 have increased since this week's estimate-beating announcement. The stock trades at 24.8 times the $1.29 per share estimate for the year.

Amazon.com (Nasdaq: AMZN) rose despite the announcement that Barnes & Noble (NYSE: BKS) will take its online unit public. The company is separating its two businesses so that its online losses don't impact the performance of its traditional business. Meanwhile, it hopes to raise enough cash to compete online with cash-heavy Amazon.com. What this also signifies to me is the difference between the two selling models. Each business requires its own focus -- off-line and online -- as each are incredibly different. Also of note: If B&N didn't believe that it could eventually be profitable online, it probably wouldn't bring its online division public. To do so without a single hope for eventual profit would be unfair to investors, and the company isn't a new startup with little to lose.

To close, on Friday the Drip Port compares the business performances of Intel and Johnson & Johnson, and addresses the importance of dividends. And the booklet that just about every Foolish investor needs is now available: here.

Fool on!


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09/25/98 Close

Stock Change Bid ---------------- AMZN +7 1/8 109.25 AOL +2 5/8 114.75 T + 1/2 59.75 DJT - 1/16 3.19 DD + 5/8 58.75 XON -1 68.38 INVX --- 13.50 IP +1 9/16 48.44 IOM --- 4.25 KLAC +1 1/8 27.00 LU + 3/8 76.88 SBUX + 3/16 35.81 COMS +1 5/8 32.06 TDFX +1 1/16 12.38
Day Month Year History Annualized FOOL +3.19% 26.65% 45.79% 389.28% 46.75% S&P: +0.19% 9.11% 7.66% 127.91% 22.02% NASDAQ: +1.35% 16.30% 11.03% 142.10% 23.81% Rec'd # Security In At Now Change 8/5/94 710 AmOnline 3.64 114.75 3055.56% 9/9/97 580 Amazon.com 19.11 109.25 471.67% 5/17/95 1960 Iomega Cor 1.28 4.25 231.93% 10/1/96 84 LucentTech 23.81 76.88 222.89% 4/30/97 -1170*Trump* 8.47 3.19 62.36% 8/12/96 130 AT&T 39.58 59.75 50.97% 2/20/98 200 Exxon 64.09 68.38 6.69% 2/20/98 270 Int'l Pape 47.69 48.44 1.56% 2/20/98 215 DuPont 59.83 58.75 -1.81% 8/13/96 250 3Com Corp. 46.86 32.06 -31.58% 7/2/98 235 Starbucks 55.91 35.81 -35.95% 8/24/95 130 KLA-Tencor 44.71 27.00 -39.61% 6/26/97 325 Innovex 27.71 13.50 -51.28% 1/8/98 425 3Dfx 25.67 12.38 -51.79% Rec'd # Security In At Value Change 8/5/94 710 AmOnline 2581.87 81472.50 $78890.63 9/9/97 580 Amazon.com 11084.24 63365.00 $52280.76 4/30/97 -1170*Trump* -9908.50 -3729.38 $6179.13 5/17/95 1960 Iomega Cor 2509.60 8330.00 $5820.40 10/1/96 84 LucentTech 1999.88 6457.50 $4457.62 8/12/96 130 AT&T 5145.11 7767.50 $2622.39 2/20/98 200 Exxon 12818.00 13675.00 $857.00 2/20/98 270 Int'l Pape 12876.75 13078.13 $201.38 2/20/98 215 DuPont 12864.25 12631.25 -$233.00 8/24/95 130 KLA-Tencor 5812.49 3510.00 -$2302.49 8/13/96 250 3Com Corp. 11715.99 8015.63 -$3700.37 6/26/97 325 Innovex 9005.62 4387.50 -$4618.12 7/2/98 235 Starbucks 13138.63 8415.94 -$4722.69 1/8/98 425 3Dfx 10908.63 5259.38 -$5649.25 CASH $12005.75 TOTAL $244641.69

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